Economy

January 2026 Forecast

Bank rate cuts anticipated in 2026

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.

Midyear review

• The dominant geopolitical story of the first half of 2026 in Europe has been the US-Iran conflict, with knock-on effects on global energy markets putting central bankers back in the spotlight. An easing of energy prices offered some relief – but the situation remains fluid and markets are still pricing in residual risk. Despite the global geopolitical uncertainty, most European economies saw some degree of growth, albeit with uneven distribution across the continent. Ireland was a notable outlier, because of substantial multinational-driven growth in 2025.
• Inflation was the first macro casualty of the US-Iran conflict. The Eurozone headline Consumer Price Index (CPI) inflation moving above 3% in May prompted a June rate hike by the ECB, which lifted the deposit rate to 2.25%. The rate path therefore has changed directionally from our January outlook, but the inflation could be temporary, and therefore rates could return to the January levels in 2027.

January 2026 Forecast

Long-rates to remain elevated

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 80bps – 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.

Midyear review

• Long rates increased since the start of the year and have remained elevated beyond our earlier expectations. Renewed inflation concerns have pushed sovereign yields up markedly, compounded by fiscal expansion announcements and rising concerns over the sustainability of public debt in major economies.

January 2026 Forecast

AI starting to reshape the employment landscape

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.

Midyear review

• In January, we described AI adoption as a risk to the employment outlook. At midyear, corporate announcements on AI implementations have accelerated sharply. Unemployment rates across most European economies remain low but the composition of the labour market is shifting beneath the surface. For example, hiring for graduate roles and those that involve routine tasks has slowed in sectors with the highest AI exposure.

H2 2026 Outlook

Uncertainty persists, but the outlook is shifting

Inflation remains the central challenge, but the outlook is improving. Euro Area headline CPI is expected to be 2.9%* in July 2026, reflecting the impact of the oil price shock earlier in the year, with second-round effects still a lingering risk. The ECB has responded with a single hike, and we expect no further hikes this year. With oil prices continuing to display volatility, the future path of interest rates depends on assured safe passage through the Strait of Hormuz.

Growth is expected to continue during the second half of 2026, but expansion remains modest. Central European economies lead the way, with stronger performances at one end of the spectrum and the EU's two largest economies, France and Germany, posting weak growth at the other. A pickup is expected in 2027 but is likely to be gradual, with fiscal stimulus in Germany providing welcome support.

Long rates are proving stickier than expected. With the ECB now on hold, government finances move to the fore as the key variables to watch in the second half of 2026. Less robust economies face the greatest pressure, and we expect little room for government yields to come down across Europe.

We believe AI is more likely to complement the labour force than replace it. Job posting declines are concentrated in occupations weighted toward routine tasks, while demand for non-routine roles holds steady. Therefore, we don't see the widespread structural decline in office space demand that AI adoption might imply.