And I will continue in English because I see that some of you are a bit surprised to see me starting in French.
So the topic that you have chosen today goes to the heart of Europe's economic future. You rightly mentioned that artificial intelligence has the potential to transform how we produce, how we work, how we innovate. Firms are set to devote around 10% of total investment to AI in 2026. That is a result of telephone corporate survey that we conduct on a regular basis. And AI-related borrowing already accounts for roughly a quarter of credit worth to firms.
AI should could significantly enhance Europe productivity, competitiveness, and living standards. But because that's the rosy picture, it will also affect and to some extent it it's already affecting investment, labor, markets, and inflation. And it therefore also matters for monetary policy. Europe has a real opportunity to harness this technology, but success is not automatic. We need to seize the benefits while managing the risk appropriately.
In my remarks today, I will first discuss the outlook for the Euro area economy and explain our latest monetary policy decisions. I will then elaborate on how artificial intelligence may affect inflation and the wider economy.
So turning to the first topic, the current situation from an economic standpoint and our monetary policy decision. I would say that despite headwinds from the energy shock, the Euro area economy proved resilient and solid real GDP growth in the second quarter of 2026 was evidence. You will have received the one-pager which has a number of graphs, but one of them certainly on the front page is referring to growth. So growth was broad-based across most countries and sectors. This pattern is expected to have continued in the third quarter as well. Manufacturing is performing solidly supported by higher government spending on defense and on infrastructure.
Consumer confidence has rebounded from the low levels in the spring helping services in particular to recover and increased AR related activity is visible in digital services, business investment and exports.
The labor market remains robust. Unemployment stood at 6.4% in July. Although growth in employment and the labor force continues to slow, productivity has gradually picked up. Over the medium-term, consumption should be supported by gradually falling energy prices and a robust labor market.
Business and housing investment should increasingly bolster growth while exports should benefit from stronger foreign demand. The baseline of our September ECB staff projections expect the economy to grow by 0.9 in 2026, 1.4 in 2027 and 1.5 in 2028. Again, you have elements on that on the two pages that you have received.
Headline inflation increased to 3.2% in August from 2.9% in July. Energy inflation rose to 14.3% after 10.3% in July.
This increase reflects in particular a strong contribution from refining margins on liquid fuels in particular as well as higher energy commodity prices. At the same time, food price inflation decreased to 1.1% in August from 1.2% in July.
Inflation excluding energy and food edged down to 2.4% owing to a fall in services inflation only partially offset by an increase in goods inflation.
So far wages do not show a material response to the energy shock. Compensation per employee which measures nominal wage growth stood at 3.3% in the second quarter down from 3.6% in the first quarter.
Sorry, 3.6% from the first quarter. The baseline of the September ECB staff projections see headline inflation averaging 3% in 2026, 2.5% in 2027, and 2.1% in 2028.
For inflation excluding energy and food, the baseline for seized 2.5% in 26, 2.6% in 27 and 2.3% in 28.
Inflation expectations over shorter horizons remain at elevated levels, but most measures of longer-term inflation expectations stand at around 2% supporting the stabilization of inflation around target in the medium term. The outlook continues to be surrounded by high uncertainty with upside risks to inflation and downside risks to growth.
Looking at our monetary policy stance, in line with our commitment to ensuring that inflation stabilizes at our 2% target in the medium term, we decided to raise the three key ECB interest rates by 25 basis points at our monetary policy meeting earlier this month. So, let me try to explain the rationale behind this decision.
When facing energy shocks, the ECB has a very clear strategy. We do not react to energy prices. We react if we see risks of higher energy prices becoming embedded in inflation.
We assess these risks through a comprehensive assessment grounded in three criteria. First, the inflation outlook where we look at our forecast for inflation and the risks surrounding it. Second, the dynamics of underlying inflation, which today is mostly about how higher energy prices are feeding through to other prices and to wages. Third, the transmission of our monetary policy to borrowing costs and to economic growth. So looking at these three criteria that I have just described for you, we see higher inflation ahead, but no signs yet that it is becoming embedded.
The inflation outlook will be higher in 2027 and 2028 than we expected a few months ago, mostly due to higher energy prices. But we do not see evidence at this stage of energy prices feeding into higher wages.
And while growth has been resilient since our last meeting, long-term interest rates have risen notably which will slow growth and reduce pass through by more than projected in our September exercise.
So taken together, this means that we remain in the middle path for monetary policy. The middle path that I had laid out earlier this year. This means that while the shock is too large to look through, we view a measured response as appropriate to keep inflation in check.
So let me turn now to artificial intelligence and I will continue to use English although tempting to translate into French.
So AI is a transformative force. It can reshape production processes, business models and structures across the entire economy but its overall macroeconomic effect is uncertain. Its impact will work through several interconnected channels encompassing both the demand and supply sides of the economy and will unfold over the course of time.
I will focus on two of the channels most relevant for the outlook for inflation. First, productivity and investment and then labor markets and income distribution. So looking at productivity and investment, AI has the potential to help firms produce more and over time higher productivity could lower costs. All else equal this should reduce inflationary pressure in the long term.
But the size and speed of that effect will depend on the adoption in the economy. There are some encouraging signs, but there is also additional work to be done. A recent ECB survey finds that by late 2025, 38% of Euro area firms already reported at least moderate use of AI. Yet only 7% reported significant use. So those numbers date to 2025 and they have significantly evolved over the course of the last few quarters.
Unlocking the full potential of AI will require substantial investment. Europe needs investment in innovation, but also computing capacity, data centers, and energy. Firms also need to adapt their processes and train their employees.
AI related investment is rising in Europe and more is in the pipeline for firms, but still lags way behind the United States.
In parallel, European initiatives like InvestAI and the Scale Up Europe fund can help mobilize additional investment in AI infrastructure. 30 billion for AI gigafactories to develop advanced AI in the EU is a good start, but it's only a start. At the same time, AI investment activity will also depend on what happens in financial markets and where the risks associated with booming AI funding will materialize.
Global equity valuations are concentrated in a relatively small number of AI related firms which are also rapidly increasing their debt funding. A sharp reassessment of AI companies prospects and the sustainability of their debt could trigger market corrections and spill over to Euro area investors and the wider economy.
Second, AI will work through labor markets and income distribution. So AI will change both the tasks people perform and the skills firms need. And how the gains from AI are distributed will matter.
Currently about 50% of workers already use AI in their job and so far on balance firms are continuing to hire. In fact, survey evidence suggests that firms making significant use of AI are more likely overall to recruit than firms making sorry than phase than companies that are in a transition phase. But it matters what firms are using AI for. Firms using AI to support research, innovation, and new products tend to hire, while those using it primarily to cut labor costs are reducing employment. The central question is thus whether over the longer term or for the economy as a whole, AI will AI will mainly complement workers or replace workers.
This can then affect incomes, demand and ultimately inflation. But those impacts are still uncertain to predict. Historically, major technological advancements have not reduced employment. But right now, the ver the verdict is still out on whether AI may prove different.
So what should then Europe do to capture the AI growth opportunity was while also ensuring sovereignty? First, Europe must enable innovation in AI. Innovative ideas and firms need large and integrated markets, deep and accessible capital, significant computing power and skilled workers, as well as abundant and affordable energy. I think you know where I'm going. That means reducing fragmentation in the single market, advancing the savings and investments union, and accelerating the energy transition.
EU initiatives, including AI factories, testing facilities, and regulatory sandboxes, can also help ideas move faster from research to commercial use. And there is room to innovate in many areas from greener chips to more efficient algorithm. Second, Europe must build greater independence. Europe should strengthen underdeveloped critical parts of the AI value chain. Building European capacity will also ensure that we can rely on European tech for sensitive activities in line with the aim of the technological sovereignty package. The goal is not self-sufficiency. It is to ensure that critical functions can operate under any circumstances.
At the same time, Europe has an interest in a strong foothold in the global AI value chain both for economic and geostrategic reasons. Third, Europe must deploy AI intensively. AI adoption must spread beyond a small number of technology leaders, but diffusion alone is not enough. Firms must also use AI deeply and effectively. And among other things, this will require targeted support for retraining programs to address the critical shortage of AI related skills and ensure that the workforce can adapt to this transformation process. Applying the AI strategy can support broader adoption and we also look forward to the commission's forthcoming initiative on industrial AI and priority sectors.
So in conclusion for monetary policy the task is clear. We must closely observe and study how AI affects productivity, investment, labor markets, financial conditions and inflation so that we can continue our mandate of maintaining price stability. For Europe, the direction of travel is equally clear. We must create the conditions for AI to raise productivity and living standards. And we must ensure that AI sovereignty is a key principle. The precise effect of AR remains uncertain, but uncertainty is not a reason for inaction. As Alan Turing, a pioneer of computing once observed, we can only see a short distance ahead, but we can see plenty there that needs to be done. This is equally true through true true for artificial intelligence today. Thank you.
