Technology sector and renewable energy cushion euro area against fresh shocks

The euro area economy has weathered a fresh energy price shock better than expected, according to the European Central Bank (ECB), with improved energy efficiency, government spending and a global artificial intelligence investment boom helping to cushion the impact of geopolitical tensions. In a blog post, ECB officials Óscar Arce, Gerrit Koester and Beatrice Pierluigi said the economy had continued to expand despite renewed disruption to global energy markets, while warning that the factors supporting growth might not last. They mentioned that the euro area has faced a succession of shocks in recent years, including the Covid-19 pandemic, supply shortages, the energy crisis following Russia’s invasion of Ukraine, disruptions to shipping in the Red Sea and trade tensions linked to US tariffs. Despite these challenges, economic output has continued to rise moderately since 2022, with the latest energy shock having a relatively limited effect so far. Excluding Ireland, where economic data can be volatile, real GDP in the second quarter of 2026 was 0.6 per cent higher than in the final quarter of 2025. The economy has also maintained quarterly growth of around 0.3 per cent over the past 4 quarters, outperforming expectations. The ECB attributed this resilience to 3 main capabilities, namely the ability to absorb shocks, recover from them and adapt economic structures to reduce vulnerability to future disruptions. Renewable transition buffers power costs One of the most significant changes has been the euro area’s reduced dependence on fossil fuels, which has limited the impact of energy price fluctuations on businesses and households. Over the past 3 decades, firms and households have improved energy efficiency and reduced their reliance on oil and gas, while economic activity has shifted towards less energy-intensive sectors, particularly services. The euro area economy is now only half as reliant on oil as it was in the early 1990s, ECB analysis showed. The conflict in the Middle East initially sent oil prices soaring before they eased following a June memorandum of understanding between the United States and Iran. A second wave of the shock began in July, bringing another significant increase in oil prices, sharp rises in refining margins and persistently higher gas prices. Nevertheless, the ECB said the economy’s reduced exposure to fossil fuels had helped limit the damage to growth, consumption and investment. The expansion of renewable energy has also reduced the influence of gas prices on electricity costs, particularly in countries with substantial renewable or nuclear generation. In Spain, the proportion of hours during which gas-fired power stations determined electricity prices fell from around 80 per cent in 2020 to just above 20 per cent in 2026, based on the first 9 months of each year. France recorded a similar decline, from around 60 per cent to around 20 per cent, reflecting the importance of nuclear power in its electricity mix. Unlike during the 2021-22 energy crisis, when electricity prices closely followed gas prices, the latest shock had a smaller impact in countries with larger renewable and nuclear energy shares during the first half of 2026. Fiscal support and AI driving resilience Government spending has provided another important buffer, with the public sector playing a larger role in the economy since the pandemic. The ECB said non-market services had consistently grown above their long-term average and faster than other sectors in recent years. Fiscal support for the economy has also increased. Projections published in December 2025 had anticipated an expansionary fiscal stance equivalent to 0.25 percentage points in 2026, but this has since doubled to 0.5 percentage points. The increase mainly reflects higher defence and infrastructure spending in Germany, alongside measures introduced by euro area countries to cushion the impact of higher energy costs. However, the ECB cautioned that some of this support was temporary, while several countries had limited room to increase spending further. The outlook also points to less fiscal support in the coming years, potentially reducing governments’ ability to cushion future shocks. The ECB identified 4 additional factors that have helped sustain growth, including easing uncertainty, stronger international trade, investment linked to artificial intelligence (AI) and a resilient labour market. Uncertainty surged at the beginning of the Middle East conflict, as businesses feared shortages of energy and other commodities, including fertilisers, while global supply chain pressures deteriorated. However, some of these concerns began to ease in May, with production expectations returning to pre-war levels in August and September as the most severe scenarios failed to materialise. Some companies may also have brought forward orders and production to secure supplies amid fears of shortages and higher costs. Stronger global trade has also supported the euro area economy, particularly through demand for technology-related equipment and specialised manufacturing products. The ECB’s December 2025 projections had anticipated global trade growth of 2 per cent in 2026, but the latest estimates put it at 4.7 per cent, more than twice the original forecast. The AI investment boom has been an important driver, benefiting the euro area through its exposure to international trade and demand for capital goods. AI has also supported domestic investment, with business surveys pointing to a relatively rapid recovery in output and new orders towards pre-war levels. Manufacturing linked to AI, particularly technology equipment, has performed better than the wider economy in terms of output, employment and new orders. In services, software businesses have recorded stronger output performance, although employment and new orders have not followed the same pattern. The ECB warned that this concentration of demand creates risks, as a reversal in AI-related investment could leave parts of the economy particularly exposed. The labour market has provided further support, with employment expectations recovering quickly after an initial decline following the outbreak of the conflict. Employment has continued to rise steadily since 2022, growing faster than its long-term average, despite the energy shock. This contrasts with previous energy crises, which often led to weaker labour demand and rising unemployment. The ECB said the stronger labour market had helped the economy withstand higher energy costs by supporting household incomes and consumption. Downside risks demand systemic reform Looking ahead, however, the central bank warned that the outlook remained highly uncertain, with significant downside risks from escalating geopolitical conflicts, disruptions to energy supply chains, deteriorating financial market sentiment, renewed trade tensions and extreme weather events. These risks could emerge quickly and reinforce one another, while robust global demand, AI-related investment and fiscal support might not remain at current levels. The ECB said strengthening the euro area’s ability to adapt to future shocks would require further progress on the green transition, continued innovation and more effective allocation of capital. Reducing dependence on imported fossil fuels would limit exposure to geopolitical disruptions while helping to cut greenhouse gas emissions and reduce the risks associated with climate change. Further integration of EU electricity markets, including more cross-border connections and investment in power grids, would allow cheaper renewable electricity to flow to where it is needed and reduce the influence of gas prices on wholesale electricity costs. The ECB also highlighted the potential of AI to boost productivity and long-term growth, although the benefits would depend on how quickly the technology was adopted across businesses and sectors. Finally, the central bank said rising financing needs linked to the energy and digital transitions made it increasingly important to direct savings towards productive investment. Faster progress towards a deeper savings and investments union could therefore strengthen both the euro area’s long-term growth prospects and its ability to withstand future economic shocks.