Economic growth will remain subdued over the next two years as the largest economies struggle and the smaller ones outperform. Past ECB interest rate cuts will do little to boost activity because private sector borrowing costs have not fallen far. Meanwhile, household income and employment growth are slowing and consumers are remaining cautious. Germany’s fiscal stimulus is likely to be smaller and less effective than many assume, and other countries will tighten fiscal policy leaving euro-zone fiscal policy broadly unchanged. Wage growth will continue falling which will help to pull inflation below target next year. With this in mind we have pencilled in two rate cuts by the ECB for 2026. Elsewhere, the Swiss National Bank will probably cut its policy rate back into negative territory next year, whereas we think the Riksbank’s next move will be a hike.
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