Global Economic Overview – October 2026

Despite headwinds stemming from the Middle East and tighter financial conditions, the theme thus far this year has been one of resilience in the global economy. This is evidenced by our upward, albeit minor, revisions to 2026 GDP growth forecasts for individual countries, as well as to global growth, which we now forecast at 3.3%, up 0.1%pt. 2027 has also been revised 0.1%pts higher to 3.1%, the resilient nature of 2026 having a positive carry-over effect into next year.  China is one country that has been upgraded, thanks to stronger than expected Q3 GDP figures, of 4.5% y/y. This puts the government’s 4.5-5% growth target for this year firmly within reach: we forecast 4.6% growth.

Chart 1: We made minor positive revisions to our GDP forecasts amidst resilient global growth

Source: Investec estimates

China’s resilience to both energy prices and domestic issues related to the continuing property market downturn can be attributed to factors including a strong trade picture: exports rose 30% y/y in September, driven by tech and AI, with hi-tech exports rising 56%. The impact of AI more broadly has contributed to the resilience in the global economy, although the channels vary. In the US, AI-related capex has accounted for just over half of US GDP growth year to date, whilst South Korea and Taiwan have benefited from semiconductor chip production. European activity is now also seeing evidence of an uplift, with S&P’s Europe sector PMI showing the strongest rates of growth in the technology equipment and software and services sectors. 

Chart 2:  Strong exports have been a factor supporting Chinese GDP growth (in CNY terms)

Source: Macrobond

But there are likely limits to this resilience. Here the Middle East remains the key risk. Whilst diplomatic progress was limited last month, there was better news on physical energy flows, with brief periods of oil exports reaching pre-war levels thanks to dark transits, STS* transfers and US escorts. However, the situation remains in flux. This month, Iran has stepped up attacks on shipping, with 32 reported incidents so far, the highest since the start of the conflict. Regional tensions are also escalating between the Houthis in Yemen and Saudi Arabia. Houthi missile attacks have targeted Saudi energy facilities and shut down its airports this month. Reports have also emerged over US preparations for the possibility of significantly escalated military action post-midterm elections. 

Chart 3: UKMTO reported a step-up in Middle East shipping incidents# during October

* Ship-to-ship transfers, # incidents include missile/drone strikes, mines, small arms fire   Source: UKMTO

The consequence of this has been a rise in oil prices: at one point, Brent traded above $111/bbl, its highest since May. But it is not just the price of crude oil that has risen: tanker rates as evidenced by the Baltic Dirty Tanker Index hit a record high earlier this month and at the last reading were 270% higher than before the war started (27-Feb), an indication that stress remains in the system given logistical problems and high insurance premiums. This represents an inflationary risk. Yet whilst near-term inflation profiles will be higher than before, it should be remembered that a negative base effect should still push down on inflation in 2027, that in the absence of an extra surge in energy prices from here.

Chart 4: It is not just oil prices that have risen, tanker freight rates have surged too

Source: Reuters Workspace

Ultimately, we expect a modest tightening by central banks, but not to the extent that markets are pricing in (Chart 5), which we judge to be overly bearish on our baseline assumption that a Middle East deal is struck next year. If this were to be the case, we would expect pressure on bonds to ease through 2027: we see 10y Treasury and gilt yields falling to 4.50% and 4.75%, respectively, by Q4 ’27. But in the near term current dynamics may not change much given the continued concerns over fiscal policy and crowding-out effects of AI debt. However, we get a sense that markets may be reluctant to push yields much higher from here given the pressures they could put on the economy. The market…

Chart 5: Are markets overly bearish on central bank policy outlooks?

Source: Macrobond, Investec estimates

…reaction to this month’s strong US CPI print was a prime example: an initial bond selloff reversed as equities fell. In fact, despite the upward pressure on energy prices, yields are flat to lower this month. Consequently, bonds still seem to be retaining their safe-haven appeal in times of stress. This may become more applicable given more concerns over AI, in part due to higher yields and the ability of neocloud companies to finance the data centre build-out. CoreWeave is a prime example: its 2032 bond now yields 15%, a 540bp rise from its issue in June. Lower-rated US corporates too are seeing a material widening in credit spreads. Is this just individual company noise or the canary in the coal mine? It may be too early to say, but it is certainly a risk worth watching.

Chart 6: Higher-yielding US corporate bonds are showing signs of stress, including AI firms (%)

Source: Macrobond, FRED database (Federal Reserve Bank of St. Louis), BBG  

Since becoming Fed Chair, Kevin Warsh has upheld his pledge not to provide forward guidance, believing that it can lead to policy mistakes if committee members feel ‘trapped’ by a specific course of action. He has not however gone as far as preventing other committee members from sharing their own views on the path for rates. As such, recent comments (Chart 7) have bolstered our own forecast that the Fed will wait until the December meeting to lift rates again, despite the continued rise in gasoline prices. Waiting an extra meeting provides the committee more time to assess the risks, while also having the benefit of not tightening policy less than a week before the midterm elections, which could be uncomfortable for policymakers. 

Chart 7: Some FOMC members warn against back-to-back hikes

Sources: Investec Economics, Federal Reserve 

If committee members were hoping that the latest CPI inflation print would help justify waiting another meeting, they would have been disappointed though. The annual rate for September was hotter than expectations, rising 0.3%pts to 3.7%. Energy prices were the main culprit for the increase, although concerningly core inflation also ticked higher, to 2.6%. Much of the latter could be attributed to shelter, although an argument could be made that some secondary effects – such as in toy prices – are starting to show in the data. We imagine it will just be a matter of time before these become more obvious: producers are unlikely to be willing/able to swallow rising costs for much longer – the latest PPI data placed producer price inflation at 6.3% y/y.

Chart 8: Energy prices have driven CPI inflation higher. Will goods prices follow? 

Sources: Investec Economics, Macrobond, BLS

One more helpful piece of evidence though were the recent downward revisions to PCE inflation, bringing the headline rate closer to the Fed’s 2% objective (Chart 9). The revisions were driven by methodological changes in areas such as computer software & accessories and portfolio management & advice services. The latter previously closely tracked financial asset prices, resulting in a high rate of inflation. This has now been switched to a measure based on how much nominal spending has risen relative to the amount of investment management services being provided, calculated using aggregate hours worked in the industry. In total, the changes pushed headline PCE inflation for July 0.3%pts lower (to 3.4% headline, 3.0% core).

Chart 9: Methodological changes push PCE inflation closer to the Fed’s 2% objective

Sources: Investec Economics, Macrobond, BEA

Also helping the Fed’s case to ‘pause’ this month are conditions in the labour market. The latest employment situation report was soft, with non-farm payrolls rising by just 29k in September (and downward revisions to the back data), while the unemployment rate ticked up to 4.2%. One theme since the start of the year had been a decline in the participation rate, which could not easily be explained. This contributed to the fall in the unemployment rate over the same time period, as job seekers left the market. However the participation rate has increased in the past two reports (Chart 10). If this is signal, rather than just noise, this could drag the unemployment rate higher with it. This would support our call for a period of steady rates early next year, before cuts start in June, on the assumption that the Iran conflict ends. 

Chart 10: Has the US participation rate turned a corner – is it signal or noise? 

Sources: Investec Economics, Macrobond, BLS

Over the next few weeks the macro might take a backseat, however, with attention focused on the midterm elections. It is a difficult backdrop for the Republicans, with fuel prices extremely high and President Trump’s approval rating at record lows. Currently, betting markets and pollsters favour the Democrats to retake both the House and the Senate. If that comes to pass, what does that mean for policy? It will certainly constrain the Republicans’ fiscal ambitions, which is why the party frontloaded major fiscal plans into the first two years. From an Iran point of view, it is unlikely to constrain Trump militarily at first, but problems will likely arise if the President needs extra funding for the war.

Chart 11: Betting markets are increasingly favouring a Democrat clean sweep on 3 November

Sources: Investec Economics, Macrobond, PredictIt

Heading towards the midterms the US dollar has strengthened, in part due to inbound capital flows, higher oil prices and a weakening euro (see Eurozone section). Will the election results alter the path for the USD? We doubt that the outcome will move the greenback materially, especially of course if it is in line with expectations. Historical experience suggests that macro and Fed developments matter more for the dollar than the midterms (Oct’s employment report is due the Friday of that week). We have assumed in our baseline case that the same is true this time, but should the results fuel expectations of a material shift in domestic or foreign policy, the USD could be subject to volatility. 

Chart 12: This year the USD has performed well against major currencies (CNY aside)

Sources: Investec Economics, Macrobond

Looking at headline GDP data alone, the impact of the energy shock is not yet visible: excluding the volatile Irish figures, GDP expanded by 0.3% q/q in both Q1 and Q2, matching the average pace in 2024 and 2025. With Ireland included, Q1 and Q2 growth rates were zero and +0.6% instead. But the impact of the shock builds over time, so monitoring monthly data can give a timelier insight into more recent trends. A proxy of monthly GDP we constructed points to an expansion of 0.1% m/m in July (Chart 13) but its profile also hints at weaker momentum in Q3 than in Q2; our q/q forecast is +0.2%. Our ‘26 full-year forecast stays at 1.0% but we now predict softer growth of 1.4% in ‘27 (previously: +1.5%). 

Chart 13: A proxy of monthly GDP hints at base effects that could mean slower Q3 expansion

Source: Eurostat, Macrobond and Investec Economics

One reason why is that we have cut our forecasts for French GDP. Rising interest rates are making public-sector deficit reduction even tougher, from a high starting point – the ‘26 deficit is projected to be 5.4% of GDP. The government’s ‘27 budget plan sees this merely falling to 5.0%, despite primary structural tightening of 0.8%pts. Marine Le Pen, front-runner for next year’s presidential elections, tried to reassure markets by outlining her proposals for fiscal consolidation via drastic spending cuts, which are to exceed the cost of lowering the retirement age. But these look sketchy, and social unrest adds to questions about how deliverable such plans are. The silver lining though of market pressure and wide OAT-Bund spreads is that this may at least incentivise the highly divided National Assembly to approve the ’27 budget.

Chart 14: Cyclical deterioration and higher rates are projected to keep the French deficit high

Source: Haut Conseil des Finances Publiques and Investec Economics

There are growing questions over whether the ECB will be forced to step in using TPI# to bring French bond spreads down. The conditions for deploying this as yet untested tool are not yet met, and the ECB will hope it will not become unavoidable around the French election. Political turmoil though is not confined to France. Spain will hold snap elections on 29 Nov, a gamble that PM Sánchez took in order to help his coalition retain power despite previous scandals. The issue he hopes will galvanise support is their support for progressive measures on the housing market, where rental and house price inflation have risen (Chart 15). But the latest polls still have them behind. 

Chart 15: Spanish house prices and rents are rising much faster than pre-pandemic

# Transmission Protection Instrument                                           Source: INE, Macrobond and Investec Economics 

The Euro has been on the back foot since the outbreak of the Iran conflict, especially against USD. In addition to the EU21 facing a larger rise in energy prices than the US, with gas prices affected too, a good part of that seems to have reflected the upturn in US policy rate expectations having been sharper than in the Eurozone. But it looks as though the bond market’s fears about France have added a bit to the downside momentum during October too. We expect political uncertainty in France to weigh on EUR in early 2027 as well. But the stakes seem too high for President Macron’s successor not to calm the market’s fears at least somewhat. So, although we predict EURUSD to trade at $1.13 at end-’26 we forecast a level of $1.18 at end-’27.

Chart 16: The Euro’s weakening in October does not look linked to interest rate differentials

Source: Macrobond and Investec Economics

At the margin, the weaker EUR is not helpful for the Eurozone’s inflation outlook either. We have raised our forecasts, now predicting HICP inflation of 3.1% y/y for ’26 and 2.8% for ’27 (Sep: 3.0% & 2.7%). Rather than the euro, the main reason for this is the further rise in oil and gas futures prices since late September, as these underpin our baseline forecasts. Direct effects initially dominate, but indirect effects also start to build over time as resulting production cost hikes are passed onto end customers. ECB research found that at its peak after about a year, a 10% gas price shock adds about 0.6%pts to inflation, with direct and indirect effects broadly equal, before fading away in the second year.

Chart 17: Eurozone inflation looks likely to climb to a higher peak but fall back during 2027

Source: Eurostat, Macrobond and Investec Economics

Evidently prospects of an even greater inflation overshoot relative to target are unwelcome for the ECB. However, we have not made major changes to our forecasts for ECB policy rates. After all, our baseline forecasts still see inflation around the 2% target by the end of 2027. Moreover, broader financial conditions have tightened visibly since the summer, as per the ‘Macro-Finance FCI’ – a gauge constructed by ECB staff that amalgamates rates with longer-dated yields, sovereign spreads, risk assets and the euro (Chart 18). This works much like a rate rise. We have therefore pushed back the timing of when we expect the ECB to hike next from Oct to Dec. Our end-’26 and end-’27 Deposit rate forecasts remain 2.75% and 2.25%, as before.

Chart 18: Financial conditions have tightened, doing some of the ECB’s work for it

Source: Macro-Finance FCI, Macrobond and Investec Economics 

Chancellor John Healey's first Budget takes place on 28 Oct. Last year, the number of policy leaks reached fever pitch. This year there are relatively few, partly (apparently) thanks to 'military' level security. Another is that there may not be too many substantial measures to unveil. Mr Healey faces hefty constraints to raising spending in areas such as defence. These have been heightened by adverse movements in gilt yields and medium-term interest and inflation expectations acting to squeeze the headroom he has in meeting his fiscal rules. It seems likely that we get a 'skinny' Budget this time, with a more extensive exercise next year once a full Spending Review has been conducted. For our preview, see 'Budget preview- do no harm'.

Chart 19: If you have no room, then ‘do no harm’…

Source: Investec Economics, pictures from UK Parliament

At current wholesale gas prices, utility bills look set to soar another 25% or so in Jan, pushing CPI inflation above 4.0%. But a deescalation in the Iran conflict by the spring would drag energy prices and inflation down - we think close to the 2.0% target by end-2027. But meanwhile, the BoE will be fearful of a protracted period of elevated energy prices and the danger of surging pay. Hence we still expect the MPC to raise the Bank rate by 25bps in Nov and Feb to 4.25%, as insurance against these risks. On our base case though, the MPC has room to reverse the hikes in H2, returning the Bank rate to 3.75% by end-2027. Market prices are embodying a totally different outlook, pricing in 4-5 hikes, with no cuts. A point of debate is whether…

Chart 20: Our rate views are very different from what is priced into markets…

Sources: Investec Economics, Macrobond, Bank of England

… the increase in term rates since the summer reflects genuinely higher policy rate expectations, an increase in the ‘term premium’ from the gilt market or a mix of both. In any case the result is a tightening in financial conditions that acts as a drag on economic activity, which had helped stave off an increase in the Bank rate until now. For example 5y swap rates, currently 4.77%, have risen by 72bps since the end of June. Homeowners have therefore faced higher mortgage rates (Chart 21), with new mortgage approvals falling to 54.9k in August, their lowest level since Dec 2023. But as mentioned above, the MPC seems to be turning to the view that this has become insufficient and that an increase in the policy rate is required shortly.

Chart 21: The housing market has been squeezed by higher mortgage rates 

Sources: Investec Economics, Macrobond, Bank of England, Moneyfacts

The BoE has restructured its plans for QT, dropping its gilt auctions in favour of selling to the govt via the DMO (the DMO will adjust its own issuance in response). These are intended to start in April and conclude in 2034. Passive QT - allowing gilts in its APF portfolio to ‘run off’ without replacing them - will also finish then. In the febrile environment for bonds, support for longer-term paper may come via three routes. First, no active sales are taking place at all until April. Second, the BoE intends to hold £120bn of its longest gilts in its £488bn gilt portfolio* to 'mirror' the note issue. This means it will keep most of its 2049 gilts and all of those with a longer maturity. Third, the DMO might opt to fund its purchases from the BoE via shorter-term gilt issuance.

Chart 22: The BoE’s multi-year QT plan should be complete in 2034

*Correct at time of writing (21 Oct 2026)                                              Source: Investec Economics, Bank of England

The economy has performed well, bearing in mind Gulf related events. Consecutive punchy +0.4% monthly increases in GDP in June and July were followed not by an August correction, but a small 0.1% rise. We expect a slowdown from here, not least because hot, sunny weather supporting summer spending has drawn to a close. But the economy should nonetheless grind out growth of 1.5% this year and next, the latter supported at some stage by prospects for interest rate cuts. Our views on sterling are little changed from last month. We maintain our view of cable of $1.35 end-year and $1.37 end-2027, with an implicit view that the Budget will do the UK currency ‘no harm’ (Chart 23).

Chart 23: Sterling still on course to rise modestly against the USD, but not against the euro 

Source: Investec Economics, Macrobond

There may or may not be a ‘Burnham bounce’ in the economy (we are sceptical), but a bounce has undeniably taken place in the opinion polls. Having trailed Reform UK by 8% at the time of May’s local elections, Labour now enjoys an average lead of 6% and also comfortably held the seat of Holborn & St Pancras at a parliamentary by-election earlier this month. A frequent question is whether the PM will try and capitalise on his party’s better fortunes by calling a snap election. A recent MRP poll by Electoral Calculus did point to a Labour overall majority. But this is just one poll and going to the country now would be a huge risk. We doubt Mr Burnham will take the plunge, especially given that Labour currently has an effective majority of 167.

Chart 24: Current party breakdown in the House of Commons – Labour effective majority of 167

*Independents include MPs who have lost the whip                             Source: Investec Economics, UK Parliament