European Economics Mid-Year Outlook: Under Pressure

Research evidence excerpt

European Economics Mid-Year Outlook: Under Pressure

Europe Insight

May 12, 2026 10:00 PM GMT

Morgan Stanley Europe S.E.MEuropean Economics Mid-Year Outlook Jens Eisenschmidt

Chief Europe Economist

Under Pressure Jens.Eisenschmidt@morganstanley.comJean-Francois Ouvrard +49 69-21662817

Deputy Chief European Economist

Jean-Francois.Ouvrard@morganstanley.com +49 69-21662813

Higher energy prices come with softer growth and higher Morgan Stanley & Co. International plc

inflation. Some transmission to core is also likely. The ECB Bruna Skarica

increases rates in June and Sept-26 to 2.5%, and then cuts back ChiefBruna.Skarica@morganstanley.comUK Economist +44 20 7425-9110

to 2% in 2027. Fiscal policy is accommodative, due to the Chiara Zangarelli

German package; energy-related measures remain limited. EconomistChiara.Zangarelli@morganstanley.com +44 20 7677-3644

Growth | High energy, low speed: The economy entered the energy shock with low Morgan Stanley Europe S.E.

Gabriela Silova

momentum. We think activity will stall in 2Q26 and accelerate only progressively.

Economist

Annual growth in '26 and '27 will remain below potential and the output gap open Gabriela.Silova@morganstanley.com +49 69-21662832

further. Structural developments are key. On the downside, Europe's exporters are Morgan Stanley & Co. International plc

challenged by China competition. On the upside, accelerating AI adoption likely has Skander Garchi Casal

a small positive impact on productivity. Investment continues to benefit from Economist

Skander.Garchi.Casal@morganstanley.com +44 20 7425-0034

tailwinds (German fiscal, EU funds, digital transition).

Morgan Stanley Europe S.E.

Inflation | Up up and away: Headline inflation climbed to 3.0%Y in April and will Claire A Thuerwaechter

likely move up further.