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Global weakness to weigh on Europe
The European economy is expected to deliver modest growth this year, with Eurozone GDP projected to expand by just under 1.0%, marking a slowdown compared to 2025. This deceleration is partly attributable to the lingering impact of tariffs, which are anticipated to weigh more heavily on activity in 2026 than in the prior year.
Performance will vary across markets, with some economies forecast to post weaker growth. Germany, for instance, enters the year following a prolonged period of stagnation driven by global uncertainty, subdued investment, and declining exports. However, increased public spending is now supporting domestic consumption and investment, offering a degree
of resilience.
More positively, inflation on the continent has moderated significantly. Eurozone inflation is expected to average 1.5% in 2026, with UK inflation expected to be stickier at 2.5%. We do not expect any further rate cuts from the ECB, while a single rate cut is expected from the BOE. The lower inflation environment in Continental Europe is supporting real household incomes, which should underpin consumption growth throughout the year.
The unemployment rate remains relatively low across Europe, and is forecast to fall or remain stable in most countries except for the UK and France. Labour market conditions are expected to stay resilient, supported by ongoing employment growth.
Long-term interest rates remain elevated and have dislocated from short rates, given the bond markets’ cautious views on government debt and political issues.
Europe is expected to continue to suffer from weaker global growth. The Eurozone’s export prospects are still being dampened by higher US tariffs, the appreciation of the Euro, and persistent competitive pressures.
Under our upside scenario, the effective tariff rate falls to 8% by the second half of 2026. We expect a lift in business confidence and investment, supporting stronger economic growth and stable bond yields – conditions that are favourable for real estate markets. Under our downside scenario, the US reinstates more aggressive retaliatory tariffs on key trading partners. Inflationary pressures would likely return, driving bond yields higher and creating a challenging environment for real estate investment.
Figure 1: CBRE economic forecasts 2026
*Eurozone unemployment not forecasted
Trends to watch
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Central Bank rates
The possibility of faster-than-expected disinflation could prompt the ECB to make rate cuts in 2026. Recent inflation data confirms that price pressures continue to ease and may decline further. Should inflation fall more sharply than anticipated, the ECB could consider rate cuts to boost growth. Such a scenario would reinforce Europe’s already competitive lending environment and provide further support for real estate investment activity.
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Government bonds
Persistent political uncertainty and elevated government debt levels in Europe could put further upward pressure on bond yields. For example, these factors have pushed French yields above those of Greece, with the spread over German Bunds surpassing 80 basis points – the widest differential since the Eurozone crisis in 2012. So, further political, or geopolitical, instability across Europe in 2026 could push yields higher and widen the gap between short- and long-term debt.
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AI adoption
While unemployment is expected to decline across most European economies in 2026, the accelerating adoption of Artificial Intelligence (AI) introduces a potential structural shift. Corporate announcements on AI implementation are increasing, and firms are therefore actively rightsizing operations through natural attrition or layoffs. This rapid evolution in the AI landscape warrants close attention. Beyond its immediate impact on employment, it could reshape demand patterns across different real estate segments in 2026 and beyond.