Global Economic Overview – July 2026

The Iran conflict has re-escalated, as the US and Iran have interpreted the wording in the MoU of who is to be in control of the Strait very differently. Instead of diplomacy, both sides are trying to settle this through military means. So far, strikes have largely been on military facilities/assets inside and outside of Iran and on ships attempting to pass through the renewed bilateral blockade. This has halted vessel traffic through the Strait (Chart 1), stifling the return of Gulf energy products onto global markets. In turn, spot and futures prices for oil and natural gas have jumped again. So the previous swift return of (spot) crude oil prices to pre-war levels, which had taken observers by surprise, has now unwound.  

Chart 1: Commercial traffic through the Strait of Hormuz has dried up, squeezing global supplies  
 

Source: Bloomberg, Macrobond and Investec Economics

That said, current oil futures prices are only a tad higher now than when the spot oil price was at a peak (Chart 2). The stakes of pursuing the military path are rising: the previous reopening of the Strait was too brief to rebuild energy stocks meaningfully, so there are warnings that the ‘pinch point’ where the cushion of these inventories runs out and energy prices spike much higher may be only weeks away, risking hurting markets and US voters pre-midterms. Iran, meanwhile, is incurring damage and forgoing export revenues and the release of some frozen funds. This incentivises a return to diplomacy soon. As the current futures curve is downward sloping, markets seem to be implicitly priced for this. 

Chart 2: Brent futures price in a similar path for the oil price now as they did on 31 March
 

Source: Bloomberg, Macrobond and Investec Economics

We have embedded the same assumption into our baseline forecasts. Yet, energy prices are now priced to stay somewhat higher than anticipated last month, triggering a small downgrade to our global growth forecasts relative to June (Chart 3). Our world GDP growth forecasts for ’26 and ‘27 are both 0.1%pt lower, leaving the aggregate picture still resilient. Relative to the latest IMF forecast update, they are similar, both in aggregate and for individual countries, especially for ’26. For ’27, we are slightly more pessimistic on US growth but more upbeat on EU21 growth than the IMF. That said, even if baseline forecast changes are small, the risk of an even greater escalation that results in additional damage to Gulf energy infrastructure, and so a much weaker outturn, has increased

Chart 3: Our baseline GDP forecasts have been cut slightly, and downside risks have risen
 

Source: IMF, Macrobond and Investec Economics 

Nor is it only the conflict in the Middle East that is exerting pressure on world energy markets. Ukraine has increasingly deployed its drone capabilities to strike Russian energy facilities, to add pressure on President Putin to end the war against it. Faced with resulting widespread fuel shortages, on 8 July Russia imposed a full ban on diesel exports, to last until 31 July. This has compounded the global diesel supply crunch, pushing Russia’s usual customers into other markets. The spread between diesel and crude oil prices has therefore jumped (Chart 4). But it is unclear whether this will push Putin to end the Ukraine war. To the contrary, some intelligence agencies have warned of a potential escalation, perhaps in the form of an incursion into Poland from Belarus.

Chart 4: The spread between crude oil and diesel prices has risen sharply
 

Source: EIA, Macrobond and Investec Economics 

This would certainly be a very much bleaker risk event for Europe and roil the world economy. For now, though, these risks are not what is preoccupying markets. Besides Iran, the key topic remains AI and resulting winners and losers. Within equities, a big shift in sectoral performance has taken place: IT is now underperforming several other sectors within the S&P500, having previously vastly outperformed (Chart 5). Profit-taking and relative valuations may well have played a role. This is also visible elsewhere: the huge relative rally in South Korea’s Kospi has been scaled back (ytd gains are 55% vs 116% at their peak) and the relative outperformance of Taiwan’s TAIEX has also eased. Both are heavily exposed to chipmaking and so to AI.

Chart 5: The three S&P 500 sectors with the biggest price gains in Apr & May have since lagged
 

Source: Bloomberg, Macrobond and Investec Economics

But even as markets are repricing some AI-linked valuations, there is great optimism on the longer-term potential of AI to boost growth. This is shared by policymakers: China included a far-reaching ‘AI+ action plan’ in its ‘26-‘30 policy blueprint in March, putting it at the heart of its agenda. As yet this is to pay off: at 4.3% y/y, China’s Q2 growth was the weakest since late ‘22, and below the government's annual target of 4.5%-5.0%. The report noted the mismatch between strong supply and weak domestic demand. The gap is currently plugged by strong export growth, holding down import prices elsewhere. If China deploys AI more cheaply than other countries, its exports could become even more competitive.      

Chart 6: Net exports remain an important contributor to Chinese GDP growth
 

Source: China National Bureau of Statistics, Macrobond and Investec Economics

After a run of weak outturns around the turn of the year, employment growth picked up strongly. But June's data showed total non-farm payrolls rising by a relatively modest 57k (Chart 7), well below the previous 3m average of 164k. Is this indicative of a weakening economy? Given the volatile and revision prone nature of the series, one should not infer too much from one data point. Indeed wider evidence is not consistent with a sharp slowdown, although a modest cooling seems likely in H2, after record tax refunds supported household demand over Q2. In all we have nudged down our GDP forecasts for 2026 & 2027 by 0.1%pt in each year, to 2.1% and 2.0%, still very much solid growth territory.

Chart 7: Payrolls – a sign of the economy coming off the boil? Probably not…   
 

Source: Macrobond, BLS, Investec Economics

To put the figures into context, various Fed studies show the 'breakeven’ employment rate (i.e. that to keep the unemployment rate steady) may have dropped as low as 30k-90k per month due to demographics and lower net migration. In addition, the participation rate has dropped by 0.8% pts over the past year to 61.5%, a more than five-year low. Clear participation trends across age cohorts are visible (Chart 8) and although underlying reasons are not clear, providing that the data are accurate overall, lower participation is exacerbating labour market supply pressures. The read through is that the labour market may be tightening – note the U3 unemployment rate now stands at 4.2%, a 12-month low.

Chart 8: Labour market participation trends have varied across age cohorts but are down overall
 

Source: Macrobond, BLS, Investec Economics

Indeed at Kevin Warsh's first FOMC press conference last month, he indicated that some on the committee thought that labour market trends were better than 'stable', the descriptive term adopted by the collective FOMC. Also 9 of the 18 contributors to the 'dot plot' (Warsh himself seems to have recused himself), signalled their preference for a hike this year and subsequently several members have warned higher rates may be necessary. However better June readings for the CPI and PPI – an unchanged monthly core CPI was the lowest since January 2021 – offer policymakers breathing space for a while. Our baseline view is still that the Fed funds target range remains at 3.50%-3.75% this year, although admittedly, this has become a tougher call.

Chart 9: The FOMC has become more hawkish…
 

Source: FOMC minutes, News outlets, Investec Economics

Warsh seems set on various reforms at the Fed and has set up five taskforces, headed up by heavyweight names (Chart 10). At this stage we would offer three comments; i) Warsh has indicated that there will be less forward guidance. Although we don't know exactly what is in store, his dislike of the dot plot is well documented; ii) contrary to previous reports, .Warsh recently spoke out against introducing a 'looser' inflation target, quelling some fears over the Fed's commitment to price stability; iii) Warsh is a known advocate of shrinking the Fed's balance sheet, but as we have written previously, there is a trade-off here between balance sheet size, shortdated rate stability and the frequency with which the Fed has to intervene to add liquidity.

Chart 10: Changes afoot at the Fed - Warsh’s five taskforces
 

Source: Federal Reserve, Investec Economics 

What Warsh didn’t mention in his pre-prepared testimony to Congress was tariff policy. Following the Supreme Court ruling that the IEEPA* tariffs were illegal, the effective tariff rate has shifted lower – we estimate it to be around 10.5%. This fall has certainly been helpful for the Fed in its mission to return inflation to its 2% target. But it has come at a cost to government revenues, with tariff refunds also now being paid (Chart 11). Tariffs could become more problematic for the Fed post 24 July though when the current universal 10% Section 122 tariff expires, depending on what it is replaced with. Currently investigations under Section 301 are underway, with USTR already having proposed new tariffs of 10%-12.5% on 60 economies. 

Chart 11: US customs duties turn negative as tariff refunds are paid
 

* International Emergency Economic Powers Act                  Source: Macrobond, US Treasury, Investec Economics 

As we approach Nov's midterm elections, the Democrats appear to have regained momentum. According to Polymarket, the party's chances of retaking the House now stand at 85% and they are credited with a 44% chance of regaining the Senate as well. The necessary net gain of four seats though might be something of a stretch. North Carolina, Maine and Texas could all result in victories by Democratic challengers, while a win for an independent in Nebraska over the GoP would also help the Democrats’ case. But we would also note that the Democrats are defending a narrow lead in Georgia and that they are vulnerable in an open seat in Michigan. 

Chart 12: President Trump’s approval rating has been falling since he re-entered office
 

Source: Macrobond, Rasmussen, Investec Economics

The latest Middle East escalation poses renewed risks to the EU21 inflation outlook. But despite the rise back to $90/barrel, the spot price of Brent is still materially below its peak earlier in the conflict. Our latest upwardly revised estimate now envisages HICP inflation rising again, peaking at 3.2%, which is a little lower than the ECB’s own 3.4% peak forecast. What remains unknown is the extent of possible indirect and/or second-round effects. To date there have been limited signs of either, with goods inflation running at just 0.7%, whilst an examination of inflation sub-categories shows half of components by HICP weight* running below the 2% target. That is not to say though such effects won’t emerge, hence the ECB’s vigilance, particularly so with services inflation running above 3%.

Chart 13: HICP inflation heatmap: not all components are running hot
  

* Level 2 COICOP categories                                                       Source: Macrobond, Eurostat, Investec Economics

June’s ECB meeting emphasised a ‘measured policy approach’ to the current energy shock, which at the time had fuelled speculation over back-to-back 25bp hikes with a second move this month. However, such a prospect now appears unlikely; we anticipate that the ECB will wait until September. This would provide it the time to see how the uncertainties in the Middle East play out and whether price pressures emerge. A set of new projections will also be available giving members an updated picture of the inflation outlook. We suspect that this will be the last hike and that the ECB will enter a holding pattern until H2 2027, when we envisage a gradual easing retuning the Deposit rate to 2.00%.  

Chart 14: Markets anticipate more ECB interest rate hikes than three months ago
 

Source: Macrobond, Investec forecasts

Fears of a material economic slowdown were prevalent at the start of the conflict. Yet the EU21 has in fact proven to be fairly resilient. One factor has been an uptick in manufacturing activity, boosted by a front-loading of orders on supply chain and price concerns. This was only likely to be a temporary boost, and some indicators now suggest that this may be beginning to fade: the manufacturing PMI has eased in the last two months, whilst manufacturing output declined (m/m) in May, for the first time in four months. But on the proviso that the war does not escalate and energy prices are contained the service sector may offer an offset, judging by the recent rise in consumer sentiment and improved PMIs. 

Chart 15: Manufacturing’s initial boost from frontloading shows some signs of fading
 

Source: Eurostat, Macrobond and Investec Economics

In the medium term, manufacturing should receive some support from the increase in European defence spending. Germany is at the forefront of this, with the Cabinet’s approval of the draft 2027 Budget putting numbers to its ambitions. The figures are significant, with spending almost doubling to €154bn in 2028 from €83bn in 2026. In addition, Germany is also executing large-scale investment via a €500bn fund, of which €49bn has already been disbursed. These factors support our German GDP forecasts which stand at 0.7% ’26 and 1.3% ’27, that in the context of 0.7% and 1.6% respectively for the wider EU21. But risks are clearly skewed to the downside given the conflict in the Middle East. 

Chart 16: German defence spending will more than double over the next four years (€bn)
 

Source: German Federal Ministry of Finance and Investec Economics

Europe also faces its own political risks stemming from the far right, although these will only come to a head in 2027. France is the main focus given this month’s appeals court decision that allows Marine Le Pen to run in next April’s Presidential election. She has subsequently confirmed that she will run, that despite having to wear an electronic tag. Polls since have shown Le Pen may win a run-off vote against both former PM Edouard Philippe and Gabriel Attal. However such polls do not fully account for centrist tactical voting, which in the past has kept out the far right. For the EU, a potential Le Pen victory is a concern. Having lost one difficult leader (Viktor Orbán), the EU may be faced with another.

Chart 17: French opinion polls (%): Le Pen looks to be in pole position for 2027
 

Source: Europe Elects, Second round polls: Ifop (7-8 Jul), Harris (7-8 Jul)

Italian PM Meloni is facing her own challenge from the far right too in the form of Roberto Vannacci. His party Futuro Nazionale, which split from Lega, is polling around 6%. This could be enough to lose Meloni her majority at the next election, which could be brought forward to April, the same month as France, if reports are to be believed. We see these political concerns weighing on the Euro at the start of 2027. However, ahead of that will be the US’s own political issues in the form of the midterms which we see triggering a period of USD weakness. More broadly we remain bearish over USD prospects and see €:$ ending this year at 1.17 and next at 1.19, although we do acknowledge that the risks are skewed towards a stronger USD, particularly if the Fed were to raise rates.  

Chart 18: Politics, both US and Eurozone, are expected to influence €:$ in the short-term
 

Source: Macrobond, Investec Economics

With no challengers to his nomination, Andy Burnham became PM this week, the UK’s seventh in just ten years. His first job was to appoint a Chancellor and a wider cabinet. They will face the same constraints and challenges as the previous Cabinet however, given that Mr Burnham has pledged to stick to the existing fiscal rules and manifesto pledges (not to raise income tax, VAT, employees’ NICs or corporation tax). Upholding Reeves’s fiscal rules might have placated financial markets but alongside ruling out the ‘big four’ tax revenue raisers, it gives the government fewer ways of clawing back revenue if it opts to raise public expenditure significantly.

Chart 19: Burnham to uphold 2024 manifesto pledges, ruling out lifting key revenue raisers
 

Source: Investec Economics, images from Parliament.UK

What Mr Burnham can do is tinker around the edges – we wouldn’t be surprised if equalising capital gains and income tax comes back into the conversation. There has also been talk of a wealth tax, although other nations that have tried this have shown how difficult it is in practice. Some extra revenue might need to be raised though to fund the new PM’s planned extra council house build and cuts to business rates. Given fiscal constraints, the more radical changes are likely to relate to the workings of the government, starting with the opening of No.10 North. Centre to his vision is a devolution push in which more power over decision-making is transferred from Westminster to local & regional levels. 

Chart 20: Burnham wants ‘good growth in every postcode’. Where should he prioritise?
 

2023 is the latest available data by region                                        Source: Investec Economics, Macrobond, ONS

Mr Burnham is keen to prioritise domestic policy, perhaps mindful of criticism that his predecessor devoted too much attention to foreign affairs. Yet Mr Burnham is entering leadership at a time of great global fragility; the international environment will require attention too. Over the past few weeks, the ceasefire in the Middle East has broken down (see Global section). This has pushed oil and gas futures curves up once again, impacting our inflation call. We are now predicting a peak inflation rate of 3.4% in Q4. We still are hopeful though that inflation will return to target next year, albeit later than originally thought. We maintain our view that second-round effects will be contained as wage growth remains low, while other disinflationary forces outside of energy appear to still be intact. 

Chart 21: Inflation peak still set to be lower than pre-MoU, but if the Houthis get involved…
 

Source: Investec Economics, Macrobond

How the Bank of England’s MPC responds to the latest developments in the Middle East is a tough call. There is already some appetite for a hike on the committee (Pill and Greene voted for an increase at the last meeting), while there must be broader concern that inflation has not been sustainably at target for over five years. However, we still think that the collective MPC will keep the Bank rate on hold this year, at 3.75%. Monetary policy is still thought to be restrictive, so is already pushing against inflation. Also, although we have recently moved further away from peace in the Middle East, what the earlier signing of the MoU showed was that once a deal is agreed, energy prices can fall rapidly and the inflation outlook shift lower.

Chart 22: We do not think the BoE will hike his year, but it is a close call
 

Source: Investec Economics, Macrobond

Gilts have been particularly sensitive to developments in the Middle East, often experiencing larger daily moves in yields in response to events relative to US Treasuries or German Bunds (Chart 23). UK gilts have also been moving on political developments at home. Most concerning to fixed income markets is who will become Chancellor (at the time of writing this was yet to be announced) and whether when faced with mounting demands on the public purse they will be fiscally responsible. The first real test of this will be the Autumn Budget. There is no date set yet but note that the Treasury has to notify the OBR ten weeks ahead of time. This might be a combined Budget and Spending Review.

Chart 23: UK gilts have exhibited a higher beta (more volatile) since the start of the year
 

Source: Investec Economics, Macrobond data

Despite the political uncertainty sterling has had a good run as late, as Chart 24 shows. It has made gains against the majority of its key trading partners, with the pound hitting a one-year high against the euro last week. As we approach the Budget we think some nerves could creep into UK assets, driving some of the recent sterling momentum to wane. By the middle of next year though dynamics are likely to flip with political concerns in the Euro area, starting with April’s French elections (see Euro area section) weighing on the euro to the benefit of sterling. Against the USD though we could see some sterling weakness in 2027 if we get the interest rate cuts we expect, but markets do not (Chart 22). This leaves end’27 cable at $1.35 and EURGBP at 88p.

Chart 24: GBP has performed strongly vs peers this month (%)
 

Source: Investec FX Trading, Macrobond