The strong 1H26 performance prompted a sizeable upgrade to our growth outlook. GDP expanded by 4.1% y/y in 1H26, with domestic demand remaining firmly in the lead and investment providing particularly strong support. Private consumption should stay resilient, on the back of solid real wage growth and a supportive labor market, while investment momentum should gradually moderate as some one-offs fade and the RRF enters its final phase. External demand remains less certain, although recovering demand from key trading partners and new capacities in the automotive and pharma sectors should provide some support. We have raised our FY26 GDP forecast to 3.2%, from 2.0%, with risks still tilted mostly to the upside, before some moderation towards 2.5% in 2027.
Inflation pressures strengthened in 2Q, largely reflecting renewed energy effects, before July-August brought some relief and the headline moved back close to 3% y/y. Energy remains the key source of volatility, while services continue to run above the headline and food prices provide an important offset. Encouragingly, second-round effects remain relatively contained thus far. We see inflation averaging around 3.2-3.3% in 2026 and gradually moderating towards 2.5% in 2027, although geopolitical developments and the energy-price outlook keep risks tilted to the upside.
On the fiscal side, the 2026 budget rebalance confirms a broadly supportive stance, with the budget deficit target remaining just shy of 3% of GDP. Stronger growth and tax intake provide an important offset to higher defense, RRF and social policy-related spending, although expenditure momentum continues to limit room for rebuilding fiscal buffers. On the market side, global factors continue to dominate yield moves, while spreads remain firmly in the sub-40bp zone. The improved growth backdrop and solid rating profile continue to support our view of broadly steady spreads ahead.
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