Europe’s economy was projected to grow by 1.5 per cent in 2026 and 1.6 per cent in 2027, as high energy costs, elevated trade barriers and weak productivity constrained expansion, according to the International Monetary Fund (IMF). The Fund urged policymakers to accelerate reforms supporting innovation, business expansion and energy resilience to strengthen the region’s growth prospects.
The IMF projected Europe’s economy to grow by 1.5 per cent in 2026 and 1.6 per cent in 2027, constrained by high energy costs, trade barriers and weak productivity.
It urged reforms to deepen market integration, support innovation and accelerate the energy transition. Inflation, geopolitical uncertainty and rising borrowing costs remained risks, while targeted fiscal support were priorities.
In its October 2026 Regional Economic Outlook: Europe, titled ‘Choosing Growth: Reforms for Innovation, Scale, and Resilience’, the IMF said economic activity had held up despite successive shocks. However, geopolitical uncertainty, rising sovereign borrowing costs and mounting defence and other public spending pressures left growth fragile.
The projections for Europe remained unchanged from April, following growth of 1.6 per cent in 2025. The euro area was forecast to expand by 1.1 per cent in 2026 and 1.2 per cent in 2027, while European Union (EU) growth was projected at 1.4 per cent in both years.
Among major economies, Germany was expected to grow by 1.3 per cent in 2026, Spain by 2.5 per cent, Italy by 0.8 per cent and France by 0.4 per cent. The UK’s economy was forecast to expand by 1.3 per cent.
Higher energy prices had squeezed household disposable incomes and increased business costs, weighing on private consumption and investment. Summer heatwaves and drought had added pressure on agriculture, river transport and electricity generation, while higher borrowing costs and tighter lending standards created further headwinds.
The IMF expected growth momentum to weaken towards the end of 2026 and into 2027 as elevated commodity prices continued to feed through to consumers and businesses. Defence spending across the region and higher infrastructure investment in Germany were expected to provide some support.
Inflation remained a concern. Euro-area headline inflation had risen from 1.9 per cent year on year in February to 3.8 per cent in September, although core inflation had remained comparatively stable at around 2.1–2.3 per cent. The Fund projected average euro-area inflation at 3.1 per cent in 2026 and 2.8 per cent in 2027, with a return to target expected only during 2028.
Weak productivity remained the central obstacle to stronger growth. An incomplete EU single market and national regulatory barriers limited companies’ ability to expand, access finance and invest. These constraints also restricted innovation, leaving it concentrated in traditional industries with relatively modest growth prospects.
Manufacturing exporters in Central, Eastern and Southeastern Europe faced additional pressure from wages rising faster than productivity, currency appreciation and stronger international competition. The IMF called for investment in skills, stronger competition and reforms that would help businesses diversify into new products and markets.
The Fund estimated that eliminating remaining domestic policy distortions and cross-border barriers to trade and labour mobility could raise EU productivity by about 20 per cent. Higher productivity could attract up to €800 billion in additional investment over a decade and increase GDP per capita by about 35 per cent over time.
Continuing the energy transition and improving cross-border electricity connections were also essential to reduce costs and dependence on imported fossil fuels. The IMF said renewable energy had already helped cushion Europe against the economic effects of the Middle East conflict.
Policymakers were urged to remain alert to broader inflation pressures and avoid expansionary fiscal measures. Any additional energy-price relief should be targeted at vulnerable households while preserving incentives to improve energy efficiency, the report added.
Fibre2Fashion News Desk (SG)
