European Central Bank — Economic Bulletin (Europe, 2025)

Economic Bulletin Issue 8 / 2025 Contents Economic, financial and monetary developments Overview External environment Economic activity Prices and costs Financial market developments Financing conditions and credit developments Fiscal developments 1 2 3 4 5 6 Boxes 1 2 3 4 5 6 7 8 Bulgaria adopts the euro From text to trouble: understanding the limits of text-derived trade policy uncertainty measures Tracking trade in real time: augmenting the nowcasting toolkit with satellite data The household saving rate revisited: recent dynamics and underlying drivers Has housing regained its allure? Insights from a new survey- based housing Sharpe ratio Holding on: labour hoarding and firms  expectations Inside the food basket: what is behind recent food inflation? Liquidity conditions and monetary policy operations from 30 July to 4 November 2025 Articles 1 2 What is the untapped potential of the EU Single Market? Short-term forecasting of euro area economic activity in an uncertain world Box 1 The revised system of bridge equations: technical summary Box 2 A case study: short-term GDP forecasts for the third quarter of 2025 in real time Statistics Economic Bulletin, Issue 8 / 2025   Contents 2 2 7 12 20 27 32 40 43 43 51 57 64 69 74 80 88 94 94 114 118 124 S1 1 Economic, financial and monetary developments Overview At its meeting on 18 December 2025, the Governing Council decided to keep the three key ECB interest rates unchanged. Its updated assessment reconfirmed that inflation should stabilise at the 2% target in the medium term. According to the December 2025 Eurosystem staff macroeconomic projections for the euro area, headline inflation is expected to average 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028. For inflation excluding energy and food, staff project an average of 2.4% in 2025, 2.2% in 2026, 1.9% in 2027 and 2.0% in 2028. Inflation has been revised up for 2026, mainly because services inflation is now expected to decline more slowly. Economic growth is expected to be stronger than in the September 2025 ECB staff macroeconomic projections for the euro area, driven especially by domestic demand. Growth has been revised up to 1.4% in 2025, 1.2% in 2026 and 1.4% in 2027 and is expected to remain at 1.4% in 2028. The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council s interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path. Economic activity The economy has been resilient. It grew by 0.3% in the third quarter of 2025, mainly reflecting stronger consumption and investment. Exports also increased, with a significant contribution from chemicals. The sectoral composition of growth was dominated by services, especially in the information and communication sector, while activity in industry and construction remained flat. This pattern of services-led growth is likely to continue in the near term. The economy is benefiting from a robust labour market. Unemployment, at 6.4% in October 2025, is close to its historical low, and employment grew by 0.2% in the third quarter. At the same time, labour demand cooled further, with the job vacancy rate at its lowest level since the COVID-19 pandemic. Domestic demand is expected to remain the main driver of euro area growth, bolstered by rising real wages and employment, in the context of resilient labour markets with record low unemployment rates. Additional government spending on Economic Bulletin, Issue 8 / 2025   Economic, financial and monetary developments Overview 2 infrastructure and defence announced in 2025, especially in Germany, alongside improved financing conditions stemming from monetary policy rate cuts since June 2024, is also expected to support the domestic economy. On the external side, while competitiveness challenges persist, including some that are of a structural nature, exports are expected to pick up in 2026. This improvement is attributed to a rebound in foreign demand amid declining trade policy uncertainty, despite a gradually unfolding impact from higher tariffs. Annual average real GDP growth is projected to be 1.4% in 2025, 1.2% in 2026, 1.4% in 2027 and 1.4% in 2028. Compared with the September 2025 projections, GDP growth has been revised up over the whole projection horizon, reflecting better than expected data, reduced trade policy uncertainty, stronger foreign demand and lower energy commodity prices. The Governing Council stresses the urgent need to strengthen the euro area and its economy in the present geopolitical context. It welcomes the European Commission s call for governments to prioritise sustainable public finances, strategic investment and growth-enhancing structural reforms. Unlocking the full potential of the Single Market is crucial. It is also vital to foster further capital market integration by completing the savings and investments union and the banking union to an ambitious timetable, and to rapidly adopt the Regulation on the establishment of the digital euro. Inflation Euro area annual inflation, as measured by the Harmonised Index of Consumer Prices (HICP), has been in a narrow range since spring 2025 and remained at 2.1% in November. Energy prices were 0.5% lower than in the previous November, after a larger decline in October 2025. Food price inflation was 2.4%, after 2.5% in October and 3.0% in September. Inflation excluding energy and food was steady at 2.4%, as goods and services inflation moved in opposite directions. Goods inflation declined to 0.5% in November, from 0.6% in October and 0.8% in September. Services inflation rose to 3.4% in October and 3.5% in November, from 3.2% in September. Indicators of underlying inflation have changed little over recent months and remain consistent with the Governing Council s 2% medium-term target. While growth in unit profits was unchanged in the third quarter of 2025, unit labour costs grew at a slightly higher rate than in the second quarter. Compensation per employee rose at an annual rate of 4.0%. This was more than expected in the September 2025 staff projections and was due to payments over and above negotiated wages. Forward- looking indicators, such as the ECB s wage tracker and the results of surveys on wage expectations, suggest that wage growth will ease in the coming quarters, before stabilising somewhat below 3% towards the end of 2026. Most measures of longer-term inflation expectations continue to stand at around 2%, supporting the stabilisation of inflation around the Governing Council s target. Inflation is projected to decrease from 2.1% in 2025 to 1.9% in 2026 and then to 1.8% in 2027, before rising to the Governing Council s medium-term target of 2% in 2028. The expected decline in headline inflation at the start of 2026 reflects a Economic Bulletin, Issue 8 / 2025   Economic, financial and monetary developments Overview 3 downward base effect stemming from energy prices, while inflation in non-energy components should continue to ease throughout 2026. The contribution of energy inflation to headline inflation is expected to remain muted up to late 2027, before increasing notably in 2028 driven by the expected implementation of the EU Emissions Trading System 2 (ETS2), with an upward impact of 0.2 percentage points on headline inflation. HICP inflation excluding energy is expected to fall from 2.5% in 2025 to 2.2% in 2026 and to 2.0% in 2027 and 2028. Food inflation is projected to drop noticeably as the effects of prior price increases in global food commodities and adverse weather conditions over the summer subside, and is expected to stabilise at rates somewhat above 2% as of late 2026. HICP inflation excluding energy and food is projected to moderate from 2.4% in 2025 to 2.0% in 2028 as services inflation declines amid easing labour cost pressures, and as the past appreciation of the euro feeds through the pricing chain, curbing goods inflation. Wage growth should continue to moderate through 2026, before stabilising at around 3%, underpinned by a resilient labour market and productivity growth just slightly below 1%. Unit labour cost growth is expected to ease, although the impact on inflation is expected to be partly offset by a gradual recovery in profit margins over the projection horizon. Compared with the September 2025 projections, the outlook for headline HICP inflation has been revised up by 0.2 percentage points for 2026, reflecting recent data surprises for HICP inflation and wage growth, with the latter leading to a notable upward revision to the wage outlook. The projection for HICP inflation has been revised down slightly for 2027. This is the result of an assumed lower contribution from energy inflation, since the implementation of ETS2 is now expected to be postponed from 2027 to 2028. However, this contribution is expected to be partly offset by stronger services inflation. Risk assessment While trade tensions have eased, the still volatile international environment could disrupt supply chains, dampen exports, and weigh on consumption and investment. A deterioration in global financial market sentiment could lead to tighter financing conditions, greater risk aversion and weaker growth. Geopolitical tensions, in particular Russia s unjustified war ag