Societe Generale economists report that the euro area is entering a new energy shock with improved resilience and lower oil and gas intensity than in the past decade. NiGEM simulations in their baseline scenario estimate that higher energy prices would cut euro area GDP by about 0.2–0.3 percentage points. They expect the economy to move on from a weak period and for growth to run above potential over the forecast horizon. Drivers cited include German fiscal stimulus, resilient consumption, AI-related investment and a housing recovery, based on a baseline scenario linked to the conflict in Iran.

Euro Area Fiscal Outlook

They project the euro area public deficit rising from 3.1% of GDP in 2024 to about 3.4% in 2025 and 2026. Germany’s public deficit is forecast to increase from 2.4% of GDP in 2025 to 4.3% in 2026, with other countries also expected to use fiscal headroom. With headline inflation expected to stay around 2% in 2027, they see no near-term need for ECB action. They forecast 25 basis point rate rises in December 2026 and June 2027, with a risk these moves occur earlier, possibly in June. We are seeing the Euro area manage the current energy price situation with surprising strength, a notable change from past shocks. The recovery that began in the second half of 2025 appears solid, supported by Eurostat’s flash estimate for Q1 2026 GDP growth which came in at 0.5%, beating expectations. This underlying momentum suggests the economy is on a firm path. This resilience is being driven by consistently strong consumer demand and government spending, especially the German fiscal package that passed late last year. We are already seeing the effects, with German factory orders rising for the third consecutive month through February 2026. This, combined with recovering housing markets, should keep economic growth running above its potential.

Implications For Rate Markets

For derivative traders, this points to the European Central Bank eventually raising rates, but the timing is the key question. Our base case is for the first hike to come in December 2026, suggesting that short-term interest rate markets may be pricing in action too soon. This could present opportunities in instruments like Euribor futures for those betting on a patient ECB. The main risk to this view is that the strong economic data forces the ECB to act sooner, perhaps as early as its June meeting. The latest March 2026 inflation figure of 2.6% was slightly higher than anticipated, which will certainly give the more hawkish members of the governing council a strong argument. Using options to protect against a more aggressive rate path in the second quarter would be a prudent strategy. We should also not forget how much Europe’s energy situation has improved since the crisis in 2022. Looking back, the massive build-out of LNG import capacity and renewable energy sources has made the economy far less sensitive to price swings. Gas storage facilities are currently 65% full, a level well above the five-year average for early April, providing a substantial cushion against further shocks. Create your live VT Markets account and start trading now.

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