Advanced economies proved resilient in 2025 despite a tariff shock that disrupted global trade. By early 2026, they were on track for faster growth and lower inflation. A fresh shock linked to the war in the Middle East, however, is reigniting inflation while slowing growth. This mix primarily reflects the impact of a likely decline in purchasing power on consumer spending. However, many of the factors that underpinned 2025 growth — AI development, higher defense spending (especially in Europe), and continued trade growth — are set to persist in 2026. They would be reinforced by an acceleration of electrification, against a backdrop of rising oil prices and an AI-driven rise in electricity demand.
Due to the military interventions by the United States and Israel in Iran and Lebanon, emerging economies are experiencing financial strains: rising risk premiums, depreciation of their currencies against the dollar, and a decline in central banks’ foreign exchange reserves. As is often the case, Türkiye is once again in the spotlight due to the sharp fall in the reserves of its central bank.
The economies of Central Europe have weathered several shocks since 2020, demonstrating remarkable resilience. In 2025, the US tariff shock had a limited impact on economic activity. In fact, regional growth even accelerated, driven by strong consumer spending. In 2026, the war in the Middle East is once again putting the region to the test, while its fiscal flexibility has been considerably reduced. Uncertainties over the duration of the war are casting a shadow over the economic outlook. In any case, Central Europe can count on four key strengths to weather this shock. Firstly, its direct exposure to risks associated with disruptions in energy and industrial material supplies remains limited
Following a strong performance in 2025, the UK economy will suffer in 2026 as a result of its dependence on imported commodities, with little fiscal headroom to address the situation. GDP growth is expected to fall to 0.7%. Inflation is expected to remain persistently above the Bank of England’s (BoE) 2% target, standing at 3.6% in 2026 and 3.3% in 2027 (though this forecast will depend on the scale and duration of the conflict). However, demand is significantly less robust than in 2022, which should limit second-round effects. Nevertheless, the BoE is expected to respond. According to our forecasts, it will raise its key interest rate by 25 basis points in Q2 and then in Q3; it is expected to lower it again in 2027
The war in the Middle East has caused prices of several commodities to rise, in particular oil which has neared historic highs. Although conflict’s trajectory remains highly uncertain, weaker supply and demand constraints compared to 2022 should limit the upward pressure on inflation. Household consumption and sectors least able to pass on rising production costs to sales prices (primarily consumer goods) are likely to be hit hardest. The ultimate effect on GDP growth will depend on the duration and severity of the damage. According to our baseline scenario, a recession should be avoided. However, if the conflict were to escalate to the point of causing shortages (of fuel or inputs), its impact on growth and inflation could lead to such a recessionary outcome
Surveys suggest a healthy level of activity in Q1 but are already showing signs of deterioration from Q2 onwards. Business sentiment indicators were fairly positive at the start of 2026. However, they now point to a downturn, with a resurgence of supply constraints and an expected deterioration in demand (from both businesses and households). The manufacturing output index is contracting for the first time in six months.?
The Turkish economy has experienced a moderate deceleration despite a flat labour market since 2024 and a reduction in exports in the second half of 2025. Concerns linked to political tensions in March 2025 have dissipated. Consumption is slowing but remains buoyant thanks to renewed disinflation and the use of credit. Investment has recovered after a slump in 2024. Growth is expected to strengthen slightly in 2026, in contrast to the previously expected slowdown scenario. Consumption is expected to moderate further, influenced by tighter controls on credit card use. However, monetary policy is likely to remain accommodative, and fiscal policy will also adopt a more supportive stance. The overvaluation of the lira continues to be the main risk to growth
The business climate is still favourable in the UK, but household consumption has remained sluggish. Payroll employment fell sharply in Q4, mainly in the retail sector. The unemployment rate stabilised in November at its highest level since December 2020 (5.1%).
Growth is expected to reach 1.1% in 2026, down from 1.4% in 2025, the latter benefiting from an exceptionally strong first quarter. However, GDP growth is likely to be unevenly distributed. On the one hand, the service sector is likely to gain from advancements in AI. On the other hand, households will suffer from the deterioration of the labour market, while the industrial sector will face penalties from reduced competitiveness and increased competition from China. Disinflation is expected to progress gradually, which will restrict the BoE's ability to ease monetary policy. The policy mix will be more accommodative, with part of the fiscal consolidation effort postponed until the end of the decade
The primary budget balance has gradually recovered post-COVID, mainly supported by improved growth, but remains high compared to the rest of Europe.
Turkish economic growth is slowing down. Excluding changes in inventories, final demand contracted in Q2 2025, after slowing significantly in Q1. In doing so, it rebalanced with less consumption and more investment. The contribution of foreign trade has become negative, but for the time being, the current account deficit remains contained thanks to lower energy bills and tourism revenues. Persistent inflation remains the main obstacle to growth, not only because of its detrimental effects on purchasing power and external competitiveness (through the appreciation of the real exchange rate), but also because of the constraints it imposes on monetary policy in a context of temporary but recurring financial instability
The composite PMI has been in expansionary territory for five months. However, it fell to 50.1 in September (-3.4 pts m/m), dragged down by the services PMI (50.8; -3.4 pts m/m), which had reached an 18-month high in August. The manufacturing PMI was weakened in September by the ‘production’ and ‘new export orders’ sub-components. The July decline in industrial production suggests a backlash after a surge in growth linked to expectations of US tariff increases.
After solid growth in H1 2025, the second half of the year is expected to see a slowdown (under the weight of US trade policy and UK fiscal policy). Despite the downside risks on the labour market and industry difficulties, growth is expected to be at a higher and stable rate in 2026 (+0.3% q/q on average) thanks to monetary easing. However, the policy mix will remain moderately restrictive, constrained by high inflation and gilt market pressures. Striking a balance between fiscal consolidation and growth remains a challenge in the UK.
Business sentiment improves in all sectors: The composite PMI index rises in June (+1.7 points, to 52), driven by both services (+1.9 points, to 52.8) and industry (+1.3 points, to 47.7). The trade agreement with the United States has reduced uncertainty among businesses, leading to the start of a recovery in export orders (+3 points, to 46.2).
After picking up again in fall 2024 and winter 2025, the Turkish economy is expected to bend. This is due to financial tensions since mid-March, the impact of US tariff increases on exports, and a more restrictive fiscal policy. But it will not break. Our scenario remains one of continued gradual disinflation, which would allow the monetary easing cycle to resume. The government's solvency should continue to strengthen, but external vulnerability, due to volatile portfolio investment, is likely to increase. However, with moderate twin deficits, historically low public debt and a solid banking sector, financial stability is not at risk.
The Spending Review and the GBP 725 billion ten-year infrastructure plan, unveiled on 11 and 19 June, respectively, demonstrate the British government's desire to move away from forced fiscal consolidation. Getting public finances back on track remains a major challenge in the UK, which is constrained by pressure from the bond market, and provides a point of comparison for France. This is against a backdrop of major structural upheaval and growing investment needs. At this stage, we believe that the UK's fiscal consolidation strategy is credible, but the government is walking a tightrope.
Industry stalls, services resist. The May PMI flash estimate for services returns in expansion territory (50.2). However, the flash composite index remains below this threshold (49.4) due to a deterioration in industry (-0.3 points to 45.1). Industrial production fell by 0.7% m/m in April.
The EU-UK summit on 19 May marks a new phase in economic rapprochement, more than five years after the Brexit, which has undeniably weakened the UK economy. The structural challenges facing the UK – high inflation, sluggish business investment, low productivity – partly result from this event.
Business climate is deteriorating: the services PMI (48.9) catch up the industrial PMI (45.4) in contraction territory in April, as does the composite PMI (48.2). The index of new export orders in the manufacturing sector (not taken into account in the calculation of the manufacturing PMI) plunges and approaches the lows reached during Covid.
Although the United Kingdom has been penalised less severely than its European neighbours, it has not escaped the 10% tariff floor on US customs duties. The negative impact on activity will add to the pre-existing domestic brakes.
The GfK index rose in February (+2 points to -22), but did not erase January's fall. The balance of opinion on the one-year financial outlook is back in positive territory. Retail sales rebounded by 1.6% m/m in January, after four months of decline. This upturn was confirmed by the BRC/KPMG survey, which showed retail sales (smoothed over three months) up by 2.2% y/y in February.
In France, we could think that the increase of public debt is a general consequence of the Covid-19 crisis. However, the chart we are commenting here shows that it is not.
Les dynamiques de consommation et de production industrielle restent défavorables. Les ventes au détail (hors carburant) ont reculé de 0,5 % m/m en décembre et de 1,1 % au T4 par rapport au T3. La production industrielle qui a enregistré, entre septembre et novembre, trois mois de baisse successifs demeure sur une dynamique très difficile au démarrage de l’année 2025. Certes, le PMI manufacturier s’améliore (+1,3 point à 48,3) tout comme l’enquête mensuelle du CBI, mais l’enquête trimestrielle du patronat britannique chute à nouveau lourdement au T1
The labour market in the UK continues to deteriorate. According to tax data (PAYE) published on 21 January by the ONS, the number of employees in the UK fell by 46,922 (-0.2% m/m) in December, the largest one-month decline since November 2021, which followed a drop of -0.1% in November. The year-on-year change drops drastically and falls below zero (-8,407) for the first time since April 2021.
The British example tends to suggest otherwise. Its impact on monthly payments remains modest compared to that of interest rates and rising property prices, and is offset by the higher total cost of the loan. In addition, longer loan maturities are likely to fuel the rise in property values.
