Economic Bulletin Issue 7, 2026

Summary

At its meeting on 29 October 2026, the Governing Council decided to keep the three key ECB interest rates unchanged. Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook. While the full effects of the energy shock are still unfolding, underlying inflation has remained broadly stable so far and wages do not show a material response at this stage. The increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation and lower growth. Financing conditions have tightened since the Governing Council’s meeting on 10 September 2026, which is likely to weigh on inflation and growth. The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.

The Governing Council remains well positioned to navigate the current elevated uncertainty. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

Economic activity

The incoming data suggest that the euro area economy continued to expand in the third quarter of 2026. Services have recovered, after weakening at the start of the Middle East conflict. Manufacturing, digital services and exports are benefiting from AI-related business investment. Government spending on infrastructure and defence is also supporting activity. These factors should continue to underpin growth in the near term. At the same time, renewed energy price increases have hit consumer confidence, and higher financing costs are likely to weigh on growth.

The unemployment rate remained at 6.4% in August. Growth in employment and the labour force remains subdued, while productivity has gradually picked up.

Over the medium term, a recovery in confidence and real incomes, driven by gradually declining energy prices and a robust labour market, should bolster domestic demand. Investment in AI-related activities and government spending on infrastructure and defence should also continue to support growth. Export growth should pick up on the back of strengthening foreign demand.

Higher potential growth requires structural reform and has to be underpinned by sound public finances. Fiscal sustainability is a crucial anchor for broader economic stability. Fiscal responses to the energy shock should be temporary, targeted and tailored. Simplifying and harmonising rules across the EU’s Single Market, accelerating the energy transition and completing the savings and investments union are key building blocks to make the euro area economy more dynamic and resilient. As the process for agreeing on the legal framework for the digital euro moves into its final stage, the Governing Council reiterated the importance of reaching agreement on the Single Currency Package as quickly as possible.

Inflation

In September 2026 inflation rose to 3.8%, from 3.2% in August. Energy price inflation increased markedly, to 18.9%, from 14.3% in August. Diesel and petrol prices reached new peaks in September, in part reflecting elevated refining margins. Inflation excluding energy increased to 2.3% in September, from 2.1% in August. Food price inflation increased to 1.3%, from 1.1%. Services inflation increased to 3.2% in September, from 3.0% in August, while goods inflation declined to 1.1% from 1.2%.

Indicators of underlying inflation have remained broadly stable, although the early stages of the pricing chain point to upward pressures. Wage pressures remain moderate. Compensation per employee grew by 3.3% in the second quarter of 2026, down from 3.6% in the first quarter, while rising productivity has helped contain the growth of unit labour costs. The ECB wage tracker suggests that negotiated wage growth will fluctuate between 2.5% and 2.8% in the remaining months of 2026 and average 2.6% in the first three quarters of 2027. Inflation expectations over shorter horizons have risen, but most measures of longer-term inflation expectations stand at around 2%, supporting the stabilisation of inflation around target in the medium term.

Energy prices have increased beyond the baseline path foreseen in the September 2026 ECB staff macroeconomic projections for the euro area. This is likely to raise inflation further in the near term and keep headline inflation well above target over the coming quarters. Thereafter, declining energy inflation, together with the effects of higher interest rates, should support the return of inflation to target.

Risk assessment

The risks to the growth outlook are to the downside. This is due, in particular, to the Middle East conflict and recent developments in Russia’s unjustified war against Ukraine. Continued disruption of energy supplies could cause energy prices to rise further and for longer than currently expected. This would weigh on real incomes, spending and investment. A worsening of global financial market sentiment or intensifying spillovers in global bond markets could tighten financing conditions and thereby dampen demand. Fiscal uncertainty may also further tighten financing conditions and weaken confidence, thereby lowering consumption and investment. A resurgence of trade tensions between major economies could further disrupt supply chains, reduce exports and weaken consumption and investment. By contrast, growth could turn out to be higher if the economy and energy markets were to adapt more quickly than expected to the disruption caused by the ongoing conflicts or if these were resolved sustainably. Moreover, the adoption of new technologies by euro area firms and government spending on infrastructure and defence, as well as reforms to enhance productivity and complete the EU’s Single Market, may drive up growth by more than expected.

The risks to the inflation outlook are to the upside. This is due, in particular, to the Middle East conflict and recent developments in Russia’s unjustified war against Ukraine. The energy shock could intensify further and its effects on other prices and wages could be stronger than currently expected. Gas prices, in particular, could increase if supply is disrupted further or an unusually cold winter coincides with low storage levels. The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects. Renewed trade tensions could give rise to more fragmented global supply chains, curtail the supply of critical raw materials and worsen capacity constraints in the euro area economy. Extreme weather events, potentially reinforced by intensifying “El Niño” conditions, and the unfolding climate and nature crises more broadly, could drive up food prices by more than expected. By contrast, inflation could turn out to be lower if ongoing geopolitical conflicts were resolved sustainably or if indirect or second-round effects from higher energy prices proved less pronounced than anticipated. More volatile and risk-averse financial markets, together with higher long-term interest rates, could weigh on demand and thereby lower inflation as well.

Financial and monetary conditions

Financial conditions have tightened since the Governing Council’s meeting on 10 September 2026. Interest rates have broadly moved up, while stock prices have fallen.

In August 2026 the cost of market-based debt for firms rose to 4.1%, from 4.0% in July, while bank lending rates for firms remained at 3.8%. Growth in bank lending to firms slowed to an annual rate of 4.2% in August and September, from 4.4% in July, while corporate bond issuance grew at an annual rate of 4.2% in September, up from 3.8% in August and 3.5% in July. Credit standards for loans to firms tightened in the third quarter, as reported in the October 2026 ECB bank lending survey for the euro area, with banks citing concern about the economic risks faced by their customers. Despite higher financing needs for inventories and working capital, corporate loan demand declined, reflecting in particular higher interest rates.

Mortgage rates rose to 3.6% in August, from 3.5% in July, while mortgage lending growth edged down to 3.0% in September. Credit standards for mortgage lending were unchanged in the third quarter, whereas demand for mortgages declined substantially given higher interest rates.

Monetary policy decisions

At its meeting on 29 October 2026, the Governing Council decided to keep the three key ECB interest rates unchanged. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility remain at 2.50%, 2.65% and 2.90% respectively.

The asset purchase programme and pandemic emergency purchase programme portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

Conclusion

The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term. The Governing Council will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Its interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

In any case, the Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises sustainably at its medium-term target and to preserve the smooth functioning of monetary policy transmission.

1 External environment

Global growth remained steady in the second quarter of 2026, with survey data signalling favourable near-term momentum. Trade expansion shifted towards services, while artificial intelligence (AI) equipment became the main driver of goods trade growth. Higher finished goods inventories may reflect precautionary stockbuilding amid supply uncertainty, and surveys suggest AI demand is contributing to shortages in some sectors. Renewed tensions in the Middle East pushed oil and gas prices higher despite recovering shipping flows, while food prices declined. Higher energy costs lifted headline inflation, although core inflation remained broadly stable and inflation expectations rose only moderately.

Global economic growth held steady in the second quarter, with a shift towards precautionary inventory accumulation amid resurfacing supply uncertainty. Global real GDP excluding the euro area expanded by 0.8%, quarter on quarter, in the second quarter of 2026, unchanged from the first quarter. Purchasing Managers’ Index (PMI) data signal favourable near-term economic momentum, with the composite output PMI increasing to 55 in September, driven by both manufacturing and service sector activity. However, PMI data also suggest that stocks of finished goods have increased well above their long-term averages, as reporting firms may be actively ramping up production and hoarding finished goods to protect their operations from persistent uncertainties such as supply shortages. PMI data on sectoral supply shortages indicate that the AI demand boom is increasingly contributing to supply shortages in some sectors, such as electrical items (Chart 1). At the same time, supply constraints in those sectors most affected by tensions in energy markets related to the Middle East conflict appear to have partly stabilised.

The sustained global trade expansion has shifted from goods to services, both bolstered by the AI boom. Global imports excluding the euro area expanded by 2.0%, quarter on quarter, in the second quarter of 2026, up from 1.4% in the first quarter and close to the early-2025 growth peak, which was driven by tariff frontloading ahead of the new US tariffs. Trade has since consistently surprised to the upside, largely underpinned by AI demand. In 2025 goods trade growth was strong throughout the year, supported by both traditional merchandise and AI hardware. That dynamic changed in the first half of 2026: non-AI goods imports contracted in early 2026, leaving AI equipment as the main growth driver for goods trade. On the other hand, services trade growth picked up, driven by steady contributions from digital AI services as well as a sharp rebound across broader commercial activities, notably transportation services and financial and insurance services.

Renewed tensions in the Middle East pushed both oil and gas prices higher. Oil prices increased by 13% over the review period from 10 September to 28 October, reflecting opposing forces related to the Middle East conflict. On the one hand, oil shipments through the Strait of Hormuz recovered meaningfully, supported by “dark” crossings and ship-to-ship transfers. Available estimates suggest that volumes doubled at the end of September compared with August, bringing Persian Gulf exports close to their 2025 average. On the other hand, attacks on the Saudi East-West pipeline (a key route bypassing the Strait), together with the recent intensification of strikes by Houthi rebels in the region, have led to renewed concerns about the normalisation of oil flows. As a result, oil prices ended up higher than at the beginning of the review period. Global refined product markets, particularly the diesel market, have also been tight, as disruptions to Middle Eastern supplies and Ukrainian strikes on Russian refineries have reduced global refining output. Gas prices rose by 27% owing to the renewed strikes in the Middle East, despite some improvement in liquefied natural gas (LNG) flows through the Strait. The recovery in gas flows is more limited than that observed for oil: they remain 25% below pre-war levels, reflecting the greater vulnerability of LNG carriers given the flammability of their cargoes. Food commodity prices declined by 4%, as wheat prices fell on the back of expectations of easing disruptions to Black Sea grain exports. Cocoa prices decreased amid expectations of ample near-term supply, despite concerns that the effects of El Niño could tighten supply further ahead. Metal prices also fell, by 5%, reflecting improved global supply prospects for aluminium.

Global inflation picked up, with energy inflation still the main driver. Global headline inflation across the member countries of the Organisation for Economic Co-operation and Development (OECD) excluding Türkiye rose to 3.2% in August 2026, from 3.0% in the previous month (Chart 2). The rise in headline inflation was almost entirely due to higher energy inflation (14.1% in August, compared with 11.9% in July). At the same time, core inflation (excluding food and energy prices) remained broadly stable, and food inflation declined by 0.2 percentage points. The risk of inflationary second-round effects appears contained so far, as one-year-ahead survey-based inflation expectations across major economies have risen only moderately, by between 0.1 and 0.5 percentage points, since the start of the conflict in the Middle East.

Economic activity in the United States is expected to remain resilient in the second half of the year. After a marginal slowdown of real GDP in the second quarter to 0.6%, quarter on quarter, on account of volatile inventories and net exports, available indicators signal a stabilisation of real GDP growth at similar levels over the second half of the year. While AI-related investment is still a key source of strength, there are signs that investment might be broadening beyond AI, as non-AI related investment growth turned positive in the second quarter. Private consumption, another key contributor to activity in the second quarter, is expected to remain strong, supported by high-income households on account of accumulated wealth gains. The rise in long-term government bond yields may exert a limited drag on household consumption in the short run, as a large share of household mortgage debt has a fixed rate. At the same time, tighter financial conditions are increasing affordability challenges for consumers taking out new loans. In September, US headline inflation and core consumer price index (CPI) inflation increased to 3.7%, year on year and 2.6%, year on year respectively, mainly on account of higher energy prices. Higher diesel prices are expected to affect inflation mostly indirectly, as the weight of diesel in the CPI basket is very small, but some industries such as transportation are heavily affected. At its September meeting, in a unanimous decision the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, its first increase since 2023. The FOMC also revised its projections for inflation upwards, delaying its return to target to 2029.

In China, exports continue to be a key growth driver as domestic imbalances persist. Quarterly GDP growth increased from 0.9% in the second quarter of 2026 to 1.2% in the third quarter, keeping China on track to meet its annual growth target. Activity data point to persistent domestic imbalances, with supply continuing to outpace demand and growth remaining reliant on foreign demand. Recent policy measures aim to support domestic demand, but their near-term impact is likely to be limited. Chinese export growth remains robust, with broad-based strength across products and destinations. Short-term trade policy risks have eased somewhat following the extension of the US-China trade truce to January 2027 after the meeting between President Trump and President Xi Jinping on 23-25 September. Headline consumer price inflation rose to 0.9% in September, from 0.8% in August, mainly reflecting higher energy prices. Producer price inflation surged to 5.0%, up from 3.8% in August, but price increases were concentrated in energy-intensive and AI-related industries; elsewhere, they continued to decline amid weak domestic demand and overcapacity. As temporary factors fade, export price inflation is expected to ease but remain positive over the projection horizon.

Economic activity in the United Kingdom was sustained amid higher inflation. Real GDP growth for the second quarter of 2026 was revised up to 0.5%, quarter on quarter, mainly supported by stronger business investment and exports. While monthly GDP up to August suggests ongoing momentum, timelier high-frequency indicators signal some moderation towards the end of the third quarter. Looking ahead, activity growth is expected to slow down in the second half of this year, as persistently elevated energy costs and uncertainty are likely to weigh on consumption and investment. Headline inflation picked up further in September to 3.5% (from 3.1% in August), primarily driven by higher energy inflation. At its September meeting, the Bank of England announced a multi-year quantitative tightening plan that will reduce the stock of gilts held for monetary policy purposes to zero by end-2034, implying an annual balance sheet reduction of GBP 46 billion. The key policy rate was kept unchanged at 3.75%.

2 Economic activity

The incoming data suggest that the euro area economy continued to expand in the third quarter of the year. Services have recovered, after weakening at the start of the Middle East conflict. Manufacturing, digital services and exports are benefiting from business investment related to artificial intelligence (AI). Government spending on infrastructure and defence is also supporting activity. These factors should continue to underpin growth in the near term. At the same time, renewed energy price increases have hit consumer confidence, and higher financing costs are likely to weigh on growth. The unemployment rate remained at 6.4% in August. Growth in employment and the labour force remains subdued, while productivity has gradually picked up. Over the medium term, a recovery in confidence and real incomes, driven by gradually declining energy prices and a robust labour market, should bolster domestic demand. Investment in AI-related activities and government spending on infrastructure and defence should also continue to support growth. Export growth should pick up on the back of strengthening foreign demand. The outlook is highly uncertain and remains conditional on the geopolitical situation as well as the functioning of energy markets.

Euro area real GDP rose by 0.6% in the second quarter of 2026, and by 0.3% when excluding volatile Irish data, according to the latest Eurostat national accounts release. The decomposition of demand shows that private consumption and export growth strengthened in the second quarter, while investment moved sideways. At the same time, changes in inventories made a substantial negative contribution to GDP growth (Chart 3). Growth was broad-based across industrial sectors. The ECB’s recent contacts with non-financial companies show that they have been negatively surprised by the duration of the conflict in the Middle East but positively surprised by how firms have adapted to it (see Box 4).^[1]

Incoming information suggests that activity remained positive but slowed in the third quarter.^[2] Industrial production excluding construction stood 0.6% below its second-quarter level on average over July and August. AI-related production supported industrial output, with production of computer, electronic and optical products around 3% higher in July and August than in the second quarter, partly offsetting declines elsewhere in manufacturing. At the same time, in July services production stood 0.4% above its average level in the second quarter – an improvement that largely reflects developments in information services activities and other professional, scientific and technical activities. The composite output Purchasing Managers’ Index (PMI) recovered in the third quarter, after dropping sharply at the onset of the Middle East conflict. Manufacturing continues to improve and perform solidly (Chart 4, panel a), while the services sector has recovered strongly from its low after the initial energy price shock (Chart 4, panel b), supported by increased AI-related activity.

The few indicators with a bearing on the fourth quarter are signalling continued, albeit moderate, growth; but uncertainty is very high. The composite output PMI eased between September and October 2026, still indicating continued moderate growth at the beginning of the fourth quarter. The manufacturing PMI declined from the third quarter of 2026, standing at 52.4 in October, with the services PMI business activity index also falling back, from an average of 52.1 in the third quarter to 51.7 in October. The ECB’s recent contacts with non-financial companies corroborate this outlook for moderate growth in the fourth quarter (see Box 4). On balance, contacts reported ongoing moderate momentum and confidence in recent months, although with notable variations across sectors. The manufacturing sector experienced a clear split in activity, with very strong growth in demand for high value added electronics, electrical equipment and related machinery, while many other industries continued to struggle with low, flat and/or declining volumes amid intensifying import competition. The protracted energy shock, tighter financing conditions and the increase in policy uncertainty are expected to dampen spending and investment decisions in the near term.

Employment continues to grow at a moderate pace amid lower labour demand. Employment and total hours worked increased by 0.1%, quarter on quarter, in the second quarter of 2026.^[3] The pace of employment growth slowed to 0.5%, year on year, in the first half, compared with an average of 0.7% in 2025 (Chart 5). This moderation partly reflects weaker labour demand. The job vacancy rate fell to 2.1% in the second quarter of 2026, down by 0.1 percentage points from the first quarter and by 1.2 percentage points from its peak in the second quarter of 2022. Vacancy rates in construction and health services remain above the levels reached in the second quarter of 2025, whereas vacancy rates in information and communications technology and professional services have declined further. Labour market tightness, measured as vacancies per unemployed person, fell from 0.36 in the second quarter of 2022 to 0.25 in the second quarter of 2026. Labour force growth has also moderated. Year on year, it increased by 0.5% in the first and second quarter of 2026, compared with average growth of 0.9% in 2025.

The PMI employment index suggests that employment continued to grow at a moderate pace in the third quarter of 2026. The index averaged 50.4 in the quarter, 0.9 points above its second-quarter average and slightly above the threshold of 50, signalling positive, albeit moderate, employment growth. Preliminary October data show the PMI employment index falling to 50.1 from 50.5 in September, pointing to a continuation of this very moderate employment growth in October.

Private consumption growth is expected to have lost momentum in the third quarter of 2026. Private consumption expanded by 0.4%, quarter on quarter, in the second quarter, driven by spending on services and durable goods (Chart 6). Spending on durable goods was supported mainly by purchases of electric and hybrid vehicles, which now account for around 70% of new car registrations, likely reflecting a shift away from vehicles exposed to high fuel prices. By contrast, consumption of non-durable goods declined. As real disposable income rose only marginally in the second quarter, households drew on their savings to cushion the impact of higher inflation on consumption. This was reflected in a decline in the household saving rate to 14.2% in the second quarter, from 14.4% in the first quarter. Turning to the third quarter, retail trade volumes were down by 0.3%, quarter on quarter (on average for July and August), pointing to weaker goods spending, mainly on food, fuel and equipment. Nevertheless, tourism-related spending appears to have remained resilient despite the conflict in the Middle East. Survey indicators also point to a moderation in household spending momentum. The European Commission’s consumer confidence indicator declined in September and October amid renewed increases in energy prices. The decrease in September was driven mainly by weaker household expectations for their own financial situation and major purchases. Consumer uncertainty also increased in September. Nevertheless, the European Commission’s consumer-weighted expected activity indicator rose, mainly driven by retail trade and food, while expectations for accommodation and travel declined. Looking ahead, elevated energy prices and the uncertainty triggered by the conflict in the Middle East are likely to continue weighing on private consumption, with higher energy prices eroding households’ real incomes. At the same time, continued high uncertainty and tight credit supply conditions could prompt households to save more. Nonetheless, these negative effects could be cushioned by the resilience of households’ balance sheets, which have supported private consumption since the end of 2022, amid historically low levels of household indebtedness and leverage.

Business investment is expected to have picked up in the third quarter and is seen to expand moderately thereafter. Business investment (excluding volatile Irish intangibles) contracted by 0.1%, quarter on quarter, in the second quarter amid high energy prices and elevated uncertainty. A breakdown by assets shows that investment in tangibles – which also includes military equipment – fell in the second quarter partly owing to a sizeable base effect from high defence investment in the first quarter. Meanwhile, investment in intangible assets showed modest growth. Short-term indicators for the third quarter of 2026 remain somewhat mixed. Capital goods production fell in July and August while intangibles production rose in July compared with their respective averages in the second quarter. However, confidence among capital goods producers (including producers of computer, electronic and optical products) and digital services providers was higher in the third quarter than in the second quarter (Chart 7, panel a). Investment at the end of 2026 and beyond should continue to grow, driven by AI technology, digitalisation and defence. Corporate contacts reported that geopolitical uncertainty related to tariffs and the Middle East conflict are increasingly seen as a “new normal” rather than a short-lived disturbance. This is prompting them to diversify suppliers and markets, invest in preparedness and shift towards longer-term adaptation strategies. They also see strong investment in the defence, electronics and semiconductor-producing sectors, while activity in traditional processing industries, such as chemicals, remains more subdued (see Box 4). Survey data from the European Commission show a near-term expansion in computer production, which serves as a proxy for AI-enabling equipment, particularly in Germany and the Netherlands. Confidence in digital services providers also rose in the third quarter relative to the previous quarter. Nonetheless, tighter financing conditions could weigh on investment, as also flagged in the ECB’s euro area bank lending survey.

Housing investment may only stabilise gradually in the near term, as temporary factors and tighter financing conditions slow its recovery. After housing investment declined by 1.3% in the second quarter of 2026, construction sentiment worsened further in the third quarter. Survey indicators such as the PMI for housing output and the European Commission’s indicator of recent trends in building and specialised construction activity have decreased in recent months, pointing to a slowdown in housing market activity (Chart 7, panel b). These activity indicators were also affected by adverse weather conditions during the summer months – notably heatwaves, which temporarily weighed on housing investment – and may therefore partially revert later in 2026.^[4] The share of firms reporting insufficient demand in the European Commission survey increased in September; a situation that was corroborated by contacts from the corporate sector indicating that demand was increasingly being dragged down by rising interest rates. Despite the tightening financing conditions, housing loan growth shown by monetary financial institutions remained at 3.1% in August, up from 2.5% in August 2025. Similarly, the number of residential building permits continued to increase, pointing to robust underlying demand, although it was also driven by some front-loaded registrations in response to a legislative change in the Netherlands. In addition, the current output of building construction and specialised construction activities in July and August stood 0.1% above its level in the second quarter, indicating some recovery in housing investment. Overall, these indicators suggest that housing investment may gradually stabilise over the coming quarters as country and weather-specific factors subside, although tighter financing conditions continue to weigh on the outlook.

Extra-euro area goods exports continued to grow in August, while import price pressures remained elevated. Export volumes increased by 1.0% in the three months to August compared with the preceding three-month period, while import volumes declined by 0.9%. However, momentum eased, overall export volumes are still below their 2021 levels and growth is uneven across product categories and countries. Exports of AI-related goods grew by 14% in the first six months of the year, although the increase was considerably smaller than in the rest of the world. At product level, gains were concentrated in machinery and transport equipment – which include AI-related goods – and chemicals. At country level, they were driven mainly by the Netherlands, with other positive contributions from Ireland and Germany. These gains reflect AI-related global demand, which benefits each country according to its different specialisations. Looking ahead, short-term indicators point to stronger momentum in manufacturing, but a weaker outlook for services. Manufacturing PMI new export orders increased further in September and October, while services export orders remained in contractionary territory. Sectoral PMIs show a strong increase in suppliers’ delivery times in the technology sector, pointing to downside risks relating to the extent and durability of AI support for euro area exports.

The euro area growth outlook remains highly uncertain; in particular, owing to the geopolitical situation, the protracted energy shock and volatility in the global bond markets. Renewed disruptions of energy supplies could cause energy prices to rise further and for longer, weighing on real incomes, spending and investment. A resurgence of trade tensions between major economies could also further disrupt supply chains, reduce exports and weaken consumption and investment. By contrast, growth could turn out to be higher if the economy and the energy markets were to adapt more quickly than expected to the disruption caused by the ongoing conflicts or if these were resolved sustainably. Moreover, the adoption of new technologies by euro area firms and spending on defence and infrastructure, as well as reforms to enhance productivity and complete the EU’s Single Market, may drive up growth by more than expected.

3 Prices and costs

Annual euro area headline inflation increased to 3.8% in September 2026, from 3.2% in August, owing mainly to higher energy inflation. Energy prices have continued to rise, posing upside risks to the inflation outlook. The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects. While the full effects of the energy shock are still unfolding, underlying inflation has remained broadly stable so far and wages do not show a material response at this stage. Annual growth in compensation per employee decreased to 3.3% in the second quarter of 2026, down from 3.6% in the previous quarter. Negotiated wage growth and forward-looking indicators, such as the ECB wage tracker and the results of surveys on wage expectations, point to a rise in wage growth over the coming quarters before a slowdown towards the end of 2027. Inflation expectations over shorter horizons remain at elevated levels, while most measures of longer-term inflation expectations stand at around 2%, supporting the stabilisation of inflation around target in the medium term.

Annual euro area headline inflation, as measured by the Harmonised Index of Consumer Prices (HICP), rose to 3.8% in September 2026, from 3.2% in August (Chart 8). This increase was driven mainly by a surge in energy inflation, alongside smaller increases in both food inflation and the HICP excluding energy and food (HICPX). In the third quarter of 2026 euro area headline inflation stood at 3.3%, in line with the September 2026 ECB staff macroeconomic projections for the euro area.

In September 2026 the annual growth rate of energy prices soared to 18.9%, up from 14.3% in August, amid a re-escalation of the conflict in the Middle East. This surge in energy inflation was due mainly to a year-on-year increase of 33.8% in prices for transportation fuels, as prices for petrol and diesel rose on the back of higher crude oil prices and large refining margins. Prices for electricity and gas also ticked up, adding to the rise in energy inflation, as the pass-through of wholesale prices to consumer prices continues.

Food inflation picked up to 1.3% in September from 1.1% in August. This increase was due to a sharp rise in unprocessed food inflation, up to 4.0% in September from 2.7% in August. However, this was partly offset by a slight decline in processed food inflation, down to 0.4% from 0.5% over the same period. The slowdown in processed food inflation most likely reflects delayed effects from earlier declines in commodity prices and subdued pipeline pressures, as the current energy price shock may still pass through to prices at the later stages of the production chain. The surge in unprocessed food inflation was driven primarily by the prices of weather-sensitive vegetables that were affected by the heatwaves over the summer. Such weather events – heatwaves, droughts and the developing “El Niño” conditions – together with the indirect effects of the energy shock may pose upside risks to the food inflation outlook.^[5]

HICPX inflation ticked up to 2.5% in September from 2.4% in August. This reflected higher services inflation, which rose to 3.2% in September from 3.0% in August and more than compensated for the slight easing in non-energy industrial goods (NEIG) inflation, down to 1.1% from 1.2% over the same period. The rise in services inflation stemmed mainly from stronger price growth in recreation services, in particular accommodation and package holidays, and was partly offset by slower growth in communication and housing services alongside stable transport services inflation. The slowdown in NEIG inflation in September reflects a decline in semi-durables inflation, and, to a lesser extent, in non-durables inflation, while durables inflation remained unchanged.

Developments in indicators of underlying inflation remained somewhat mixed in September (Chart 9). Most exclusion-based measures of inflation increased slightly by between 0.1 and 0.3 percentage points, except for the weighted median, which was unchanged, and HICPX excluding travel-related items, clothing and footwear (HICPXX), which ticked down to 2.5% from 2.6% in August. Regarding model-based indicators, the Persistent and Common Component of Inflation rose to 2.4% in September, from 2.3% in August, while the Supercore indicator, which comprises HICP items sensitive to the business cycle, edged down to 2.5% from 2.7% over the same period. Domestic inflation, which comprises items with a low import content, also eased in September, down to 3.2% from 3.3% in August. Overall, the range of values across the underlying inflation indicators narrowed slightly in September to 2.2%-2.7% from 2.1%-2.7% in August, and does not point to any broadening of underlying price pressures.

Pipeline pressures increased further at the early stages of the pricing chain, while showing mixed signals at the later stages (Chart 10). At the early stages of the pricing chain, energy producer price inflation soared to 21.0% in August from 13.0% in July. Over the same period, energy import price inflation surged to 30.9% from 18.5%. Both measures had moderated earlier in the summer but stood at these elevated levels in August owing to a re-escalation of the Middle East conflict. Regarding intermediate goods, both domestic producer price inflation and import price inflation increased in August from July, to 6.8% from 6.3% and to 9.1% from 8.8% respectively. In the same month, at the later stages of the pricing chain, there was little change in pipeline pressures for non-food consumer goods, with domestic producer price inflation increasing by 0.2 percentage points, to 2.5%, and import price inflation remaining unchanged at 0.7%. For manufactured food, the annual growth rate of both domestic producer prices and import prices remained in negative territory in August: the former held steady at ‑1.2%, while the latter stood 0.1 percentage points below its July level, at ‑2.1%. Owing to the ongoing conflict in the Middle East, developments in producer and import prices remain subject to high uncertainty, not only because of the lagged pass-through to the prices of energy-sensitive goods, but also because a prolonged energy shock could drive up producer costs in foreign countries, and hence euro area import prices, further.

Domestic cost pressures, as measured by GDP deflator growth, remained unchanged at 2.4% in the second quarter of 2026 (Chart 11). This was due to a lower contribution from unit labour costs, partially offset by a higher contribution from unit profits, while the contribution from unit taxes decreased marginally. Between the first and second quarters of 2026, unit labour cost growth fell markedly, from 3.6% 2.6%. This decline reflected an increase in annual labour productivity growth, from 0.1% to 0.7%, alongside a decrease in the annual growth rate of compensation per employee, from 3.6% to 3.3%. The latter decrease reflected a decline in negotiated wage growth, to 2.4% from 2.6%, and a drop in the contribution from the wage drift component to 0.9 percentage points from 1.0 percentage points. Looking ahead, the ECB wage tracker, which has been updated with data on wage agreements negotiated up to mid-October 2026, suggests that pressure on negotiated wages will reach 2.8% in the first half of 2027 before declining to 2.4% in the third quarter of that year.^[6] Furthermore, respondents to the ECB’s Corporate Telephone Survey expect wage growth to slow slightly, from 3.0% in 2026 to 2.9% in 2027 (see Box 4).

Surveys conducted among professional forecasters, monetary analysts and consumers show a temporary uptick in short-term inflation expectations and no change in longer-term inflation expectations. Short-term inflation expectations for 2026 increased in both the October 2026 ECB Survey of Monetary Analysts (SMA) and the ECB Survey of Professional Forecasters (SPF) for the fourth quarter of 2026, to stand at 3.1% and 3.0% respectively, up from 2.9% and 2.7%. Both the SMA and the SPF point to a decline in inflation in 2027, to 2.8% and 2.6% respectively (Chart 12, panel a). Regarding short-term consumer inflation perceptions and expectations, the median rate of perceived inflation over the previous 12 months edged up to 3.6% in the September 2026 ECB Consumer Expectations Survey (Chart 12, panel b) from 3.5% in August. Over the same period, median expectations for inflation over the next 12 months also increased slightly, to 3.1% from 3.0%, and for three and five years ahead they were unchanged at 2.9% and 2.5% respectively. The median rates for longer-term inflation expectations in the SMA and the SPF were likewise unchanged, at 2% (Chart 12, panel a).

Over the review period from 10 September to 28 October 2026, near-term market-based measures of inflation compensation increased, while longer-term market-based expectations remained well anchored (Chart 12, panel a). Market pricing of the inflation outlook increased over the near term, reflecting higher energy prices. Inflation fixings, which are swap contracts linked to the euro area HICP excluding tobacco, increased over short horizons, peaking at 4.5% in January 2027, which is around 31 basis points higher than at the start of the review period. Over longer horizons, they suggest that investors expect inflation to remain elevated in the first half of 2027 before falling sharply in the second half of the year to reach levels close to the Governing Council’s 2% inflation target by 2028. Looking beyond the near term, the one-year forward inflation-linked swap rate one year ahead decreased by 10 basis points, to stand at around 2.2% at the end of the review period. When adjusted for inflation risk premia, however, the same measure declined by 1 basis point, to stand at 2.1% at the end of the review period. Longer-term market-based inflation expectations, as reflected in the five-year forward inflation-linked swap rate five years ahead, remained firmly anchored at around 2.0% once adjusted for inflation risk premia.

4 Financial market developments

Over the review period from 10 September to 28 October 2026, euro area financial markets were influenced mainly by developments in the Middle East conflict and a repricing in sovereign bond markets. The rate hike announced by the Governing Council on 10 September was well anticipated and fully transmitted to money markets. At the end of the review period, the euro short-term rate (€STR) forward curve implied around 43 basis points of cumulative policy rate hikes by the end of the first quarter of 2027, down from the level priced in at the start of the review period. Both short and long-term risk-free rates in the euro area decreased slightly during the review period. Euro area sovereign bond yields increased, reflecting wider sovereign spreads relative to risk-free rates. Broad stock market indices for the euro area moved down over the review period on account of a broad-based moderation in risk appetite. Corporate bond spreads widened in both the investment-grade and high-yield segments. In foreign exchange markets, the euro depreciated against the US dollar (‑4.2%) and in trade-weighted terms (‑2.5%).

Short and long-term risk-free rates in the euro area decreased over the review period. The benchmark €STR stood at 2.44% at the end of the review period, reflecting the Governing Council’s decision to raise the three key ECB interest rates by 25 basis points at its meeting on 10 September 2026. Excess liquidity decreased by around €22 billion to €2,095 billion, which mainly reflected the continuing decline in the Eurosystem’s portfolios of securities held for monetary policy purposes. Short-term forward rates fell during the review period: the €STR forward curve on 28 October 2026 implied cumulative policy rate hikes of about 43 basis points by the end of the first quarter of 2027, down from 71 basis points priced in on 10 September. Beyond mid-2028, the curve remained broadly unchanged up to the five-year maturity but fell at longer horizons. The decline in the forward curve, which partly reversed earlier upward moves around the time of the September Governing Council meeting, reflected central bank communication in the period between monetary policy meetings as well as changes in the economic outlook and risk sentiment amid a widening of euro area sovereign and corporate spreads.

Euro area long-term sovereign bond yields rose over the review period and remained close to multi-year highs (Chart 13). While the ten-year nominal overnight index swap (OIS) rate had decreased from 3.4% to 3.2% by the end of the review period, the ten-year GDP-weighted euro area sovereign bond yield rose by 8 basis points, standing at around 4.0% at the end of the review period. This increase reflected a widening of sovereign spreads by 17 basis points, as the steady upward trend in global long-term yields since 2024 has compounded fiscal concerns, prompting investors to demand greater compensation for holding sovereign bonds. Cross-country dispersion of sovereign spreads over risk-free rates remained contained compared with historical levels, with the exception of the ten-year French sovereign spread relative to the OIS rate, which widened by 59 basis points. The ten-year US Treasury yield increased by around 4 basis points to 5.1%, while the ten-year UK gilt yield rose by around 5 basis points to 5.3%. The increase in long-term yields over the review period extended an upward trend that has been observed across major currency areas since late 2024.

Broad stock market indices for the euro area fell slightly over the review period, on account of a broad-based moderation in risk appetite. Overall, euro area stock markets went down by 1.5% over the review period, led by a 7.4% decline in bank share prices. The sub-index for non-financial corporations increased by 0.7%. Differences between country-level indices were generally small, pointing to a broad-based moderation in risk appetite. In the United States, the broad equity market index rose by 2.0%. US non-financial corporations posted an increase of 2.5%, mostly reflecting the performance of stocks related to artificial intelligence, while US bank equity prices decreased by 1.2%.

Euro area corporate bond spreads widened in both the investment-grade and high-yield segments over the review period. The widening was most pronounced in the high-yield segment, where spreads increased by about 69 basis points. Investment-grade spreads widened by approximately 26 basis points for financial firms and by 20 basis points for non-financial corporations. However, spreads remained contained by historical standards.

In foreign exchange markets, the euro depreciated against the US dollar and in trade-weighted terms (Chart 14). The depreciation mainly reflected shifts in market expectations for further monetary policy tightening in the United States, as well as growing concerns about government finances and political uncertainty surrounding fiscal consolidation in a number of euro area countries. These concerns were accompanied by higher government bond yields and a widening of spreads over risk-free rates. The nominal effective exchange rate of the euro – as measured against the currencies of 40 of the euro area’s most important trading partners – declined by 2.5% over the review period. This weakening was broad-based, as the euro depreciated against the US dollar (‑4.2%), emerging market currencies including the Chinese renminbi (‑4.7%), and other major currencies such as the pound sterling (‑2.5%) and the Swiss franc (‑2.0%). The energy shock stemming from the prolonged conflict in the Middle East continued to weigh on the euro.

5 Financing conditions and credit developments

Financing conditions for firms and households have tightened since the Governing Council’s meeting on 10 September 2026. In August bank lending rates increased to 3.6% for households, although they remained broadly unchanged for firms at 3.8%. Over the review period from 10 September to 28 October 2026, the cost of equity financing increased and the cost of market-based debt edged up slightly, reflecting a higher equity risk premium and a rise in corporate bond spreads respectively. In August and September annual growth in loans to firms slowed to 4.2% from 4.4% in July and annual growth in loans to households remained unchanged at 3.1%. Annual growth in broad money (M3) held steady, at 3.5%. According to the October 2026 euro area bank lending survey, banks reported a decrease in demand for new loans to firms and a further tightening of credit standards in the third quarter of 2026. Demand for housing loans decreased markedly and demand for consumer credit fell slightly, while credit standards for household loans remained broadly unchanged and those for consumer credit tightened. In the Survey on the Access to Finance of Enterprises for the third quarter of 2026, firms reported an increase in bank interest rates as well as a continued tightening of other lending conditions.

Bank funding costs increased in August, continuing their gradual upward trend since March (Chart 15). The composite cost of debt financing for euro area banks increased to 1.8% in August from 1.7% in July, compared with 1.5% in March. This development was driven primarily by the ongoing increase in bank bond yields, reflecting broad upward pressure on global bond yields, as well as an increase in spreads on credit default swaps for euro area banks amid fiscal concerns over several euro area countries. These concerns triggered a repricing of sovereign risk (see Section 4, “Financial market developments”). Interbank rates also increased following the Governing Council’s decision to raise the three key ECB interest rates in June and September. The composite deposit rate, which measures the marginal cost of bank deposit funding, stood at 1.0% in August, broadly unchanged from the previous month. Interest rates on time deposits and savings accounts rose, as banks passed on the earlier increase in policy rates, while rates on overnight deposits for firms and households were broadly unchanged.

Bank lending rates for households increased further, while those for firms were broadly unchanged (Chart 16). The cost of borrowing for households for house purchase increased slightly from 3.5% in July to 3.6% in August, reflecting ongoing transmission from higher market rates. Higher risk-free rates and sovereign bond yields put upward pressure on mortgage and longer-term corporate borrowing rates. The increase in mortgage rates was broad-based across rate fixation periods but most notable for mortgages with short fixation periods (up to one year). In August the cost of bank borrowing for non-financial corporations was broadly unchanged at 3.8%, which masked offsetting developments across loan segments. Rates on small loans continued to rise, while rates on large loans (above €1 million) fell. Consequently, the spread between interest rates on small and large loans to firms widened to 68 basis points.

Over the review period from 10 September to 28 October 2026, the cost of equity financing increased further and the cost of market-based debt edged up only slightly. The overall cost of financing for non-financial corporations – the composite cost of bank borrowing, market-based debt and equity – rose for the third consecutive month, reaching 6.7% in August (Chart 17).^[7] The main driver of this increase was the cost of equity, while market-based debt financing and bank borrowing costs remained broadly unchanged. Daily data covering the review period also show a further rise in the cost of equity financing owing to a higher equity risk premium. The cost of market-based debt reflects a small increase resulting from higher corporate bond spreads, especially in the high-yield segment (see Section 4, “Financial market developments”).

Growth in loans to firms and to households remained unchanged from August to September (Chart 18). The annual growth rate of bank lending to non-financial firms stayed at 4.2% in August and September, below its annual rate of 4.4% in July, and close to its historical average of 4.3% since the start of 1999. The annual growth rate of external debt financing by firms increased to 4.2%, up from 4.1% in August and July, reflecting stronger net issuance of corporate bonds. Short-term loans increased markedly, continuing their upward trend that started in February 2026 and likely reflecting higher working capital needs amid the energy shock. The annual growth rate of loans to households was also unchanged, at 3.1%, below its historical average of 4.1% since the start of 1999. While growth rates in mortgage lending and consumer credit declined slightly, this was offset by a marked increase in growth in other forms of lending to households, including loans to sole proprietors.

The October 2026 euro area bank lending survey, conducted between 21 September and 6 October 2026, reports a further tightening of credit standards for loans to firms and broadly unchanged credit standards for housing loans in the third quarter of 2026 (Chart 19). The tightening of credit standards for loans or credit lines to euro area firms was larger than expected by banks in the previous round. Higher perceived risks to the economic outlook and lower risk tolerance on the part of banks remained the main contributing factors. Some banks indicated tightening pressure stemming from geopolitical uncertainty and developments in energy markets. Banks reported broadly unchanged credit standards for housing loans and a further net tightening for consumer credit, with lower risk tolerance and higher risk perceptions as the main drivers. For the fourth quarter of 2026, euro area banks expect credit standards to tighten further for loans to firms and to tighten significantly for housing loans and consumer credit.

Banks reported a decrease in the demand for loans to firms, a strong decrease in the demand for housing loans and a slight decrease in the demand for consumer credit in the third quarter of 2026.^[8] The decline in the demand for loans to firms was unexpected, as banks had anticipated an increase in the previous survey round. Loan demand was primarily dampened by higher interest rates. Among other factors contributing to the decrease were weaker demand for fixed investment among small and medium-sized enterprises (SMEs) and substitution towards alternative sources of finance. Demand for inventories and working capital, and to a lesser extent financing related to debt refinancing and restructuring, continued to exert upward pressure on loan demand. Demand for housing loans decreased markedly, whereas demand for consumer credit only fell slightly. In the case of housing loans, the reported net decrease was the most pronounced since the third quarter of 2023 and was larger than banks had anticipated. Developments in interest rates were the main driver of the decline, followed by deteriorating consumer confidence and worsening housing market prospects. The higher level of interest rates and lower consumer confidence, as well as weaker spending on durable goods, weakened the demand for consumer credit. For the fourth quarter of 2026, banks expect broadly unchanged loan demand for firms and a stronger decline in the demand for housing loans and consumer credit.

The funding situation of banks deteriorated further, while lower excess liquidity and greater risks to credit quality had a tightening impact on credit standards. According to the responses of banks to the ad hoc questions in the survey, the ease with which banks were able to access debt securities, money markets and retail funding deteriorated further in the third quarter of 2026 while remaining broadly unchanged for securitisations. Over the next three months, banks expect access to funding across all four categories to deteriorate further. The reduction in the ECB monetary policy asset portfolio has had a mildly negative impact on the liquidity positions and market financing conditions of euro area banks over the last year. However, its impact on bank profitability was seen as slightly positive, as their overall higher net interest income was partially offset by small capital losses. Banks expect these effects to persist over the coming year. They also reported a net tightening impact of non-performing loan ratios and other credit quality indicators on their credit standards across all loan categories. This mainly reflected higher risk perceptions. In response to a new question, euro area banks reported that the contribution to their business strategy was slightly positive over the past year and neutral in terms of their broader financial situation and with respect to credit standards. For the next year, banks expect digital assets to have an increasingly positive impact on their business strategy alongside a negative impact on their retail funding business.

In the latest Survey on the Access to Finance of Enterprises (SAFE), conducted between 26 August and 2 October 2026, firms reported a tightening in bank lending conditions amid increases in bank interest rates. In the third quarter of 2026 a net 46% of firms reported an increase in bank interest rates, compared with a net 42% in the previous quarter. The increase in interest rates was more often reported by large firms than by SMEs. Beyond interest rates, firms also faced higher non-interest borrowing costs, although the pace of tightening eased slightly.

Bank loan availability declined more than needs for bank loans, resulting in a widening of the perceived financing gap (Chart 20). In the third quarter of 2026 a net 2% of firms indicated a decrease in needs for bank loans (compared with a net 2% indicating an increase in the previous quarter), while a net 5% of firms reported a decline in bank loan availability (from ‑1% in the previous quarter). Developments in bank loan availability were similar across size classes, with both SMEs and large firms reporting a decline. SMEs indicated broadly unchanged needs for bank loans (net 1%, down from a net 2%), while large firms indicated a decrease (net ‑6%, compared with 3% in the previous quarter). As a result, the euro area bank loan financing gap indicator – an index capturing the difference between changes in needs and availability – remained positive for a net 2% of firms compared with a net 3% in the previous quarter. Looking ahead, a net 8% of all firms anticipate a decline in bank loan availability over the next three months.

Annual growth of broad money (M3) remained stable in September, amid weaker short-term dynamics (Chart 21). The annual growth in M3 stayed unchanged at 3.5% in September, well below its historical average of 5.2% since the start of 1999. The annual growth of narrow money (M1), comprising currency in circulation and overnight deposits, decreased to 2.7% from 2.9% in August. This reflected a shift from overnight deposits to time deposits and a larger contribution from marketable instruments, both of which offer investors higher returns. From a counterpart perspective, annual M3 growth was supported by net external inflows into the euro area and domestic credit growth, while the ongoing reduction of the Eurosystem balance sheet continued to weigh on M3 growth.

1 Narratives and risks: a quantitative toolkit to evaluate scenarios applied to the Middle East conflict

Prepared by Niccolò Battistini, Mohammed Chahad and Luís Fonseca

This box introduces a quantitative framework to evaluate the alternative scenarios around the Eurosystem/ECB staff baseline projections, focusing on assessing the plausibility of their economic impact. As is typical in a policy context, the baseline projections are assumed to represent the most likely outcome within the set of possible future outcomes, conditional on the current state of the economy and a set of technical assumptions. To highlight the uncertainty around the baseline, these projections are often accompanied by alternative scenarios which explore the macroeconomic implications of policy-relevant economic narratives (European Central Bank, 2025). As stressed in Cordova-Pozo and Rouwette (2023), however, the literature assessing scenario relevance remains limited.^[9] This box proposes a methodology aimed at partially closing this gap by evaluating scenarios, with a focus on the plausibility of their macroeconomic outcomes compared with empirical patterns.^[10]

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2 Extreme summer weather: what does it mean for euro area construction output?

Prepared by Johannes Gareis

The summer of 2026 brought repeated and prolonged episodes of extreme heat to large parts of the euro area, with potentially significant implications for construction activity. Construction is among the sectors most exposed to weather conditions, as much of its activity takes place outdoors and involves physically demanding work. High temperatures make it harder to work safely, and workers in climate-exposed industries such as construction have been found to reduce their working hours on very hot days, partly by shifting activity to cooler periods within the same day or to other days.^[11] The impact on working hours may be exacerbated by regulations, as several euro area countries now require outdoor work to be adapted or suspended during periods of extreme heat.^[12] Recent econometric evidence also finds that extreme weather events can have sizeable short-term effects on economic and sectoral activity in the largest euro area economies.^[13] This box assesses the implications of this summer’s weather for euro area construction output, drawing on the European Commission’s business survey as a timely indicator of weather-related disruption and on historical evidence of the impact of this disruption on output.

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3 What share of public services employment is contributed by the private sector?

Prepared by Afonso S. Moura

Public services have been a notable contributor to aggregate employment growth in the euro area in recent years. Since the COVID-19 pandemic employment has grown faster in the public services sector than most others, increasing this sector’s share in overall euro area employment. By the end of 2025 its share was around 0.8 percentage points higher than in 2019 and almost as high as when it peaked in 2021.^[14],[15] Over the last three years public services have contributed disproportionally to employment growth in the euro area, accounting for more than one-third, despite representing less than one-quarter of total workers (Chart A, panel a). This box analyses that contribution from two perspectives. First, it identifies health as the dominant driver within public services and argues that this reflects a structural trend. Second, it shows that a significant share of employment in public services, particularly in health and social work activities, is in fact provided by the non-public sector, as ageing demographics are fuelling demand for residential care and social work. The importance of the private sector in providing public services puts the increasing contribution of public services to employment growth – and the associated perception of a growing public sector – into perspective. At the same time many of the public services jobs in the private sector may be partly funded by the state, for example through social transfers in kind or long-term care insurance. Therefore the findings concern who employs these workers, rather than the overall fiscal footprint of public services.

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4 Main findings from the ECB’s recent contacts with non-financial companies

Prepared by Davide Fantino, Alex Melemenidis, Richard Morris, Zsuzsanna Riedel and Moreno Roma

This box summarises the main findings from recent contacts between ECB staff and representatives of 64 leading non-financial companies operating in the euro area.^[16] The exchanges mainly took place between 28 September and 7 October 2026.

Reports from contacts pointed to ongoing moderate growth in activity in the third quarter and towards unchanged momentum in the fourth quarter (Chart A and Chart B). Activity in the manufacturing sector was uneven with a very strong rise in demand for high value-added electronics, electrical equipment and related machinery. Meanwhile, many other industries continued to struggle with low, flat or declining volumes amid intensifying import competition. Construction and real estate activity were also losing momentum. The hot and dry summer weighed on agricultural output and food production, but it increased the demand for air conditioning and thereby raised energy output. Retail trade and related transport services remained relatively subdued, but most other business and consumer services experienced good growth.

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5 The role of refining costs and margins in HICP energy inflation

Prepared by Filippo Durero, Umberto Maglione, Ana-Simona Manu, Aidan Meyler, Mario Porqueddu, Tito Quadri and Ieva Rubene

The conflict in the Middle East is continuing to shape energy prices amid significant uncertainty. Brent front-month crude oil prices increased to above USD 110 per barrel at the end of October, close to 60% above pre-conflict levels. As pressures on crude oil prices and their volatility remain elevated, shortages originating from the Middle East, coupled with outages in Russia, have also strained global refinery operations and the supply of refined products, pushing up consumer prices.

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6 Artificial intelligence and European firms: the cost of market-based financing

Prepared by Irene Ferrari, Sofia Gori, Johannes Groß, Fabian Schupp and Sigurd Steffensen

Artificial intelligence (AI) has been the dominant theme in global financial markets since late 2022, with equities in the technology sector outperforming substantially (Chart A). This outperformance has been especially striking in the United States, led by a small group of hyperscalers, and is evident among European firms that occupy upstream positions in the global AI infrastructure buildout. However, AI’s influence on markets extends beyond a narrow set of infrastructure providers and stretches further back in time. Many firms integrate AI into their businesses, either by developing AI-enhanced products or by adopting AI-enabled processes that improve productivity.^[17] This box therefore introduces a new firm-level measure of AI exposure derived from AI-related discussions in earnings call transcripts. It uses this measure to examine how the AI exposure of European firms is reflected in their equity returns and corporate bond spreads.^[18]

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7 Bank competitiveness and its role for monetary policy

Prepared by Lorenzo Ferrante, Franziska Maruhn and Carla Valero Escribá

This box provides evidence on bank competitiveness in the euro area and its relationship with monetary policy transmission. Recently, European institutions have been exploring measures to improve bank competitiveness by reducing cross-border fragmentation and simplifying regulation and reporting requirements (European Commission, 2026). The definition of bank competitiveness is not straightforward. Banks are competitive if they generate profits based on a sustainable business model (rather than by exploiting market power) and are adequately capitalised, with affordable access to market-based funding and liquidity, allowing them to maintain lending during episodes of economic or financial disruption and through policy cycles. Bank competitiveness in turn supports the effective transmission of monetary policy.^[19]

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8 Who holds stablecoins? New evidence on euro area consumer holdings

Prepared by Alexandra Born, Johanne Evrard, Dimitris Georgarakos, Geoff Kenny, Claudia Lambert, Justus Meyer, Trixi Pairan and Luca Zannier

The expanding stablecoin market, its increasing interlinkages with the financial sector and growing consumer holdings could affect financial stability in the euro area. The global stablecoin market has grown rapidly since 2020 but has recently plateaued (Chart A, panel a). At the same time, stablecoins have become increasingly interlinked with the traditional financial sector, particularly through reserve asset holdings.^[20] While the euro-denominated stablecoin market has grown, it remains relatively small (Chart A, panel b). Stablecoins are mainly used for crypto trading, although they could potentially also serve as cross-border payment instruments. This box uses unique household-level evidence from a topical module of the ECB’s Consumer Expectations Survey (CES), carried out in August and November 2025, to assess the extent and composition of euro area consumers’ stablecoin holdings.^[21] Current exposures in the euro area appear limited, but the concentration of holdings among crypto investors and the prominence of US dollar-backed tokens could amplify shocks. Wider stablecoin use in the euro area, especially outside the crypto ecosystem, could increase the risks to traditional finance over time.^[22]

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1 Industrial policy in the EU: new opportunities, old risks?

Prepared by Sam Langfield, Daphne Momferatou and Ralph Setzer

Industrial policy can be defined as government intervention that targets the structural transformation of economic activity in pursuit of a public goal. Industrial policy deliberately directs factors of production to specific sectors. Conceptually, this distinguishes industrial policy from macroeconomic stabilisation measures and structural policies that aim to improve the general business environment (Juhász et al., 2024). While structural policies can also have uneven effects – for example, a research and development (R&D) tax credit would favour R&D-intensive industries – the conceptual distinction is useful for identifying policies explicitly designed for sectoral reallocation.

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2 From recognition to integration: the ECB’s progress on climate and nature-related risks and the role of its climate change centre

Prepared by Ivana Baranović, Giuseppe Barillà, Irene Heemskerk and John Hutchinson

The relevance of climate change and nature degradation for central banks continues to grow amid worsening physical impacts and a slower than expected transition to a low-carbon economy.^[23] Physical risks arising from more frequent and severe weather events, together with risks stemming from the transition towards a low-carbon economy, can affect inflation, economic activity, financial markets and the resilience of the overall financial system. Within its mandate, it is therefore important that the European Central Bank (ECB) develops a deep understanding of these risks and incorporates them into its monetary policy, banking supervision and other areas of activity.

More https://www.ecb.europa.eu/pub/pdf/ecbu/ecb.eb_annex202607~f276349687.en.pdf

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