FRANKFURT — The euro zone economy expanded at a faster-than-expected pace in the second quarter of 2026, as surging investment in artificial intelligence, robust government spending, and a series of one-off factors more than offset the drag from elevated energy costs and the ongoing conflict in Iran, according to data released Thursday by Eurostat. The 21-nation bloc posted quarterly GDP growth of 0.4%, more than double the 0.2% median forecast in a Reuters poll. On an annual basis, growth accelerated to 1.0%, well above the 0.5% consensus estimate, with several upward revisions to earlier figures also contributing to the stronger reading.
Despite the upside surprise, analysts caution that growth remains fragile and falls well short of the trajectory seen across the Atlantic. The United States is projected to expand by more than 2% in 2026, buoyed in part by substantial private sector AI spending. Most forecasters currently see full-year euro zone growth coming in below 1%, a figure already significantly reduced from the bloc's long-term potential.
Nevertheless, several bright spots have emerged. Unemployment held steady at 6.3% in June, defying expectations of labour market softening. A key economic sentiment indicator published on the same day rose more than anticipated, reflecting improved readings in both industrial and services sectors.
Business investment in AI has accelerated markedly across Europe, mirroring trends in the United States. Household consumption has also proved more resilient than feared, while Germany's government has continued to ramp up its long-promised expenditure on defence and infrastructure. Industry, which has been a persistent drag on growth for years, has shown surprising resistance to elevated energy costs and may have contributed positively to the quarterly figure.
Among the bloc's largest economies, Germany, France, and Italy each recorded quarterly growth of 0.2%, while Spain — the area's consistent outperformer — expanded by 0.7%, beating expectations of 0.6%. The Netherlands grew by 0.4%, twice the anticipated rate. Ireland posted particularly strong quarterly growth of 3.9%, driven by multinational firms in IT and communications that are domiciled there for tax purposes.
However, Irish GDP is notoriously volatile — it contracted by 7% the previous quarter — and analysts increasingly prefer to exclude it when assessing underlying euro zone trends. Looking ahead, economists warn that the growth drivers underpinning Q2 performance may not persist. Commerzbank economist Jörg Krämer noted that the recent escalation of the Middle East conflict suggests a final agreement between the United States and Iran remains some way off, likely weighing on the economic recovery in the second half of the year.
Krämer also revised his full-year German growth forecast upward to 1.0% from a prior estimate of 0.6%, citing the strength of the latest data. Other analysts highlight that some of the tailwinds were temporary in nature. High energy costs and supply disruptions may have diverted orders away from Asian competitors toward European producers, while some businesses may have front-loaded purchases in anticipation of worsening shortages later in the year.
As those one-off factors fade, the third quarter is expected to be more challenging. Persistent energy costs are gradually filtering through to consumers via higher petrol prices, airfares, and holiday costs. Household confidence could soften further as inflation erodes real incomes, while higher European Central Bank interest rates continue to exert pressure on consumer spending.
Reporting by Balazs Koranyi; Editing by Hugh Lawson. Source: Reuters via Kitco News.
Source: kitco.com