By David Barwick – FRANKFURT (Econostream) – The Bundesbank said in its February monthly report published Thursday that the euro area economy was likely to expand again at a moderate pace in early 2026, with activity supported by consumption and investment even as trade headwinds and euro strength weigh on exports.
At the same time, the report warned that disinflation in services had advanced only slowly and that commodity prices rising again since the start of the year could complicate further declines in inflation rates in advanced economies in coming months.
Looking ahead to the first quarter, the Bundesbank said euro area output should “again increase moderately,” citing indicators through January that showed improved production expectations in both manufacturing and services, while construction sentiment brightened on a better order situation.
Household spending was expected to keep expanding, the report said, though consumers remained cautious. It pointed to still-low willingness to make major purchases and an elevated propensity to save, even as households assessed their own financial situation “very positively.”
On the external side, the Bundesbank said exports should benefit from a still-robust global economy but would be restrained by higher tariffs in the important US market and by the euro’s effective appreciation against a broad set of trading partners.
Investment was expected to remain a support, with the report pointing to private and public spending on digital transformation, energy and commodity security, defense, and climate adaptation. It added that private investment would likely strengthen only gradually amid “multiple challenges and uncertainties.”
The report said the labor market should remain robust, with unemployment low by historical standards and employment edging higher. It nevertheless flagged signs of cooling in some member countries, including Germany and France.
Wage growth had slowed markedly through mid-2025, the Bundesbank said, but likely eased only slightly further in the fourth quarter and stayed elevated, supported in part by continued strong wage growth in Germany.
On inflation, the report said price pressures moderated somewhat late last year, mainly due to weaker goods inflation, while services inflation remained strong. It said non-energy industrial goods prices were flat, likely reflecting the euro’s appreciation.
The Bundesbank said there were “no indications” that diversion of Chinese exports into the euro area due to US tariff policy had exerted a larger dampening effect on prices.
For January 2026, the report cited Eurostat’s estimate showing headline inflation down to 1.7% and core inflation at 2.2%, attributing the decline mainly to energy and a moderation in services inflation, while other components rose at similar or slightly higher rates than in December.
Most measures of longer-term inflation expectations remained around 2%, the report said, while indicators of underlying inflation had changed little and remained consistent with the medium-term goal.
Overall, the Bundesbank said the euro area economy should continue to expand in coming months “roughly” in line with the potential growth rate, while the outlook remained uncertain amid ongoing global trade conflicts and geopolitical tensions.