ECB: September Projection Fiscal Spending Assumptions Seem Conservative

The ECB estimates that “fiscal measures announced in the first half of the year related to defence and infrastructure should provide a limited boost to growth in the medium term amounting to 0.25 percentage points cumulatively over the projection horizon. “

• At first glance, this feels like quite a conservative assumption. Our reading is that the ECB have not made any updates to their fiscal spending assumptions relative to the June projections. That suggests the details of the aggregate German fiscal rollout announced in late-June (which was more front-loaded than analysts had expected at the time) have not been incorporated.
• This may explain the softer-than-expected 2026 GDP projection of 1.0% (vs 1.1% consensus and prior)

From the ECB’s write-up:

• “In 2026 the fiscal stance is projected to loosen, mainly on account of higher public investment. This reflects the higher defence and infrastructure spending, particularly in Germany (over 2026-27), incorporated into the baseline as of the June 2025 projections, as well as high NGEU-funded investment growth in Italy, Spain and other countries”.
• “In 2027 the tightening of the NGEU-adjusted fiscal stance and discretionary measures primarily reflects lower assumed government spending related to the expiry of the NGEU grant financing and some tightening of non-discretionary factors
• “Compared with the June 2025 projections, the discretionary fiscal policy measures incorporated into the baseline point to only a slight additional fiscal tightening over the projection horizon, particularly in 2026. This tightening in discretionary measures amounts to less than 0.1 percentage points of GDP cumulatively over the projection horizon, which stems mostly from 2026 and is partly reversed in 2027”.