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.
CPI inflation recorded its largest monthly increase since 2022 in March, before reaching 3.8% y/y in April (+1.4pp in two months and a highest since 2023) – almost entirely on the back of gasoline prices, with the non-energy index edging up only moderately.
US banking regulators have recently launched a sweeping overhaul of capital requirements. Their primary goal is to restore banks to the forefront of mortgage origination. Yet it seems unlikely that the new credit-risk calibration, taken alone, will reshape the market. The widespread use of loan securitization and leverage constraints could limit its impact. By reducing risk weights on credit lines extended to non-bank mortgage lenders, the reform could even undermine its intended purpose—potentially encouraging banks to remain in the shadow of non-banks.
The central banks of the world’s leading advanced economies met this week, and all decided to leave their policy rates unchanged despite significantly higher inflation prints and outlooks. In the words of Bank of England (BoE) Governor Andrew Bailey, these were “active holds”. They are not fully hawkish yet, but the hawks have made their dissent heard while still in the minority. But they are no longer in a pure passive “wait-and-see” mode. We expect hikes to come through in June, at least for the BoE, BoJ and ECB.
US growth remains robust, exhibiting strong momentum, but is still reliant on a narrow base – AI on the activity side and healthcare for jobs. The energy shock presents a new challenge, and its impact will depend on both the duration and severity of the Iran war. In any case, this situation is likely to drive inflation further above the target. Our baseline scenario projects 2.4% annual GDP growth in 2026 (down 0.3pp vs. the pre-conflict outlook) and 2.5% in 2027 (+0.3pp). Inflation is expected to reach 3.2% y/y in 2026. Against this backdrop, we expect the Fed to adopt a two-sided stance, with balanced risks around the Fed Funds rate and a hold as the baseline scenario
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
Business sentiment surveys point to a healthy economy, despite the energy shock. In March, business sentiment (ISM PMI) remained in expansion territory in both the manufacturing (which hit a four-year high) and non-manufacturing sectors, but supplier delivery times extended and, above all, input-price growth accelerated (and stood at a high not seen since 2022). By contrast, consumer sentiment (Michigan) has dipped sharply. Expectations deteriorated, particularly around 1-year inflation.
Despite the war and energy shocks unfolding in parallel to the Meetings, finance officials, central bankers and other delegates took the situation with a poise that contrasted with the sense of shock that followed Liberation Day. Unable to predict with any degree of confidence how the war would evolve, and hence how large the economic damage would be, delegates focused more than usual on what lies beyond the near-term outlook: regime changes in geopolitics, economics and markets; how to explain and preserve recent resilience; and the multiple ongoing re-wirings of the fabric of the global economy and financial markets. Here are some personal key takeaways.
We have selected a set of indicators to track the impact of this new energy shock, caused by the war in the Middle East, on activity and prices in the Eurozone, the United States, oil and gas markets and emerging countries, and to see how much the current situation resembles the situation in 2022 at the outbreak of the conflict in Ukraine.This dashboard featuring graphs and comments will be updated on a monthly basis for as long as necessary.
The Iran war delivered a quick, though relatively contained, negative impact to US activity data and surveys.By March, CPI inflation recorded its largest monthly increase since 2022 and reached +3.3% y/y (+0.9 pp) –almost entirely on the back of gasoline prices, with the non-energy index remaining virtually stable.
Most developed countries are ageing rapidly. According to the United Nations population database, the proportion of people aged 65 and over in the group of “more developed countries” is projected to rise from 21.5% in 2026 to 32.3% by 2100. There are however significant differences between countries. Such increases pose a threat to social security systems. Without any specific reforms, pension and healthcare spending will rise while contributions from the shrinking working-age population will decline. Which countries are financially most vulnerable to ageing? We analysed this question for 16 developed countries using five ratios in our ageing vulnerability index.
Will a different situation lead to different outcomes? In other words, will the combination of weaker demand and more moderate supply constraints in 2026, as compared to 2022, help to limit the rise in inflation? Having illustrated the impact of the energy shock caused by the war in the Middle East on six key variables in the Eurozone in our previous Chart of the Week, we now move on to a new comparison between these two dates, this time focusing on the relative levels of supply and demand issues. In the Eurozone, weaker demand has resulted in a more pronounced decline in inflation, unlike in the United States, where both demand and inflation have remained more sustained
The US is pushing forward with banking deregulation. Following an in-depth review of capital requirements, the authorities have now prioritised easing liquidity rules, in a move aimed at restoring the Fed’s role as lender of last resort and potentially enabling it to shrink its balance sheet. Yet one key lesson from the March 2023 banking turmoil could potentially be overlooked: the need to expand the scope of liquidity regulations, which currently apply to far fewer institutions in the US than in Europe.
Asset prices have been moving in unusual ways since the onset of the Gulf War (no safe havens, limited dollar rally and de-risking). Do financial markets know something we don’t, has something fundamentally changed in the way asset prices reflect economic expectations, or are they simply malfunctioning and about to swing wildly as things normalise? Unfortunately, it is impossible to know for sure, and what’s more, these hypotheses are not mutually exclusive. So far, markets appear to expect an inflation spike, met with a firm central response, with limited damage to growth, and a relatively swift return of inflation to target range. That may turn out to be correct. But far worse outcomes are also very plausible
