For the first time since 2009 (excluding COVID), the GDP of the Gulf Cooperation Council (GCC) is expected to contract this year (-0.8%), whereas pre-conflict forecasts had predicted growth of 4.7%. Far from benefiting from the sharp rise in energy prices triggered by the conflict, the scale of the downturn reflects the severity of a shock that is undermining many of the pillars of the Gulf economies. Nevertheless, the consequences are varying from one country to another, depending on the level of diversification and, above all, on the degree of vulnerability to disruptions in the Strait of Hormuz.
When we compare the impact on economic activity of the current energy shock with that of 2022 (following the conflict in Ukraine), the favorable point in 2026, for the euro area, is the business climate in the manufacturing sector, which is holding up better than in 2022. Consumer confidence has fallen sharply but to a lesser extent in 2026 than in 2022. As for the deterioration in the business climate in the services sector, it was immediate in 2026, whereas it occurred with a few months' delay in 2022. The assessment of the June data is positive and reinforces the encouraging signals from May data.
Shock and resilience: These are, once again, the key words of the first half of 2026. In 2025, the global economy had already faced the US tariff shock (less severe than initially feared) and demonstrated remarkable resilience. Today, faced with the new energy shock caused by the conflict in Iran, how resilient is the global economy?
Gathered in Sintra, Portugal, from 29 June to 1st July, the members of the ECB Governing Council adopted a notably cautious stance, just three weeks after raising key interest rates. This unanimous decision was in response to the energy shock triggered by the conflict in the Middle East. Since then, energy prices have fallen sharply, and the inflation and survey data from June have shown positive trends. However, the indirect effects of the energy shock are still difficult to assess fully. We maintain our scenario of an additional ECB rate hike in September, despite the easing of inflation risks, which makes such a move less likely.
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The Bank of Japan delivered its first rate hike of 2026 at its June meeting, raising the policy rate by 25bps to 1.0%, its highest level since 1995. This marks a further step in the cautious “adjustment of the degree of monetary accommodation”, as framed by the BoJ.
In advanced economies, inflation continues to rise due to the energy shock, but there are still no signs of a wage-price spiral. According to survey data, price pressure indicators edged higher with the exception of Japan. In emerging economies, inflation increased moderately due to the energy shock. As for commodity prices, they have been falling since the announcement of the agreement protocol between the United States and Iran.
The energy shock triggered by the war in Iran is reviving inflation, but to a lesser extent than in 2022. May data supports this view. However, the situation still needs to be monitored closely. The U.S.-Iran Memorandum of Understanding provides some relief, yet many uncertainties remain. A return to normal conditions on the oil markets will take time, and the current easing of oil prices must prove durable. Inflation—driven by the lagged effects of tensions on oil, commodities and value chains—is expected to stay elevated for several more months. This will justify a more restrictive stance from central banks.
The assessment of the available data for May is rather positive. Granted, inflation keeps rising, but the contribution of the "energy" component remains dominant. Confidence enjoys a respite: business confidence in services and consumer confidence are sources of good news.
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.
In May 2026, the average CPI inflation rate for the main emerging economies was broadly stable at 4.7% y/y after 4.8% in April. The shock is still contained compared to 2022 due to limited spillover to agricultural and food prices. Manufacturers’ opinion on the trend in input & output prices has stopped deteriorating but remains higher than in 2022.
The memorandum of understanding reached between the United States and Iran certainly provides a degree of relief, but it remains shrouded in too much uncertainty to fundamentally change the situation—at least in the short term. The recent fall in oil prices is good news, but it needs to be maintained over the long term, while the reopening of the Strait of Hormuz faces numerous constraints. A return to normal will take time. This headwind to growth is diminishing, which reinforces our resilience scenario. Inflation is likely to remain elevated for some time yet due to the lagged effects of tensions on oil and other commodity prices
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 United States and Iran have reached an agreement to extend the ceasefire by 60 days and gradually reopen the Strait of Hormuz to traffic. The oil markets reacted swiftly: Brent prices have fallen by around 7% since the announcement and by 32% from a peak reached on 29 April. However, they remain 27% above the average for January. Despite this optimism, a comeback to normality for the oil market is likely to take several weeks.
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 expected, the European Central Bank raised its key interest rates by 25 basis points, bringing the deposit facility rate to 2.25%. This decision, taken unanimously, reflects the Governing Council's conviction that the persistence of the energy shock warrants a monetary policy response. The ECB revised its inflation outlook upward more significantly than its growth forecasts downward. It also updated its alternative scenarios relative to the central scenario (one more favorable, two adverse). Christine Lagarde emphasized that today's decision was "robust" across all scenarios.
Out of the spotlight, Europe is quietly preparing to emerge from its post-pandemic underwater years like a nymph turns into a stunning dragonfly. The turmoil of the last year and a half has brought about “Europe’s moment” in more ways than is being recognized. Europe isn’t just emerging as the alternative safe haven of choice. It can count on five powerful boosters: rebounding industrial strength, established services dominance, tech acceleration, a governance sea-change, and favorable geopolitical winds.
