In the United States, growth is holding up, unemployment remains low and consumer spending shows no sign of slowing. On paper, that should flatter the president’s party ahead of the midterms. Yet, Republicans could lose control of Congress. The rise in the cost of living, which weighs on households far more than macroeconomic aggregates suggest, could be one of the reasons. On top of persistent inflation, rekindled by the war in Iran, there is also a slowdown in wage growth and rising housing costs. The election could hinge on affordability, yet whichever party wins will lack the means to address it. A change in the majority in Congress will nonetheless have an impact on the country’s economy.
Eurozone growth continues to prove resilient, notwithstanding the volatility of the Irish figures. The Q3 data reinforce our forecast of 1.1% growth this year, which could even be slightly exceeded, as German and Spanish momentum shows no sign of fading. In France, the negative surprise (-0.1% q/q against a consensus of +0.1% q/q) stems from a new one-off factor (the sharp fall in aerospace output caused by delays in input deliveries) and masks an encouraging rebound in household consumption. In the United States, growth reached its highest level since Q2 2025 (0.8% q/q), driven by buoyant private domestic demand.
As expected, the Fed, the ECB, and the BoJ left their rates unchanged this week. This pause, however, does not mark the end of the cycle. The ECB’s tone is becoming more balanced, weighing inflationary risks against tightening financial conditions, but one final rate hike in December remains our base case. Across the Atlantic, Kevin Warsh describes an environment conducive to further tightening, while remaining cautious about the risk of a credit shock. In Japan, the lasting exit from the deflationary cycle is taking shape, and monetary policy adjustment is expected to continue gradually. We anticipate two rate hikes by the Fed by January and four by the BoJ by the second half of 2028.
The private credit market raises many questions, and its lack of transparency is not helping. Official public data remain scarce. The available estimates come mainly from private sources, whose methodologies vary widely. The Financial Accounts of the Federal Reserve (Fed) now shed new light on the matter. They reveal that private credit finances 7.1% of US corporate debt through households (31% of funds’ total financing), insurers and pension funds (20%), and banks (19%).
Growth looks to have held up in Q3 despite successive shocks, as it did in 2025 and H1 2026. A longer Middle East conflict has fed into more persistent inflation; drought has worsened in many countries, and interest rates have risen further – at the short end, with both the ECB and the Fed raising policy rates in September, and even more at the long end. However, our nowcasts show that growth is bending without breaking in most advanced economies.
The global economy’s unexpected resilience might have invited the self-congratulation that is a trademark of international official meetings. But policymakers gathered in Bangkok for the 2026 IMF Annual Meetings were wearily aware that “continued resilience cannot be taken for granted”, as noted in the prologue to the closing Chair’s Statement to the International Monetary and Financial Committee meeting. Growth forecasts remain in line with those made a year ago, when interest rates were much lower and no energy shock was in the cards, and even with those made in April, when a short shock was the base case
Rising energy prices are pushing inflation higher in Europe and the United States, while energy’s contribution is slightly negative in Japan. Over recent months (3m/3m), core indices have been firming in the euro area and Japan: a signal to watch. In Europe and Japan, pressure on producer prices is building. The risk of the energy shock spilling over to other CPI items is increasing. Markets (swaps) are pricing this rise in inflation into short-term measures. Long-term expectations (5y5y) are rising in Japan and the UK.
GDP growth is proving more resilient to shocks than anticipated. Second-quarter figures confirm this trend: despite rising oil prices, growth remains supported by various reflationary forces. At the heart of this cycle lies a clear driver: Artificial Intelligence (AI). Consequently, major global economies are ramping up investment in capital goods.
US macroeconomic performance has remained solid since the onset of the shock, as illustrated in particular by Q2 growth of +3.8% and +9% (annualized quarterly rate) in consumer spending and private nonresidential investment, respectively. In the manufacturing sector, business sentiment has gained momentum despite the shock, while the impact of this shock on the services sector has remained very limited. The immediate reaction of consumer confidence was, however, more negative before beginning to improve, which was nevertheless interrupted in August.
US growth remains resilient despite successive shocks. According to our forecasts, it is expected to reach 2.2% in 2026 and 2.3% in 2027. Its main driver is still investment in artificial intelligence (AI), which has remained entirely unaffected by the energy crisis. The labour market has seen a marked improvement in job creation and a fall in the unemployment rate. Core inflation remains stubbornly high and above the Federal Reserve (Fed)’s target. Against this backdrop, the Fed has begun a hiking cycle in September, which, according to our scenario, would bring the Fed Funds target to 4.50% (upper limit) by Q1 2027. At the same time, long-term rates are under upward pressure.
The scope for manoeuvre available to fiscal policy depends heavily on the interest rate environment, and this has tightened significantly in recent months.Guillaume Derrien, economist in the advanced economies team, explains where we stand today in the advanced economies, against a backdrop of high debt-to-GDP ratios and moderate growth.
“Germany is too dependent on the US for its security, on Russia for its energy and on China for its exports.” That was, in essence, Brookings’ Constanze Stelzenmüller’s diagnosis in June 2022, and it was – and is – valid as well for Europe as a whole. But does this dependency also apply to technological and industrial products? The European Commission’s EXternal Vulnerability Index (EXVI) answers that very question, mapping out the EU’s exposure to foreign supply chains.
The FOMC meeting on September 15–16 is expected to mark a turning point with the Fed’s first rate hike since May 2023. While there may have been economic reasons to hold off and maintain the status quo until now (some negative signals on the employment front and some encouraging ones on the inflation front), the conditions for a necessary recalibration now appear to be in place.
The US economy has held up well since the shock began. Consumption and business investment grew at a 4.1% annualized pace in Q2. At the same time, the scope for energy-driven disinflation has narrowed: WTI (the US reference) has averaged USD 82/bbl since 8 July, ranging between USD 72-92.
Statistical agencies often revise growth figures a posteriori, and generally upwards. But this takes time, as their data often become more comprehensive and accurate after two years. France is seeing the largest upward revisions over this timeframe, and, generally, these revisions are more pronounced in Europe than in the United States.
Central bank independence is not as hard-wired in modern institutions as they might appear to anyone born after the 1970s. That it went largely unchallenged in its first thirty years of history owes much to economic circumstances. But in today’s world of supply shock-driven inflation and large public debts, central banks face a much harder task. A series of controversial decisions since the global financial crisis, and years of above-target inflation leaves them more vulnerable than ever to political attacks on their independence. It is imperative to defend it, as there will be large costs to pay if it is lost.
The memorandum of understanding, signed in mid-June between the US and Iran, improved US data before hostilities resumed in mid-July. Headline CPI posted its first monthly drop (-0.4% m/m) since 2020 in June, driven by gasoline prices (-9.7% m/m). It stood at 3.5% y/y, down sharply from May’s 4.2% but still 1.1pp above pre-conflict levels. Inflation excl. energy eased as well (-0.2pp to 2.7% y/y), edging back towards its February reading.
In advanced economies, June inflation declined temporarily but bounced back in July, reflecting the moves in energy prices. Forward indicators of price pressures eased again in July. Long-term inflation expectations held steady as near-term expectations pulled back (UK excepted). At this stage, there is no sign of a wage-price spiral. In emerging economies, average CPI inflation fell back slightly in June after three months of increase. As for commodities, we see a broad-based rebound as tensions resurface.
Both the Eurozone and the US grew 0.4% q/q in Q2 2026. For Europe, that is a welcome upside surprise: growth landed in line with expectations (France, Germany) or above them (Eurozone overall, Spain, Italy), even as the Middle East conflict delivered an energy-driven inflation shock. It confirms that European growth rests on foundations solid enough to absorb this kind of shock. Country-level detail was incomplete on the day, but manufacturing business sentiment held firm across the board in H1, underwritten by a set of drivers (AI, defence, electrification, aerospace). US growth, by contrast, undershot expectations. But it remained robust, powered by AI investment and accelerating household consumption. Both, however, drew in imports fast enough to weaken the headline growth figure.
Business sentiment, which was on an upward trajectory before the shock, stayed resilient but signaled a faster input-price growth and longer delivery times, both directly linked to Middle East turmoil and coming on top of the issue of tariffs. Meanwhile, the outlook of households, which were already low on optimism has further deteriorated.
The US regulatory framework is becoming more favourable to intermediation conditions within the US Treasuries market. The easing of leverage requirements has enabled the largest banks, known as Global Systemically Important Banks, or G-SIBs, to fulfil their role as intermediaries during the first months of the year. The ongoing reassessment of the G-SIB capital surcharge calculation method could also benefit market liquidity. However, the capacity of large US banks to absorb federal debt is expected to remain limited.
The independence of the Federal Reserve (Fed) has been challenged by the US administration, but it remains intact. As the Kevin Warsh era begins with the 16-17 June FOMC meeting, the simultaneous strength of inflation and the labour market set the stage – should it persist, as we anticipate – for monetary tightening to start by the end of the year. Yet the turbulence at the end of Jerome Powell’s term is a reminder that central bank independence is not a given. The stakes go beyond price stability alone and extend to the global financial architecture itself.
As US regulators had hoped, the easing of the enhanced supplementary leverage ratio (eSLR) applied to global systemically important banks (G-SIBs) has improved intermediation conditions in the US Treasury market. However, this measure has not prompted banks to significantly increase their Treasury holdings.
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.
The outperformance of US growth is underpinned by productivity gains that are significantly higher than those of the previous decade. This acceleration is due more to the spillover effects of past investments and post-pandemic changes (such as remote working) than to artificial intelligence (AI). The roll-out of AI is too recent for productivity gains to have already made their mark at the macroeconomic level. In the medium term, however, AI is expected to support the upward trend.
