Philip Lane discusses euro area economy, inflation, and energy shocks

The outlook for the euro area economy

The ECB and Its Watchers XXVI Frankfurt

Philip R. Lane 25 March 2026Member of the Executive Board

www.ecb.europa.eu © Narrative of the baseline and alternative scenariosRubric

Persistence of acute Uncertainty Indirect and second- Fiscal and energy supply round effects on monetary disruptions inflation policy reactions

No explicit assumption on the In line with the observed Limited upward adjustment None beyond the

increase in the VIX index based on judgement to duration of the conflict or policies included in (4.4 points between 27 account for possible larger the baseline destruction of energy BaselineinfrastructureFebruary 2026 and the cut- impacts compared with the assumptions on short- off date of 11 March 2026) standard model elasticities term rates + fiscal Energy prices follow latest due to the size of the energy policy assumptions

technical assumptions (cut-off shock following usual rules 11 March 2026)

Acute energy supply Stronger impact on other None beyond the Increase in the VIX index

disruptions of 10 points with a fast prices (food, goods, policies included in Adverse

services) and wages due to reversal in Q3 2026 the baselineBut no significant further scenarionon-linearities (as seen destruction of energy towards the Q4 2025 level

after the 2021-22 episode)infrastructure

Stronger non-linearities Even more acute energy Increase in the VIX index None beyond the

supply disruptions of 14 points, remaining lead to sizeable indirect policies included in Severe and significant further significantly more and second-round effects the baselinescenariodestruction of energy elevated compared with the

infrastructure adverse scenario until end- 2027

©Middle East conflict scenarios: commodity price assumptionsRubric

Oil prices Synthetic commodity price index

(USD per barrel) (maximum percentage deviation)

Baseline March 2026 - cut-off 11/03 Severe Adverse Technical assumptions December 2025 10075th percentile - cut-off 11/03 95th percentile - cut-off 11/03902022 quarterly price peak 80170 70150 60 13050 40110 3090 20Sources: Refinitiv and ECB staff calculations. Source: ECB projection database.70Notes: The 2022 price peak refers to the second quarter of 2022. The latest observations Note: The left bar shows the maximum log deviation of the synthetic energy price index, 10are for 11 March 2026. combining oil and gas prices, measured over the 2021–2024 and 2022–2024 periods and reported as the average across the two periods. The right bar is based on the synthetic 050 energy commodity price index but also gives some weight to food and metal commodity 2021-2022 episode Severe scenario03/23 03/24 03/25 03/26 03/27 03/28 price indices.

©Adverse and severe scenarios – impact on the euro areaRubric

Real GDP growth HICP inflation HICP excluding energy and food inflation(percentage point deviation from (percentage point deviation from baseline annual growth rate) baseline annual growth rate) (percentage point deviation from baseline annual growth rate)

Uncertainty - real/financialUncertainty - real/financialUncertainty - real/financialEnergyEnergyEnergyGlobal spilloversGlobal spilloversGlobal spilloversTotalTotalTotal0.83.03.0 2.52.50.6 2.02.00.4 1.51.50.2 1.01.0 0.00.50.5 -0.20.00.0 -0.4-0.5-0.5 -0.6-1.0-1.0Notes: Simulations are conducted with the ECB-BASE model under a forecast setting with backward-looking expectation formation and with exogenous monetary and fiscal policy assuming that the shock starts in the second quarter of 2026. The overall impact on euro area economic growth and inflation includes energy, uncertainty and trade effects (foreign demand, competitors’ prices and exchange rates, computed in the ECB-Global model). The impact of the uncertainty shocks on GDP is estimated outside the model using an empirical framework, namely a BVAR model, and performing conditional forecast exercises on different paths for the VIX.Severe Severe SevereSevereSevere Severe Severe Severe SevereAdverse Adverse AdverseAdverseAdverse Adverse Adverse Adverse Adverse 2026 2027 20282026 2027 20282026 2027 2028 ©Growth in the baseline and adverse and severe scenarios Rubric

Real GDP growth Real GDP

(quarter-on-quarter growth rate) (index level; 2025Q4=100)

Adverse scenario Severe scenarioAdverse scenario Severe scenario December 2025 baseline March 2026 baselineDecember 2025 baseline March 2026 baseline 1050.7 0.6104 0.5 1030.4 0.3102 0.2 1010.1 0.0100 -0.1 -0.299Notes: Simulations are conducted with the ECB-BASE model under a forecast setting with backward-looking expectation formation and with exogenous monetary and fiscal policy assuming that the shock starts in the second quarter of 2026. The overall impact on euro area economic growth and inflation includes energy, uncertainty and trade effects (foreign demand, competitors’ prices and exchange rates, -0.3computed in the ECB-Global model). The impact of the uncertainty shocks on GDP is estimated outside the model using an empirical framework, namely a BVAR model, and performing conditional forecast exercises on different paths for the VIX.98-0.42025 2026 2027 20282025 2026 2027 2028 ©Inflation in the baseline and adverse and severe scenarios Rubric

HICP inflation HICP excluding energy and food inflation

(annual percentage changes) (annual percentage changes)

Adverse scenario Severe scenarioAdverse scenario Severe scenario March 2026 baselineMarch 2026 baseline 77 66 55 44 33 22

Notes: Simulations are conducted with the ECB-BASE model under a forecast setting with backward-looking expectation formation and with exogenous monetary and fiscal policy assuming that the shock 11starts in the second quarter of 2026. The overall impact on euro area economic growth and inflation includes energy, uncertainty and trade effects (foreign demand, competitors’ prices and exchange rates, computed in the ECB-Global model). The impact of the uncertainty shocks on GDP is estimated outside the model using an empirical framework, namely a BVAR model, and performing conditional forecast exercises on different paths for the VIX.

2025 2026 20272025 2026 2027 2028 ©Developments in consumer confidenceRubric

Consumer confidence around geopolitical conflicts

(adjusted percentage balances)

Gulf war (August 1990) 9/11 attack (September 2001) Russian invasion (March 2022) Middle East conflict (March 2026) 0 -2 -4 -6 -8 -10 -12 Sources: DG-ECFIN, Eurostat and ECB calculations. Notes: The consumer confidence flash estimate is published around a week before the full release of the other EC Consumer survey results and only includes information for the euro -14 area, while national data and the breakdown become available with the full release at the end of the month. The correlation between confidence and year on year consumption growth is stronger than the correlation between confidence and quarter on quarter consumption growth. Since the Russian invasion to Ukraine started on 24 February 2022, the relevant reference period is March 2022. T-1 T T+1 T+2 T+3 ©Developments in PMI activityRubric

Purchasing Managers Indices (PMI)

(diffusion indices)

Expected business PMIExpected business PMIExpected business PMI Output PMIOutput PMIActivity PMI New orders PMINew orders PMINew orders PMI

ServicesComposite

666666 646464 626262 606060 585858 565656 545454 525252 505050 Sources: S&P global and ECB calculations. Notes: The dotted lines show 2015-2019 averages of the respective variable. The latest observations are for March 2026. 484848 464646 01/25 05/25 09/25 01/2601/25 05/25 09/25 01/2601/25 05/25 09/25 01/26 Manufacturing 03/26 03/26 03/26 ©Market based inflation expectations Rubric

Change in inflation expectations Realised and expected HICP since conflict start excluding Tobacco

(left panel: month-on-month; right panel: year-on-year)(percentage points)

Interquartile range16 WDs into the conflict (Ukraine 2022)Pre-Iran war16 WDs into the conflict (Iran 2026)Median 2026 outturnMax during 16 WD periodMarket implied fixings now4.0%2.001.5% 0.025 1.753.5% 1.0% 0.0201.503.0% 1.252.5%0.5% 0.015 1.002.0% 0.750.0% 0.0101.5% 0.501.0% -0.5% 0.005Sources: Bloomberg and ECB calculations. Sources: Bloomberg and ECB calculations.0.250.5%Note: WD stands for working days. Notes: The median and interquartile range are based on realised month-on-month changes in HICP inflation (excluding tobacco) since 2000. The other series are based on fixings. 0.000.0%-1.0% 0.000IR 26 UA 22 IR 26 UA 22 IR 26 UA 22 JulApr OctJan JunFebMar1Y spot 1Y1Y forward 5Y5Y forward Aug Sep Nov Dec May ©Estimated thresholds for non-linear effects of energy shocksRubric

Synthetic indicator of energy commodity prices and thresholds for non- linear effects of energy shocks

(annual percentage change)

Synthetic energy commodity prices Small positive shock Medium positive shock Large positive shock 150 100 50 0 -50

Source: ECB staff calculations based on Bobeica, Holton, Huber and Martínez Hernández (2025).-100Notes: The chart shows the annual log differences in the synthetic indicator of energy commodity prices which combines oil and gas prices based on the euro area’s energy import shares. Red, yellow, and green dotted lines mark thresholds for small, medium, and large energy shocks (1, 2, and 3 standard deviations); non-linearities in the pass-through increase with shock sizes. The latest observation are for March 2026, yellow dot based on the March 2026 ECB staff projections, indicating that energy prices were projected to near the medium-sized energy shock threshold.-150

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 03/26 ©European Commission Firms’ Selling Price ExpectationsRubric

Manufacturing Services Retail

(net balances) (net balances) (net balances)

April 22 June 22

RetailServicesManufacturing 707070

April 22606060

505050 404040 303030 202020 101010 000Source: European Commission. Source: European Commission. Source: European Commission.Notes: The net balance represents the difference between the Notes: The net balance represents the difference between the Notes: The net balance represents the difference between the percentage of respondents expecting selling prices to increase and those percentage of respondents expecting selling prices to increase and those percentage of respondents expecting selling prices to increase and those -10-10-10expecting them to decrease over the three months after the survey. The expecting them to decrease over the three months after the survey. The expecting them to decrease over the three months after the survey. The series reached its peak in April 2022. The latest observations are for series reached its peak in April 2022. The latest observations are for series reached its peak in June 2022. The latest observations are for February 2026. February 2026. February 2026. 2004 2007 2010 2013 2016 2019 2022 20252004 2007 2010 2013 2016 2019 2022 20252004 2007 2010 2013 2016 2019 2022 2025 02/26 02/26 02/26 ©Selling prices and input costs: Corporate Telephone Survey and PMIRubric

Corporate Telephone Survey Composite PMI Prices

(averages ECB staff scores) (diffusion index)

Q2 2022 March 22Future selling prices Future input costsPrices charged Input prices

2.0100 April 22 901.5 80 1.070 60 0.5 50 400.0

Source: ECB Corporate Telephone Survey. Source: S&P Global.30Notes: Scores are averages of ECB staff scores in their assessment of what contacts said Notes: The prices charged component of the Purchasing Managers’ Index (PMI) reflects about quarter-on-quarter developments in selling prices and input costs. Scores range from survey responses on changes in the prices businesses charge for their goods and services. -0.5-2 (significant decrease) to +2 (significant increase). A score of 0 would mean no change. The input prices component captures changes in the costs businesses incur for inputs such 202008 2011 2014 2017 2020 2023 2026Both series peaked in the Q2 2022 CTS - carried out between 20 and 30 March 2022. The as raw materials, energy, and labour. Index values range from 0 to 100, with readings 2003 2006 2009 2012 2015 2018latest observations are for the first quarter of 2026. above 50 indicating rising prices and readings below 50 signalling falling prices. A value of 50 suggests no change in prices. The latest observations are for March 2026. 03/26 ©PMI prices in manufacturing and servicesRubric

Manufacturing PMI Prices Services PMI Prices

(diffusion index) (diffusion index)

October 21

March 22Prices charged Input pricesPrices charged Input pricesApril 22

100100

April 229090

8080 7070 6060 5050 4040

Notes: The prices charged component of the Purchasing Managers’ Index (PMI) reflects Notes: The prices charged component of the Purchasing Managers’ Index (PMI) reflects survey responses on changes in the prices businesses charge for their goods and services. survey responses on changes in the prices businesses charge for their goods and services. 3030The input prices component captures changes in the costs businesses incur for inputs such The input prices component captures changes in the costs businesses incur for inputs such as raw materials, energy, and labour. Index values range from 0 to 100, with readings as raw materials, energy, and labour. Index values range from 0 to 100, with readings above 50 indicating rising prices and readings below 50 signalling falling prices. A value of above 50 indicating rising prices and readings below 50 signalling falling prices. A value of 2050 suggests no change in prices. The latest observations are for March 2026. 50 suggests no change in prices. The latest observations are for March 2026.2003 2006 2009 2012 2015 2018 2021 20242003 2006 2009 2012 2015 2018 2021 2024 03/26 03/26 ©Selling price expectations: ECB SAFERubric

ECB SAFE Selling price expectations ECB SAFE Selling price expectations

(annual percentage changes) (annual percentage changes)

Industry Services All firms 7.07.0 6.06.0 5.05.0 4.04.0 3.03.0 2.02.0

Source: ECB Survey on the Access to Finance of Enterprises. Source: ECB Survey on the Access to Finance of Enterprises. Notes: Respondents are asked about their selling price expectations over the next 12 Notes: Respondents are asked about their selling price expectations over the next 12 1.01.0months. The first time this question was asked was in March 2023. The latest observations months. The first time this question was asked was in March 2023. The latest observations are for December 2025. are for December 2025.

0.00.0 03/23 10/23 05/24 12/24 07/2503/23 10/23 05/24 12/24 07/25 12/25 12/25 ©Wage developmentsRubric

Wage growth indicators

(annual percentage changes)

Indeed wage tracker Compensation per employee 10.0 8.0 6.0 4.0 2.0 0.0 -2.0

Sources: Indeed, Eurostat, and ECB calculations. Notes: The Indeed wage tracker tracks the growth in wages of new hires. The latest observations are for February 2026 for the Indeed wage tracker and -4.0fourth quarter of 2025 for compensation per employee.

-6.0 01/19 07/20 01/22 07/23 01/25 02/26 ©ECB wage tracker and negotiated wagesRubric

Negotiated wages and ECB wage tracker Forward-looking ECB wage tracker fit

(annual percentage changes) (annual percentage changes)

Wage tracker (latest, as of March 2026)Negotiated wagesNegotiated wages Wage tracker (forward-looking information as of January 2025)EWT 3 months aheadEWT 6 months ahead5Negotiated wages (realised) 5 5 4 4 4 3 3 3 2 2 2 1 1

Sources: ECB and ECB calculations. For details on the sources of the ECB wage tracker Sources: ECB and ECB calculations. For details on the sources of the ECB wage tracker and negotiated wages see Chart 1 of the ECB Wage tracker press release. (EWT) and negotiated wages see the sources to Chart 1 of the ECB Wage tracker press1Notes: The ECB wage tracker is with unsmoothed one-off payments and is calculated release .0 0following the methodology of the indicator of negotiated wages, which excludes one-off Notes: This chart compares the forward-looking information of the different wage tracker payments in Italy. The yellow dashed line reflects the forward-looking information of the vintages over time, for the indicator with unsmoothed one-off payments (adapted to fit the wage tracker as available in the January 2025 release. The red line displays the latest indicator of negotiated wages), with the ex-post realisation for negotiated wages at a fixed Jul 25 Jul 25Apr 25 Oct 25Jan 25 Jun 25Mar 25 Feb 26 Mar 26Apr 25 Oct 25Dec 24 Sep 25 Dec 25vintage of the ECB wage tracker as published in March 2026 and the dashed red line its time horizon (3-months forward in the left panel and 6-months in the right panel).Jan 25 Jun 25Mar 25 Mar 26 Feb 26Dec 24 Sep 25 Dec 25forward-looking horizon. ECB wage tracker data releases2025 2026