Global Economic Overview – June 2026

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Global

The signing of the Memorandum of Understanding (MoU) between the US and Iran this month represents a milestone moment, potentially bringing an end to the 111-day conflict. The MoU comprises 14 points, which include the reopening of the Strait of Hormuz, the cessation of hostilities across all fronts, including Lebanon, and Iran’s agreement to never pursue a nuclear weapon. Clearly this is welcome news as demonstrated by the fall in energy prices with Brent crude trading at $73/bbl and natural gas at 98p*. However this is not a formal peace deal, it simply extends the current ceasefire for a further 60 days to allow for talks on the thorniest issues, predominantly Iran’s nuclear ambitions. 

Chart 1: The MoU provides a blueprint for future talks rather than a formal peace deal
 



* UK natural gas price, pence per therm
Source: CNN (table represents a summarised version of the MoU which was read out by a senior US official)

A return to conflict cannot be ruled out, with the situation in Lebanon representing the greatest near-term threat to the deal given fighting between Israel and Hezbollah; neither are MoU signatories. Meanwhile negotiations over Iran’s nuclear programme mark the key hurdle in the medium term. The current wording is vague, but it is possible that a final deal is not dissimilar to the JCPOA# agreed with President Obama in 2015. Talks will be complex, possibly taking more than 60 days, but we judge President Trump will be less inclined to return to military action closer to the mid-term elections. Instead, making use of the MoU provision for an extension is the most likely course of action. 

Chart 2: Flows through the Strait of Hormuz have risen but it will take time to return to normal
 



# Joint Comprehensive Plan of Action
Source: Macrobond, IMF port watch, Investec Economics

For the global economy this means a resumption of maritime traffic through the Strait of Hormuz. This has risen, but it may take time to fully return to pre-war levels (Chart 2). The IEA has estimated this may be up to two months, given logistical issues such as out-of-place vessels and port storage that needs to be cleared to enable production restarts. Shipping lines will need to regain confidence, firstly that mines are removed, but also over the long-term stability of operations given Iran’s ability to disrupt shipping, as well as the ambiguous wording over the future control of the Strait and possible tolls. That said, the initial signs are positive, a factor that has led oil prices lower. It is even possible that an initial surge in supply is seen as an estimated 160 stranded tankers exit the Persian Gulf, which may release up to 170m barrels of oil. 

Chart 3: Tankers stranded in the Persian Gulf offer a possible initial surge in oil supply#
 



# based on 16 June vessel estimates, supply release calculated using vessels capacities (barrels) as MR1: 345k, MR2: 450k, Panamax: 600k, Aframax: 900k, Suezmax: 1m, VLCC 2m.
Source: Lloyds List, Investec

This is material news for the outlook, reducing the risk of escalation and higher energy prices. However, the assumption behind our baseline forecasts had been a fairly swift diplomatic solution all along, so we have made only minor changes to our baseline view for global growth at 3.2% (+0.2%) in ‘26 and 3.2% (+0.1%) in ’27. The inflation outlook is improved too, but not materially so. Some inflation components such as fuel prices will react quickly, but further passthrough remains a risk: energy futures indicate input costs staying higher than pre-war. Therefore, central banks are likely to remain cautious, with the balance of risks still tilted towards higher inflation. But given the progress so far and the desire to end the conflict it is prudent to at least consider the prospect of a mild scenario. 

Chart 4: Futures prices for oil and gas, although down from the peak, trade above pre-war levels
 



Source: Macrobond, Bloomberg, Investec Economics

There are arguments for energy prices remaining higher, as futures prices indicate: infrastructure damage and extra demand from strategic reserve rebuilding. But counterpoints can also be made. For one, production could return to normal faster than expected: some Gulf states have cited a one-month timeframe*. In fact, the IEA’s latest forecast is for a 5mb/d oversupply in 2027 as Middle East supply recovers faster than demand, a situation that may alleviate pressure from reserve re-building. But it is not just energy that matters. Urea fertiliser prices are already back to pre-war levels, potentially lessening the future impact on food prices too. As such there is a risk that inflation pressures, growth headwinds and monetary policy ease faster than expected. 

Chart 5: The International Energy Agency sees a return to significant oil oversupply
 



* This is for shut-in production and excludes damaged infrastructure
Source: IEA

Whilst the MoU signing has sent Brent lower, wider market moves have been mixed. 10y Treasury yields have fallen, but the USD has gained and the S&P 500 moved lower. Clearly other factors are at play. The eyewatering valuation of SpaceX ahead of its IPO this month highlights how the AI buildout race is dominating market sentiment. Wall Street estimates suggest that AI infrastructure could account for half the S&P’s earnings growth this year. The sustainability of such spending, more and more of which is funded by debt, remains a question. Meanwhile grappling with a more hawkish Fed, fiscal concerns and the fragmented geopolitical backdrop, volatility in markets is likely to stay. 

Chart 6: The MoU is a relief, but are markets now turning attention to other concerns?
 



*Fed nominal broad USD index.
Source: Macrobond, Investec Economics

United States

US economic data seems to have turned a corner of late, with fewer signs of weakness in the economy relative to the turn of the year. Part of that strength can be explained by unusually large tax rebates, which have supported consumption. This effect should start to fade in H2, but that will coincide with a likely continued decline in gasoline prices, limiting the fallout. A more prominent driver of economic growth does appear to be the AI boom though, which yet shows no signs of slowing (see Global section). As Chart 7 illustrates, investment into AI can account for much of US GDP growth this year. We wonder if we have also been underappreciating the impact of stock market gains from AI on the US economy, which although uneven across society, has led to a large wealth effect, which could also be a factor supporting consumption.

Chart 7: Artificial Intelligence continues to power US GDP growth
 



Replicating BIS methodology: Data centre construction investment from the US Census Bureau Construction Spending release. Data centre equipment investment is estimated to equal 3x data centre construction investment, based on Noffsinger et al (2025). Other IT equipment investment is estimated as IT equipment investment in the US national accounts minus our estimate of data centre equipment investment. IT manufacturing facilities are sourced from the Computer/electronic/electrical manufacturing facility component of the US Census Bureau Construction Spending release.
Sources: Macrobond, Investec Economics

A further sign that the economy has turned a corner is in the labour market data. After a soft start to the year, non-farm payroll gains have been solid recently: over the past three months, job gains have averaged 188k per month, the fastest 3m pace in over two years. Other indicators have also pointed to a stabilisation in the jobs market. This leads us to believe that the worst of the easing in economic conditions is behind us. As such, we have upgraded our GDP forecasts for this year and next, to 2.2% (prior: 2.0%) and 2.1% (prior: 1.8%) respectively. In 2027 AI investment is set to be a dominant theme once again, with estimates suggesting planned AI capex spend of over $1trn. 

Chart 8: The US labour market appears to have stabilised - conditions could even be tightening
 



Source BLS, Investec Economics, Macrobond

Considering the pick-up in economic momentum and the surge in inflation due to higher energy costs from the Iran war, near-term rate cuts are no longer a topic of conversation. Possible rate hikes, meanwhile, are back on the table. This was illustrated by the dropping of the easing bias in the FOMC statement and the move higher in the ‘dots’ in the latest SEP* (Chart 9), with the median member split between rates on hold and one hike this year. New Chair Kevin Warsh’s view is hard to read though, he opted not to submit a dot and refused to give much away on his view for rates in the press conference. Instead he focused on wider operational issues at the Fed, and the task forces he has created. 

Chart 9: Kevin Warsh might not like the dot plot, but it does show when FOMC opinion changes
 



*SEP – Summary of Economic Projections
Sources: Investec Economics, FOMC

We are still of the view though that with policy rates already restrictive, gasoline prices falling and financial conditions having tightened the Fed can avoid hiking, which has the added benefit of not sparking further ire from the President. We also still think the Fed will cut rates next year, although now think the easing will start in June, rather than in March and there will be two, not three, 25bp rate cuts. This leaves the end-year FFTR at 3.00-3.25%. Considering this, and our upgrade to economic growth prospects, we have nudged up our USD forecasts. Although we still foresee the greenback weakening over the next 18 months, we now look for end-26 EURUSD of $1.17 and end-27 of $1.19.

Chart 10: We expect GBPUSD at $1.36 end-26 (prior: $1.37) and end-27 at $1.35 (prior: $1.38)
 



Sources: Macrobond, Investec Economics

One key unknown is how the USD reacts to midterm elections. It is still looking likely that the GOP will lose the House, but they should hang onto the Senate (Chart 11). This is important for the President as the Senate approves key appointments. Mr Trump has been buoyed recently though by the success of his endorsements in primary races, illustrating his continued hold over the party. The question is whether this will cause problems for him come November – his picks can be more extreme, potentially improving the Dems’ odds of picking up the seat. The clearest example of this is in Texas, where Trump pick but scandal-plagued Ken Paxton has put the usually safe red seat in play for the Democrats.

Chart 11: Prediction markets still point towards the GOP losing the House, but not the Senate
 



Source: PredictIt, Macrobond, Investec Economics

A further downside risk to our USD view stems from tariff policy. The current Section 122 10% surcharge, which substituted the IEEPA tariffs*, expires in July but looks set to be replaced. How severe the new tariff policy is could impact markets. The USMCA** trade deal is another source of tariff uncertainty. Despite Mr Trump hinting at US withdrawal, as USMCA covers a third of its export market, this seems unlikely. But a continuation in its current form is also unlikely. The US is pushing for a more US-centric deal including tighter rules of origin, but with Canada only just included in the talks, the 1 July deadline, which would allow the agreement to be extended for 16 years, looks tight. Missing the deadline would mean annual reviews from here and ongoing uncertainty about its future.

Chart 12: USMCA is significant – Mexico and Canada are the US’s biggest export markets
 



The US Supreme Court ruled that tariffs made under the International Emergency Economic Powers Act (IEEPA) were invalid in February 2026. 
**USMCA: US-Mexico-Canada-Agreement
Source: Census Bureau, Macrobond, Investec Economics

Eurozone

Eurozone GDP data was revised sharply lower, now showing output down 0.2% q/q in Q1 (previous: +0.1%). This though is largely a mirage: it reflected the 12.1% (non-annualised!) GDP plunge in Ireland. Irish GDP is often prone to wild swings because of the way activities are recorded by the many multinational firms that are registered in Ireland. These can be very lumpy. That said, even by Irish standards, this swing was huge (Chart 13). We expect a correspondingly large rebound in Q2. So despite monthly data outturns that point to weaker momentum in GDP in Germany and France than we previously forecast, we have only nudged down our ’26 EU21 growth forecast by 0.1%pt to +0.8%; our ’27 forecast remains at +1.7%. 

Chart 13: Marked volatility in Irish GDP is common, but the Q1 plunge was still exceptional
 



Source: Eurostat, Macrobond and Investec Economics

The ECB set out fresh updated economic scenarios after its 11 June policy meeting. These considered not just downside risks but also a ‘milder’ scenario in which energy prices return to pre-war levels by the end of this year, so sooner than in the baseline projection. With the US-Iran MoU agreed shortly afterwards and now a Lebanon ceasefire too, this takes on some added relevance. Our baseline forecasts are little affected by the MoU because they had already been built on the assumption of a swift end to hostilities: we predict inflation to average 2.8% in ’26 and 2.3% in ‘27. Instead, what has changed more is that the risk of a worse outcome, with higher inflation and weaker growth, has receded.

Chart 14: The Iran MoU changes the risks to the EU21 inflation outlook more than the baseline
 



Source: Eurostat, ECB, Macrobond and Investec Economics 

When it comes to monetary policy, the ECB stressed that its decision to hike rates by 25bps this month was robust to any of its scenarios playing out. After all, some indirect impacts from the rise in energy prices look set to continue (Chart 15), and the starting level of rates was too low to contain them on their own: ECB Chief Economist Philip Lane suggested the upper end of the range of ‘neutral’ rates now extends to 2.50%, not just 2.25%. This leaves us comfortable with the idea that another ECB rate hike is in the offing. We see little to be gained by waiting with this, so our forecast remains for another hike in July. If the MoU terms are upheld, we continue to expect the ECB to leave it at this and to reverse this year’s hikes in 2027.

Chart 15: We expect more passthrough of higher energy prices into other price components
 



Source: Eurostat, Macrobond and Investec Economics

Whilst the ECB is tackling above-target inflation, governments across the Eurozone have other issues to address too. Polls suggest the public is dissatisfied with the German, French and Italian governments’ leaders (Chart 16), benefitting populist alternative parties. In Germany, a flurry of reforms is being debated, including to pensions. On the table is a pension age rise and shift for a portion of mandatory pension contributions from pay-as-you-go into a new funded pillar that invests in financial assets. Healthcare funding and personal income taxation are also under review. In France & Italy, approaching elections in ’27 make the need to turn opinion polls around pressing for the incumbent governments. Higher bond yields add to the challenge to do so while spending more on defence. 

Chart 16: Net approval ratings for the leaders of Germany, France and Italy are firmly negative
 



Source: YouGov and Investec Economics

Spain is no outlier to political woes. Tainted by corruption scandals, current PM Sánchez leads a minority government, which complicates passing policy. Meanwhile support for the populist Vox party is on the rise too. But despite this, Spain's economy finds itself in a relative sweet spot. Strong job creation fuelled by immigration (Chart 17), solid investment via EU RRF* funds and a still-booming tourism sector are driving growth. The economy is starting to go beyond tourism too with exports of business and IT services on the rise. But productivity lags European peers, leaving expansion reliant on additional workers more than greater output per worker. This will need to be tackled for the current performance to be sustained. 

Chart 17: Spanish unemployment has fallen to historical lows
 



*EU Recovery and Resilience Facility
Source: INE, Macrobond, Investec Economics.

When it comes to the Euro, we maintain our view that the currency will tend to strengthen from here, albeit with politics inducing some volatility. As we head into H2 uncertainty surrounding the US midterm elections could temporarily weigh on USD, benefiting EUR. Our end-‘26 EURUSD target is $1.17. Conversely there could be a temporary dip pre-French elections early next year. Over the latter half of 2027, fading uncertainty and EUR-positive relative interest rate differentials may cause EURUSD to recover to $1.19 by year-end. Against sterling we forecast an end-‘26 level of 86p and put end-‘27 at 88p, with some volatility between, driven by political factors on both sides of the Channel. 

Chart 18: We still expect the Euro to strengthen, albeit with some volatility around this trend
 



Source: Macrobond, Investec Economics

United Kingdom

The recent fall in energy prices, if broadly sustained, fundamentally alters the outlook for CPI inflation. Admittedly energy-related price increases are already in the pipeline with household utility bills set to rise by 13% from July onwards. But many price rises that have already taken place may now be reversed and others that might have occurred now may not. The May CPI inflation figures – a steady reading of 2.8% – were encouraging on this front, showing signs that the pre-war disinflation process is continuing alongside the energy price spike. We now think inflation will peak at 3.1%, a material downward revision from our previous forecast of 4.0%, before trending back towards 2.0% in 2027.

Chart 19: Recent events mean that that inflation is now probably past its peak…



Source: ONS, Macrobond, Investec Economics

Although the MPC kept the Bank rate at 3.75% at June’s meeting, Megan Greene joined Huw Pill in backing a 25bp hike. But other events reinforce our view that raising rates is unnecessary - inflation prospects have taken a turn for the better (see above); private regular pay growth is tame (2.9% in April); and GDP growth this year looks indifferent (1.2%). Indeed the hawkish shift on the MPC belies a flattening in the yield curve which now sees one 25bp hike this year from a peak of three in March (Chart 20). Markets though still see few hopes of reductions next year. But with policy currently restrictive and inflation pressures waning, we maintain our view that the Bank rate will be lowered to 3.0% by end-2027.

Chart 20: Prospects for the Bank rate – markets see no reductions next year



Source: Bank of England, Macrobond, Investec Economics

Andy Burnham's route back to parliament and in all likelihood, into No. 10 Downing Street, was facilitated by a resounding victory at the Makerfield by-election. His share of the vote rose to 55% from Labour's 45% at the 2024 General Election, impressive bearing in mind the prevailing negativity towards the party. Unusually for a by-election, the turnout also rose - 58.7% v 52.5% in 2024. Although Sir Keir Starmer has now resigned as Labour leader (and therefore PM), it is not yet 100% certain that Mr Burnham will avoid a leadership vote. But in the absence of viable challengers, a 'coronation' will take place, in which case he could become PM in July. This gives him little time to formulate the details of his agenda including, of course, fiscal policy. 

Chart 21: Andy Burnham increased Labour’s share of the vote in the Makerfield by-election
 



Source: UK Parliament, Investec Economics

Latest data on the public finances show that borrowing fell to £128bn in 2025/26, or at 4.2% of GDP, the lowest since 2019/20. OBR forecasts suggest a further decline in cash terms to £115.5bn in 2026/27. But the year has got off to a poor start – deficits in the first two months are £7.7bn above its projections. Some £2.4bn of this reflects higher interest payments, mainly due to firmer RPI outturns raising the uplift on index-linked gilts. Other tax and spending figures are provisional at this stage of the year and it is feasible that some are revised favourably – early stage estimates of income tax and VAT receipts tend to be more reliable, and they are running above OBR profiles. Even so, under the current fiscal rules, the new PM and his Chancellor will have scarce room to loosen policy. 

Chart 22: The public finances have had a poor start to the year, but…



Source: OBR, ONS, Macrobond, Investec Economics

Indeed in contrast with sentiment expressed previously, Mr Burnham has now pledged to stand by the existing rules. He has also committed to honouring Labour’s manifesto pledges of not increasing the ‘big four’ taxes (Chart 23). This means that any increases in expenditure will need to be funded by raising other taxes, a reduction in any fiscal headroom or (perhaps unlikely for now) by offsetting reductions in expenditure. We will learn more about Mr Burnham's vision and the make-up of his cabinet over the coming weeks. Critically market fears over a possible period of fiscal irresponsibility have ebbed. 10y gilt yields now stand at 4.70% with the spread to US Treasuries at one stage hitting 25bps, a 5-month low.

Chart 23: What could Andy Burnham’s policies look like?*
 



*Recent proposals not confirmed
Source: Various news outlets, Investec Economics  

Political uncertainty had resulted in some periods of sterling weakness too. Most of this has been unwound and although the pound is currently at a seven-month low against the US dollar below $1.32, much of this reflects the strength of the greenback – the UK unit has threatened to breach 10-month highs versus the euro. We may still see some jitters ahead of the autumn Budget, but assuming that whoever is Chancellor delivers a responsible package, we see a recovery in £:$, ending the year at $1.36. Thereafter if our UK rate view is correct, sterling may slip against the US dollar to $1.35 at the end of next year. After benefiting from a weaker Euro early in the year, we see €:£ at 88p end-27.

Chart 24: Rate cuts to weigh on sterling over 2027?



Source: Macrobond, Investec Economics

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