Europe’s economy stabilized in 2025 after overcoming energy, inflation, and trade shocks following the COVID-19 pandemic, but the war in the Middle East has increased uncertainty in 2026, with oil price shocks remaining a key headwind to economic growth amid weaker global trade and heightened geopolitical risk. Forrester has just published its Europe Economic Outlook, 2026 report, which analyzes the impact of these factors.
The European Central Bank (ECB) March 2026 projections outline three macroeconomic scenarios differentiated by the scale and persistence of energy shocks and the level of uncertainty:
- Baseline scenario. It assumes that energy prices and economic conditions follow current expectations without major disruptions.
- Adverse scenario. It assumes an energy price spike with supply disruptions lasting three to six months and no further significant energy infrastructure damage.
- Severe scenario. It assumes more prolonged disruptions extending beyond 2026 with significant energy infrastructure damage.
Forrester believes the adverse scenario is more likely given current geopolitical tensions, which raise the risk of short-term energy price shocks. Against this backdrop, Europe’s economic outlook for 2026 will be constrained because:
- Headline inflation will increase. Elevated energy costs will keep headline inflation high in Q2 and Q3 2026 as they pass through to transportation, utilities, food, and services. In the adverse scenario, the ECB projects headline inflation in the euro area to rise from 2.1% in 2025 to 3.5% in 2026. Higher inflation would likely delay further interest rate cuts and weigh down economic growth.
- Real GDP growth will slow. Household consumption accounts for 53% of GDP in the euro area. In the adverse scenario, the ECB anticipates that real GDP growth of the euro area will slow to 0.6% in 2026, down from 1.5% in 2025, as a pickup in inflation dampens consumer purchasing power and weighs on consumer spending.
- Government spending will prop up economic growth. Government spending on defense, green energy, healthcare, and public services will continue to support economic growth. The public investment will be supported by the Recovery and Resilience Facility’s funding under the NextGenerationEU program in 2026.
Forrester recommends that business and IT leaders in Europe boost investments for economic and technology sovereignty by rationalizing technology portfolios, diversifying supply chains, and adopting minimum viable sovereignty.
Forrester clients: Please download your copy of the Europe Economic Outlook, 2026 report to learn more, and schedule a guidance session with me to discuss the findings in detail.
