The outlook is starting to look a little more promising for the economies of the countries that make up the Eurozone, and UBS has responded by raising its 2026 growth forecast for the region.
The Eurozone economy expanded 1.5% in 2025, up from 0.9% in 2024 and exceeding the European Commission’s projection of 1.3%, helped by growth of 0.3% in the final quarter of last year.
This resulted in analysts at UBS lifting its Eurozone GDP growth forecast for 2026 by 0.2 percentage points to 1.3%, while keeping 2027 and 2028 forecasts unchanged at 1.4% and 1%, respectively.
Subscribe to InvestingPro for more analysis - discounts of up to 50% available now The revision is largely a mark-to-market adjustment reflecting the upside surprise in Q4-25 GDP, the Swiss bank said.
“While details on the Eurozone aggregate are not yet available, country data suggest that domestic demand was one driver behind the surprisingly resilient Q4-25 momentum,” analysts at UBS said, in a note dated Feb. 6.
“We expect the headwinds from U.S. tariffs to start fading and the fiscal stimulus in support of defence (EU) and infrastructure (Germany) to turn into the dominant, and firmly positive economic force in Europe in 2026/27,” UBS said.
Germany, where the stimulus is now becoming more visible, should benefit the most.
“As a result, we expect Eurozone growth to be driven by domestic demand, particularly household consumption and fixed investment, while net exports are likely to be negative in 2026 (although less than in 2025),” the Swiss bank added.
The bank expects 2026 and 2027 to be two good years for Eurozone growth, as government efforts to boost public spending will soon gain momentum and lift Eurozone GDP growth by 0.3 percentage points in each of 2026 and 2027 and twice as much (+0.6pp) in Germany, which is responsible for two thirds of the Eurozone fiscal boost.
“With public spending into defence and infrastructure likely to reach their higher ’steady state’ in late 2027, and the stimulus from the EU recovery fund (NGEU) fading, the positive growth impact from fiscal policy is likely to moderate a lot in 2028,” UBS said.
Over the coming two years, stronger fiscal policy is likely to obscure the negative impact of Europe’s profound demographic change that is already working in the background, but which is likely to be felt increasingly clearly over the medium term.
According to UN forecasts, Germany, Italy, Spain and a number of other European countries will lose between 3.5% and 7% of their working-age population between 2024 and 2030.
“We think the adverse demographic dynamics will push Eurozone trend growth (currently estimated at around 1.2% p.a.) to around 1% by 2028 (which happens to be our forecast for that year) and further down afterwards,” UBS added.
