Global Economic Overview – September 2026

We have re-evaluated our views on monetary policy and to an extent, other market forecasts as well. The Iranian conflict is now in its 8th month. Inflation has been higher for longer and each additional week has resulted in firms incurring higher energy costs which may be passed on to consumers. An added risk is that pay growth strengthens, leading to more entrenched inflation. The Fed's patience with living with these dangers cracked earlier this month, while the ECB tightened policy for the second time earlier this month. We also expect the Bank of England to throw in the towel and raise the Bank rate in November. Other central banks may well follow.

Chart 1: The rate cycle has turned – more central banks are now raising rates than cutting them

Source: Macrobond, Investec Economics

It is possible that a US/Iran deal suddenly materialises, energy prices plunge and the need for such tightening disappears. But that is not the current direction of travel - US President Trump recently rejected an Iranian proposal which aimed to reopen the Strait of Hormuz within a week. Houthi incursions around the Bab el-Mandeb have also squeezed maritime traffic and crude oil supplies have been hit further by an attack on the Saudi east-west pipeline to Yanbu, although reports suggest that flows have been partially restored. But continued tensions and fears of renewed US military action after November’s midterms have put further upward pressure on Brent crude costs, which hit $110 per barrel recently.  

Chart 2: It is not just about crude oil – crack spreads have risen as well

Data are European prices. July corresponds to the low point in the Brent price since the Iran war.
Source: Bloomberg, Investec Economics

As our commodities team frequently makes clear, crude is only part of the picture. The price of distillates such as jet fuel, diesel and petrol has at times been even more volatile. Most crack spreads (i.e. the difference between the final product and oil) have widened since July (Chart 2). European gas prices also remain elevated and although spot prices have shown some minor retracement over the past fortnight, without a material decline, a substantial hike in UK utility prices will be due in January when the ‘Energy Price Cap’ is reset. Note that in sharp contrast with the surge in European (including UK) natural gas prices, those in the US are close to where they were pre-conflict (Chart 3). 

Chart 3: European gas prices have risen, but those in the US have not

Source: Macrobond, Investec Economics 

It is certainly correct to characterise the prevailing sentiment in major sovereign bond markets as nervous. Yields have continued to rise over the past month and those at the 30y end of the curve in jurisdictions such as the US, UK and France have reached multi-decade highs. But despite much attention to these various long bond milestones and talk about the fragility of assets at this and similar maturities, yield curves have not actually steepened. As Chart 4 shows, curves in the three jurisdictions above have flattened since the turn of the year. Schemes such as the BoE's new QT framework (see UK section) and arguably the US Treasury's larger bond buybacks, seem to have provided some support to the longer end. 

Chart 4: Longer dated sovereign bonds are nervous, but yield curves have not steepened

Source: Macrobond, Investec Economics

More pain for bonds could still be felt. Pressure is building again for governments to shield households from rising fuel prices and utility bills. Data from the IEA shows that since April an increasing number of countries have rolled out measures such as fuel subsidies and lower energy taxes (Chart 5). Many of these are now having to be widened out or extended. As we head into the winter in Europe with a potentially deteriorating energy crisis, fiscal positions could worsen too. But it is not just Europe. For example, Thailand which has been rolling back fuel subsidies since March over fiscal concerns, is now considering other measures such as fuel tax cuts, whilst Indonesia has pledged to extend subsides. 

Chart 5: Will more fiscal support to households hit bond markets?

Source: International Energy Agency, Financial Times, Investec Economics

Although the global economy has faced an extended period of conflict, bond yields have risen across the globe and a number of central banks have tightened monetary policy, the story so far is one of resilience. Our global GDP growth projections have been little changed since the conflict broke out (Chart 6). This month our 2026 forecast has seen a slight upgrade to 3.2%, mostly driven by stronger than anticipated momentum in India, whilst our 2027 GDP forecast has been revised down marginally to 3.0%. Although we suspect tighter monetary policy could bear down more visibly on demand, our outlook of relatively shallow rate increases which are unwound by end-2027 means we see little reason to alter the picture of resilience dramatically.

Chart 6: Our global GDP forecasts have remained in a tight range

Source: Investec Economics 

At its September meeting the FOMC voted to lift rates by 25bps for the first time since 2023. The key driver of the rate hike was concern over the inflation outlook. Indeed, although there were only minor upward revisions to the inflation projections as displayed in the SEP*, the vast majority of participants once again viewed the risks to inflation to be to the upside (Chart 7). Unless there is a lasting resolution to the conflict in the Middle East that drags energy costs lower, we imagine this concern will justify another 25bp hike come December. Once a resolution is reached though we imagine the Fed will want to quickly reverse these ‘insurance’ hikes, as not to threaten the labour market half of the dual mandate. We see two 25bp rate cuts in H2 2027.

Chart 7: FOMC participants see risks to PCE inflation to be to the upside

* Summary of Economic Projections.
Source: Investec Economics, Federal Reserve

Inflation has now been running above the Fed’s 2% objective for five years, resulting in concerns that the Fed’s credibility could be eroded if inflation does not return to target soon. We also note that the picture looks worse on the Fed’s targeted PCE measure than the alternative CPI. Recently the PCE has been running above the CPI measure, which is unusual. One reason is the different weights: e.g. computer software & accessories account for 0.035% of the core CPI basket, but 1.2% of the core PCE basket, significant given inflation here is currently running at 25% due to the surge in semi-conductor prices. Differences in the weight and measurement of financial services also explains the divergence.

Chart 8: PCE inflation is now tracking above CPI inflation, breaking from a previous trend

Source: Investec Economics, Macrobond

Fed Chair Warsh does not just look at the level of inflation though, but also the broadness of inflationary pressures. At both Jackson Hole and the Sep Fed decision, Warsh expressed concern about the number of PCE categories which are running above 3% (Chart 9). Despite ticking up slightly since the start of the Iran war, we do not think it is indicative of widespread secondary effects from the oil shock yet, more so lingering price pressures that were already in train. However, we imagine that in the coming months there will be more evidence of secondary effects as firms pass on their added production costs to consumers. The robust economic backdrop makes this easier for businesses. We have nudged up our GDP forecast this year to 2.1%. Next year remains the same at 2.0%.

Chart 9: Chair Warsh says too many PCE (inflation) categories are running above 3%

Source: Investec Economics, Macrobond, BEA

What matters more to the Fed though is if the oil shock leads to second-round effects, in which employees secure higher wages to compensate for higher living costs. This can lead to more entrenched inflation over the medium term. Again, the strong economy and healthy labour market – nonfarm payrolls increased by 162k in August – increase this risk. However, for now, there are few signs of rapidly rising wage growth (Chart 10). A second hike by the end of the year would still be appropriate though to help mitigate this risk, but in the absence of further evidence of wage growth led inflation, these hikes could then be quickly reversed once the conflict ends and oil prices decline. 

Chart 10: It is not obvious that employees are upping wage demands due to higher costs 

Source: Investec Economics, Macrobond, BLS 

The prospect for further hikes has not helped President Trump heading into the midterms (Chart 11). Indeed, Democrats seem to have gained momentum in recent months, with betting odds now favouring the Democrats to win both the House and the Senate on 3 November. Democratic candidates appear to be increasingly focusing campaign efforts on affordability and AI concerns, which appear to be landing with voters. Sentiment on AI has quickly turned within the US, on both the local level due to concerns over data centre construction, as well as wider national safety fears over rapid developments in AI models. Mr Trump has positioned himself on the opposite side of the AI debate. 

Chart 11: Democrats more trusted on the economy than GOP for first time since 2017 (just!)

The latest poll surveyed 1,000 registered voters from Sept. 11–15, 2026. Margin of error: ±3.1 percentage points.
Source: NBC News polling, Investec Economics 

Despite widespread concerns, AI hyperscalers are ploughing on with eye-watering sums of investment; next year the total could surpass $1trn. This is increasingly being funded via debt issuance which could be crowding out the demand for Treasuries, pushing up longer-dated yields. Also pushing up borrowing costs is higher energy prices and the continued strength of the economy, whilst concerns over fiscal policy and the Fed’s credibility could be adding to the term premium. Meanwhile the hawkish pivot from the Fed is pushing up yields at the short end too. We don't see these factors dissipating in the short term and have raised our end-26 10y yield target to 5.00% but continue to see scope for yields to fall in 2027 if energy prices decline and the Fed eases policy as we expect. Our end-27 target is 4.50%.

Chart 12: UST yields have hit the highest in (at least) a decade

Source: Macrobond, Investec Economics

This month saw the ECB lift its key interest rates for a second time this year, bringing the Deposit rate to 2.50%. An updated set of ECB staff projections offered some justification for the move with HICP inflation forecast to rise in the near term driven by renewed upward pressure in energy prices, peaking at 3.6% in Q4 ’26. These forecasts were, however, conditioned on a lower oil price than the current prevailing rate. On our own updated estimates we see inflation peaking at 3.7% in Q4 before moderating through 2027. Such forecasts are, however conditioned on very uncertain assumptions regarding energy prices and so in essence the Iran conflict, a fact which is highlighted by the range in the ECB’s HICP scenarios.

Chart 13: Inflation looks set to rise further, but ECB scenarios highlight the uncertainty 

Source: Macrobond, Investec, ECB Sep-26 Macroeconomic projections 

A factor making the ECB’s decision a little easier is the resilience of the economy so far. EU21 GDP figures have been volatile due to Ireland, but stripping this out the underlying pace of growth has been a reasonable 0.4% q/q in Q1 and 0.3% in Q2. Recent monthly data too have surprised to the upside with figures such as the PMIs signalling a pickup in activity despite energy price headwinds. Governments are however seeking to soften the blow of surging fuel prices, Germany is the latest with a €0.17/l cut in petrol and diesel tax. Risks are skewed to the downside, but our broad sense is that the EU21 will record modest GDP growth, our forecasts standing at 1.0% for ’26 and 1.5% for ’27. 

Chart 14: The Euro area economy has proved resilient thus far

Source: Macrobond

The question for the ECB now is whether policy needs to become mildly restrictive given that a 2.50% Deposit rate is judged to be ‘neutral’*. Market pricing is for almost four more hikes (95bps) over the next year. This looks toppish given limited evidence of indirect price pressures or second-round effects via wages. Of course, there is a risk that the Iran conflict takes a dark turn and such aggressive action is required, but that is not our base case. As already noted, on the assumption that energy disruptions ease in Q1, we suspect that the ECB will hike once more to 2.75% in October followed by a policy pause until Q3 ’27.  At that point we see the inflation outlook to be benign enough for the ECB to begin gradually easing policy and the Deposit rate to fall to 2.25% by the end of 2027.

Chart 15: Market pricing and Investec forecasts for the ECB Deposit rate

* ECB estimated range of neutral policy rate 1.75%-2.50%
Source: Macrobond, Investec

Euro bond markets have not been immune to the global selloff. But the tightening of conditions will have done at least some of the heavy lifting for the ECB. On its estimates the rise in short and long rates this year has cumulatively lowered its growth projections for 2026-28 by 0.8%pts and HICP inflation by 0.3%pts. As to the drivers behind Euro bond markets, higher energy prices, inflation concerns and consequently higher policy rates have led the underperformance at the short end: 2y yields are up by 130bps on average. Long-dated yields have risen too. Idiosyncratic fiscal and political concerns have driven differing performances: France for example has underperformed, its 30y yields rising at almost double the pace of Germany.

Chart 16: Rising bond yields have tightened financial conditions (%)

Source: Macrobond

Meanwhile in Germany the CDU/SPD coalition government led by Chancellor Merz is coming under pressure. Popularity is waning; with an approval rating of 13% Merz is the least-liked Chancellor in postwar history. This has been underscored by the increasing success of the far-right populist AfD party in recent regional elections (Chart 17). In the state of Mecklenburg-Vorpommern the CDU even fell short of the 5% vote share required for parliamentary representation. But while these heavy losses have thrown the government into political turmoil, Merz has vowed to stay on and push ahead with his planned economic and welfare reforms. A key question though is whether Merz can restore confidence in himself or whether the CDU will oust him for a new leader.

Chart 17: AfD gains in state elections pose a problem for Merz

Source: Various

We see politics as a key influence on our market forecasts. In FX, we continue to expect April’s French presidential election to weigh on the euro. Recent polls have pointed to greater polarisation in public opinion. Marine Le Pen holds a material lead in polls, but far-left candidate Mélenchon is now in contention for a possible runoff vote, at the expense of centrist candidates. Mélenchon’s comments about cancelling French debt held by Banque de France will be unnerving for French bonds despite being rejected by the ECB. As such we now see €:$ ending this year at $1.15 before weakening in Q1 to $1.13. However, against a softer USD, we see a recovery to $1.18 in Q4 ’27. 

Chart 18: French Presidential opinion polls point to choppy waters for the Euro

Source: Various polls

As detailed last week in a change of view note, the prolonged duration of restricted Middle Eastern energy supplies to the rest of the world is likely to shortly bring about the tipping point where the Bank of England decides to act. A long-held key view at the MPC is that the labour market is loose. We doubt this judgement is about to change. Nonetheless, the longer energy prices are high, the greater the risk of second-round effects. We predict precautionary 25bp hikes in November and February. But if energy prices decline durably, as futures price in, the MPC could unwind its rate rises again as soon as in July and November ‘27. Being driven by risk management considerations, the period of peak rates would thus be briefer than usual (Chart 19).

Chart 19: The period for which the Bank rate has been held at its peak has varied in past cycles

Source: Bank of England, Macrobond and Investec Economics

When it comes to sterling, we do not anticipate a breakout from the tight trading ranges seen over the past year. If anything we forecast sterling to rise marginally against USD from current levels as we reckon that the potential fall-out from the US midterm elections could weigh on the dollar in the near term, assuming a prudent Budget from the UK Chancellor. Over 2027 an easing in energy prices and a relatively positive growth environment amid a global loosening in monetary policy could give sterling room for some modest appreciation too. Our end-‘27 target is $1.37. Relative to the Euro we think that sterling could rise to 84p at the start of 2027 as pre-French presidential elections jitters push down on the Euro, but ultimately end the year at 86p as European political factors fade.

Chart 20: We anticipate a continued fairly tight trading range for sterling against USD and EUR 

Source: Macrobond and Investec Economics

Underpinning our expectation of only modest rate hikes is a baseline forecast for inflation that is still relatively contained. A near-term pickup looks very hard to avoid; by Q1, CPI inflation could average a little over 4% (Chart 21), largely on higher petrol and utility prices. But we also see firms starting to pass on some of their own energy input cost rises to consumers. Crucially though, we assume that oil prices and, to a lesser extent, natural gas prices will decline fairly swiftly, albeit from high levels. Tighter financial conditions, from higher bond yields now and soon from a higher Bank rate too, stand to bear down on inflation over time. By end-2027, the 2% target could be very close to being reached.

Chart 21: Further inflation rises seem hard to avoid but may be relatively short-lived

Source: ONS, Macrobond and Investec Economics 

This is in the context of what we think will be ongoing moderate but above-consensus GDP growth. Recent outturns have been firm, although likely flattered by warm weather. Payback for this, Budget uncertainty and rate rises could act as temporary dampeners on momentum in the coming months. All in all, we forecast GDP growth of 1.3% y/y for both ’26 and ’27. But the bigger story relates to the long-term picture. The ONS has revised its methodology for calculating hourly labour productivity. Because its flawed Labour Force Survey did not capture what is a trend fall in hours worked, post-GFC hourly productivity growth was underestimated until now. Correcting for this leaves less of a ‘productivity puzzle’ of UK under-performance to be explained (Chart 22).

Chart 22: New data show much less of a deceleration in hourly labour productivity than before 

Source: ONS and Investec Economics

The OBR’s forecasts for productivity affect its tax revenue projections and hence its view of the sustainability of the public finances. If the OBR reckons weekly hours worked will stabilise, firmer productivity growth could help improve the outlook. That though is a big ‘if’, and there are other, more certain, headaches for new Chancellor Healey to tackle at the 28 Oct Budget. The rise in inflation adds to index-linked gilt servicing costs and higher conventional yields make rolling debt pricier. Also health and social security spending are on a long-term uptrend, partly on population ageing, and defence spending needs to rise (Chart 23). Some tax rises look virtually inevitable, even if the government allows its headroom to fall as some rumours suggest.

Chart 23: Health spending and social security are on a rising long-term trend relative to GDP

Source: OBR and Investec Economics 

The UK is certainly not alone in grappling with much higher bond yields since the start of the Iran conflict and with the consequences of this selloff. There is some consolation in the fact that the cumulative move up in yields in the UK sits between that experienced in the US and in Germany: the UK is not being punished more than others, and that despite a more left-leaning UK Prime Minister having taken over. Where the UK does stand out though is in the daily volatility of its bond yields relative to those of its peers: across the yield curve, daily moves have tended to be larger in gilts than in Bunds or in Treasuries (Chart 24). In financial market terminology, the UK bond market remains a ‘high beta’ asset.

Chart 24: Since the Iran war started, UK yields have been more volatile than others 

Note: Box shows 25th to 75th percentile of daily moves, lines show minimum/maximum, outliers are shown as dots
Source: Macrobond and Investec Economics