S&P Global Ratings has raised its 2026 growth expectations for Europe following stronger-than-expected consumer demand, but warned that persistent inflation, higher long-term interest rates and the summer drought continue to create pressure for consumer markets, costs and planning horizons relevant to textile and apparel supply chains.
The ratings agency expects the eurozone and UK economies to grow by 0.9 per cent and 1.3 per cent, respectively, in 2026, followed by 1.1 per cent growth in 2027. It said its 2026 growth forecasts have been revised upward, while projections for subsequent years remain broadly unchanged. Inflation forecasts have been revised slightly lower for 2026 but higher for 2027 and 2028.
S&P Global Ratings now expects eurozone and UK GDP to grow 0.9 per cent and 1.3 per cent in 2026, respectively, after stronger demand.
The upgrade signals firmer near-term European consumer markets, but savings-led spending may fade as fiscal support expires.
For sourcing and retail planners, stickier inflation, higher rates, gas assumptions and currency shifts keep risks elevated.
In its ‘Economic Outlook Europe Q4 2026: Resilient Demand Meets Persistent Pressure,’ S&P Global Ratings said consumers had supported recent economic resilience by drawing down savings despite higher energy costs, but cautioned that this strength could prove temporary.
Eurozone GDP rose 0.6 per cent quarter on quarter in the second quarter, compared with the agency’s earlier expectation of a mild contraction following the energy-price shock. UK GDP increased by 0.4 per cent over the same period.
S&P Global Ratings said the eurozone’s improvement was partly driven by stronger consumer spending despite weaker purchasing power, a significant decline in household saving, renewed volatility in Irish GDP linked to multinational activity rather than domestic demand, and a rebound in net exports.
Domestic demand in Ireland fell 0.8 per cent in the second quarter, while the rebound in net exports was particularly visible. The agency said some of this strength reflected expectations of changes in US trade tariffs, indicating an important one-off component.
European consumer spending resilience was one of the main macroeconomic surprises of the past three months. Across Europe, real household purchasing power fell by around 0.5 percentage points of gross disposable income in the second quarter because of higher inflation, while real consumer spending increased by an average 0.4 per cent. The gap was largely bridged by a significant decline in the household saving rate.
S&P Global Ratings said several factors may have supported spending. Households may have viewed the inflation shock as largely temporary, while consumer confidence recovered from its April low. Wealth effects may also have contributed, with equity prices reaching new highs in recent months and nominal house prices continuing to rise.
The agency estimated that net financial wealth increased by 6 percentage points of household gross disposable income over the past 12 months, potentially supporting consumption by up to 0.1 per cent.
Fiscal measures that had cushioned households against higher energy prices also expired at the end of the second quarter in most countries. Early third-quarter data showed retail sales falling 0.6 per cent month on month in the eurozone and 0.9 per cent in the UK in July.
On inflation, S&P Global Ratings said oil and gas price increases were less pronounced than expected through the second and early third quarters, contributing to lower inflation forecasts for 2026. However, geopolitical volatility in the Middle East limited the reduction in its oil-price assumptions for 2027.
European gas inventories were unusually low for this point in the year, prompting the agency to raise its Dutch Title Transfer Facility (TTF) gas price assumptions by around 20 per cent for the fourth quarter of 2026 and 27 per cent for the first half of 2027.
The summer drought has introduced another shock to the European economy, with the most visible macroeconomic impact expected to come through higher food prices. S&P Global Ratings estimates that the drought could reduce economic activity by 0.1–0.2 percentage points in the short term, mainly through agricultural output losses and supply-chain bottlenecks.
While productivity losses, industrial bottlenecks and water shortages affecting the energy sector are expected to have temporary effects, water stress in agriculture could affect crop yields into next year. This could add to inflationary pressures over the next 12 months, particularly if El Niño conditions affect agricultural yields in other regions.
Higher long-term interest rates remain another key downside risk. S&P Global Ratings said long-term rates have moved closer to its June 2026 adverse scenario than its baseline and are expected to weigh on medium-term growth.
The agency now expects German 10-year government bond yields to remain above 3 per cent until at least 2028, compared with its previous forecast for rates to fall below that level in autumn 2026. Its sensitivity analysis suggests that a 1 percentage point increase in the US 10-year Treasury yield sustained for more than four quarters would reduce eurozone GDP growth by around 0.3 percentage points and UK GDP growth by 0.4 percentage points.
For monetary policy, S&P Global Ratings expects the European Central Bank to deliver one additional rate hike in December 2026, taking the deposit facility rate to 2.75 per cent, before returning policy rates to neutral in early 2028. It expects the Bank of England to raise rates in November 2026 and keep them unchanged until the third quarter of 2027.
The agency has also revised its foreign-exchange outlook. With its baseline now assuming that the US Federal Reserve will raise rather than cut rates in 2026, S&P Global Ratings expects the euro and pound sterling to weaken against the US dollar towards the end of the year.
It expects both currencies to gradually recover thereafter, reaching around 1.20 EUR/USD and 1.34 GBP/USD by 2028 as the European economy adjusts to term-of-trade shocks. However, trade tensions and geopolitical developments continue to add uncertainty to currency projections.
Fibre2Fashion News Desk (CG)
