EU Economic Outlook for Q1 2026: Soft Landing or Stagnation?

Emily Carter

Hey everyone, welcome back to Global Equity Research—the podcast from Softgate Capital Research. I’m Emily Carter, joined as always by David Mitchell.

David Mitchell

Great to be back with you, Emily. As you know, this is where we dive into the details of the world’s economic and financial currents, with a view toward actionable insights for all you investors and analysts out there.

Emily Carter

And a reminder, if you want deeper dives or our actual reports, just point your browser to research.softgatecapital.com. We publish equity research and macro reports—affordable, clear, and built to help retail investors make sense of what’s going on, not just the institutional crowd.

David Mitchell

That’s right. We’re Softgate’s research arm, and our mission is to strip away the noise and focus on trends and fundamentals that—well, frankly—most coverage misses, or just makes too complex. All right, so Emily, we’ve got a lot to unpack today.

Emily Carter

Yeah, today’s episode is all about the EU’s economic outlook for the first quarter of 2026. So, are we headed for a soft landing, as policymakers hope, or is Europe risking outright stagnation?

David Mitchell

The short version: it's a little bit of both. The EU saw moderate expansion—about 0.3% GDP growth for the quarter, or roughly 1.3% over the year. Inflation's almost at the ECB’s 2% target with some temporary dips below, and honestly, the labor market is still tight. Unemployment’s holding near record lows at around 5.9%, and wage growth, while still robust, is cooling off.

Emily Carter

Policy-wise, the ECB is keeping things restrictive for now—rates are flat and fiscal support is being wound down. They’re only tiptoeing towards easing later in the year if inflation keeps cooperating. And for fiscal policy, there’s mild consolidation across most EU members—gone are the blanket subsidies of the pandemic or energy crisis. Now, investment through EU programs is sustaining the balance.

David Mitchell

That’s the overall feel. On the risk side, there’s always the possibility inflation picks up again—maybe a global energy shock, maybe commodity price increases, or even a global slowdown that undercuts exports. On the upside, though, faster disinflation could boost consumer spending, or structural reforms could finally pay dividends and lift growth. Investors need to remain cautious but alert to the opportunities.

Emily Carter

So, before we go any deeper, let’s talk about what’s happening globally. Growth worldwide is stuck in a subdued post-pandemic gear—nothing like the old days. Advanced economies, including the U.S., are slowing down now that higher interest rates have cooled things off.

David Mitchell

Right, and China’s story is more about restructuring. Their demand for EU exports has softened, but Beijing’s smaller 2025 stimulus did offer a little pop. Emerging markets—honestly, it’s a mixed bag. Some have been helped by hold-steady commodity prices, but others are fighting debt and funding constraints.

Emily Carter

And global inflation? It’s come down from those multi-decade highs we saw back in 2022, but in plenty of places it’s still running above target. We’ve had synchronized tightening by central banks, but now some—especially in emerging markets—are already easing, even as the Fed and ECB are holding firm. That’s created just enough optimism for global markets to settle down a bit.

David Mitchell

Exactly. For the EU, global trade is no longer the robust engine it used to be. Trade growth is weak, volumes are up only marginally, and the shift toward services means export demand is getting capped. But the big plus for the EU—energy prices are far lower than their 2022 peaks, and that’s really helped terms of trade and reduced imported inflation pressure.

Emily Carter

So, the EU enters 2026 in a cautious mood—global headwinds are fading but haven’t vanished. The backdrop is supportive, but fragile; one global shock and everything could change fast.

David Mitchell

Let's get into the data. First, growth: we’re looking at about 0.3% quarter-on-quarter for Q1, and year-over-year at 1.2 to 1.4%—so, not spectacular, but steady. Domestic demand is the main driver, especially private consumption as real incomes recover a bit. Investment? That’s more hit or miss—corporate capex is still sluggish, especially in manufacturing, but digital and green investments are moving. On the production side, services are outpacing industry by a long shot.

Emily Carter

Country wise, there’s a big divergence. Spain and a few Central-Eastern European economies are doing pretty well, partly on the back of strong domestic demand and flows of EU funds. Germany and Italy, though, are basically treading water—Germany in particular has been hit by manufacturing weakness, and Italy’s restrained consumer spending isn’t helping. France is somewhere in the middle, lifted by services and government outlays.

David Mitchell

Inflation is tracking just about 2%—and there may be some months where headline dips below that, especially in the spring and summer, mostly thanks to favorable year-on-year energy comparisons. Core inflation is a tad higher, sticking above headline, mainly because services inflation remains stubborn, but overall, the trend is for convergence around the target.

Emily Carter

Labor markets, like we said, are tight: unemployment is just below 6%, and participation is at all-time highs. Wage growth has cooled to about 3–4%, which is still healthy, but less threatening for inflation. Productivity is starting to rebound, so we’re not seeing the kind of wage-price spiral everyone feared. Exports and trade are steady, services like tourism are supporting a positive current account, and the euro’s gained value compared to 2022, which has mixed effects for competitiveness.

David Mitchell

Bottom line—moderate growth, steady jobs, and inflation near target. But, honestly, the numbers signal more of a plateau than a robust expansion. It’s a soft landing... unless the global winds shift again.

Emily Carter

Let's break down how policy is adapting to all this. The ECB is still holding interest rates at restrictive levels. The deposit rate is at 4%, and they haven’t budged since late 2025. They're just watching the data and debating when it’s safe to think about easing, but definitely not pre-committing. They remember how quickly inflation can flare up again.

David Mitchell

Yeah, and they’ve started winding down bond purchases, letting their balance sheet shrink via passive roll-off. We’ll see a PEPP—Pandemic Emergency Purchase Programme—review later in 2026, but all of this is about keeping financial conditions tight enough to lock in the inflation progress. Banks are well-capitalized, but lending standards are a lot tighter, and credit demand is, well, pretty weak. Mortgage rates and corporate loan rates are way up from just a two years ago, so investment and housing are both feeling it.

Emily Carter

On fiscal policy, most governments are winding down the kinds of subsidies we saw over the last few years. Instead, they’re focusing on targeted support where absolutely needed, and EU funds are propping up public investment—think renewables, transport, the green transition. Deficits are just above 3% of GDP on average. Debt is still high and ticking up a bit, so reforming the fiscal rules is high on the agenda, but the pace is slow. In the meantime, the overall stance is cautious consolidation.

David Mitchell

And it’s worth pointing out—financial markets are stable. Equities have been moving sideways, sovereign yields are up but not disorderly, and market sentiment is what I’d call “guarded optimism,” as long as there’s no negative surprise.

Emily Carter

Okay, this is where things get more long-term—the structural stuff. The EU’s got a persistent productivity problem: growth’s stuck below 1.5%, and there aren’t enough high-growth “scale-up” firms compared to, say, the U.S. The solution? More R&D investment, smoother access to equity, and cutting through regulatory fragmentation that slows down business expansion across the bloc.

David Mitchell

Then there’s the green transition: the EU wants net-zero by 2050, with the “Fit for 55” package shooting for a 55% emissions cut by 2030. That takes a ton of investment—over €350 billion extra every year in renewables, electric grids, and green manufacturing. There are some bright spots, like acceleration in solar and wind, but the scale is massive and reaching regional parity remains tough.

Emily Carter

Demographics are another pressure point. The workforce is shrinking and aging, so policies around raising labor force participation, legal migration, and lifelong learning are right in the spotlight. On top of that, parts of the Single Market—especially services—are still fragmented, and deeper capital markets integration is unfinished business. There’s a constant skills gap in digital and green sectors.

David Mitchell

Yeah, and regional disparity is very much on the radar. Cohesion funds try to tackle those gaps, but, as always, success depends on execution. The big policy levers—raising participation, investing in skills, finishing the Capital Markets Union—those all matter for the EU’s ability to break out of its low-growth trap.

Emily Carter

And I’ll just say, as we discussed back during our episode on the EU Green Deal and Fit for 55, real progress is totally dependent on moving beyond talk to actual delivery in investment, skill building, and integration.

David Mitchell

All right, let’s face the risks. One: inflation could prove stickier than hoped, either from renewed commodity price spikes or persistent wage growth in services. On the flip side, a resurgence in global energy prices—maybe from new geopolitical tensions—could set us back to square one with inflation.

Emily Carter

The external side is just as shaky. A sharper global downturn—whether from a U.S. recession or a hard landing in China—would hit EU exports hard. And, of course, financial stress abroad always finds its way into European markets, even if EU banks are currently sitting on solid capital ratios. Fiscal slippage is another risk: political pressures could undercut deficit reduction efforts, especially in high-debt states.

David Mitchell

But, you know, there are upside scenarios too. If disinflation moves faster, consumers could spend more than forecast, or if global demand rebounds—say, if the U.S. or China surprises to the upside—European exports could benefit rapidly. And if reforms, especially around digital and green investments, actually start to deliver, you’d see productivity and output pick up beyond current forecasts.

Emily Carter

Policy needs to stay flexible: the ECB should keep communicating its data-dependent stance, not move too fast or too slow. Fiscal support, where it continues, has to stay targeted—no return to the old blanket subsidy model. Financial stability means staying on top of risks in banks and real estate, keeping liquidity tools ready just in case.

David Mitchell

Longer-term, we’re talking about rebuilding fiscal buffers, deepening reforms, locking in green transition leadership, supporting social cohesion, and pushing for more European integration and strategic autonomy. None of these are easy, but they set the agenda for the rest of this decade.

Emily Carter

Quick reminder—everything we’ve discussed today is built on projections assuming no major shocks, and everything is conditional on current policies carrying forward. You’ll see some differences between EU and euro area numbers now and then, like inflation or unemployment—little quirks based on membership and composition.

David Mitchell

Crucially, this isn’t investment advice. Please read our full disclaimer—and if you want all the charts, numbers, and methodology, grab our most recent EU Q1 2026 macroeconomic report. The download link is in the episode description, or just go straight to research.softgatecapital.com.

Emily Carter

That wraps us for today’s episode of Global Equity Research. David—thanks as always, and thanks to you all for listening in.

David Mitchell

Always a pleasure, Emily. And thank you to everyone tuning in. We’ll be back soon with more on the trends and shocks shaping the investment world. See you next time!

Emily Carter

Bye everyone, and don’t forget to check out those reports if you want the full story. Goodbye!