Our base-case view is that while occasional flare ups will occur, an enduring ceasefire will be reached allowing oil trade to resume through the Strait of Hormuz, inflation expectations will remain well-anchored and energy prices will trend lower over H2 2026
Under this more benign scenario, inflationary pressures will recede over H2-26 & 2027 & the global economy will be able to avoid a recession
The global economy has slowed due to the impact of the Middle East war, but not collapsed
The retreat in oil prices since mid-June should see headline inflation pressures ease, although significant upside risks remain given the renewed conflict over recent days and the effective breach of the MoU
Global growth is forecast to slow from a 3.5% pace in 2025 to a below-trend 2.9% pace in 2026, before recovering to a 3.3% rate in 2027
However, we are still unable to rule out a more malign or malignant outturn should the energy shock intensify in coming months or inflation expectations start to become unanchored
Across regions, the US economy is expected to outperform aided by the AI-investment boom, which will also continue to support strong growth in semiconductor exporters in Asia
Monetary Policy
Our base-case view is that the US Fed will keep rates on hold for an extended period. However, the risks of a near-term hike are building and we could swiftly pivot to such a view, particularly if labour market conditions firm over coming months, or core inflation exhibits signs of accelerating, or inflation expectations begin to show signs of becoming unanchored.
After hiking rates in June, the ECB is forecast to deliver another hike in September to take rates to 2.50%. Similarly, the BOJ is expected to deliver another hike in December following their June rate hike.
In a close call, we expect the BOE to keep rates unchanged at 3.75% in 2026. However, any signs of a significant pick-up in core inflation in coming months would likely force the BOE to shift towards modest rate hikes.
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