Key Views Global Monthly July 2026
The global economy remains resilient in the face of a succession of shocks. With the latest energy shock now fading, a capex troika centred around AI, defence and the energy transition are likely to drive growth going forward. This is likely to support growth at roughly around trend rates in advanced economies over the coming quarters. The global investment surge is also supporting growth in China, the economy of which remains nonetheless imbalanced to the point that it is engendering new trade tensions with the EU. Against this backdrop, inflation will remain somewhat elevated over the coming months, and this should keep central banks leaning hawkish, with the ECB expected to raise rates one last time in September. Both central banks are then expected to resume rate cuts in early 2027.
Macro
Eurozone
Despite falling energy prices, inflation is expected to remain elevated over the coming months. This is being driven by a firming in goods inflation, which is linked not only to pass-through from prior energy price rises but more broadly to a rise in global supply bottlenecks. Underlying growth (ex-Ireland) meanwhile has been holding up, helped by the ongoing pickup in German defence spending, while consumption has stayed resilient, helped by the switch to EVs. A key focus will now be how quickly consumer confidence recovers on falling energy prices, and the extent to which this lifts consumption.
The Netherlands
GDP figures for Q1 were upwardly revised. While the conflict in the Middle East affects growth, the Dutch economy is resilient, in part because of recent economic momentum and because the private sector deleveraged and built considerable buffers. With higher energy prices gradually filtering through to other inflation categories, we expect inflation to stay elevated. The Dutch economy is prone to second-round effects on wages. The upcoming first Budget Day of the minority Jetten Cabinet is an important indicator of the coalition’s political strategy going forward.
UK
The resignation of PM Starmer means that the left-leaning Andy Burnham is likely to become PM before the summer is out. This could lead to some modest measures to help low income households with cost of living pressures, while keeping the UK largely committed to its fiscal consolidation trajectory. This could be mildly growth supportive next year. Meanwhile, though inflation is expected to stay elevated over the coming months, the much looser labour market means that a renewed pickup in wage growth looks much less likely than in 2022-23.
US
The first quarter of 2026 saw solid headline growth. The impulse from the energy shock has lifted inflation. The labour market has been strong on frontloaded acyclical hiring. We still expect decent headline growth figures due to the positive impulse of AI investments, and monetary and fiscal easing. Headline, and to a lesser extent, core inflation will start to decline, while the labour market will show some payback for the strong start of the year. Unemployment continues a gradual increase, with limited demand matching the strong decline in supply.
China
May data were a mixed bag, showing some parts of the economy suffering from the energy shock, and others benefiting from the strength of the global tech/AI cycle. The gap between growth of industrial production and retail sales has risen again, illustrating rising supply-demand imbalances. Producer prices keep accelerating, but (headline and core) CPI inflation remains subdued. China has withstood the energy shock quite well, with registered oil imports sharply down in April/May. With risks from the energy shock starting to fade, and tailwinds from the global tech/AI boom still present, the balance of risks to our growth forecasts is improving.
Central Banks & Markets
ECB
Following its rate hike at the June meeting, we expect the Governing Council to raise rates again in September, taking the deposit rate to 2.50%. This is in order to keep inflation expectations well anchored, with core inflation expected to stay elevated despite the declines in energy prices we are now seeing. Ultimately, however, we expect second round effects to be contained, and by early 2027 we expect the ECB to be confident enough in the inflation outlook to gradually bring rates back to its estimate of a neutral policy setting. We expect one rate cut each in Q2 and Q3 2027, bringing the deposit rate back to 2%.
Fed
The Fed held rates at the 3.50-3.75% target range in the June meeting, accompanied by a significant hawkish shift in the dot plot. Due to the combined impact of the oil shock and increasing goods inflation on the back of the AI buildout, we expect the Fed to remain on hold for the rest of the year. With inflation gradually decreasing and the labour market softening, we expect a dovish Fed to gradually ease from March 2027 onwards, with 25bps per meeting, to arrive at 2.75-3.00% by the June of next year, the lower end of neutral estimates.
Bank of England
The MPC has struck a more dovish tone of late, and the US-Iran deal strengthens our conviction that the BoE will keep policy on hold for the remainder of 2026. Ultimately we expect the MPC to resume rate cuts in early 2027, and we expect two rate cuts taking Bank Rate down to 3.25% by mid-2027. A focus of the new Burnham government will be on potential changes to the BoE’s mandate. Even if there are, we expect the impact on monetary policy to be limited in practice given that the MPC is already not fully focused on its inflation objective.
Bond yields
The Middle East conflict pushed inflation expectations higher. In response, the ECB has already hiked once, and markets are pricing in a high probability (>90%) of an additional rate hike this year. In the US, the more hawkish tone from the new Fed Chair has also led markets to expect more than one hike by year-end. As a result, bond yields have moved higher.As the market anticipates more rate increases in both Europe and the US compared to our base case scenario, we expect yield curves to re-steepen again, driven by the short end. Meanwhile, LT rates will lag the decline in front end yields, owing to increased term premiums caused by the deteriorating fiscal situation.
FX
We still expect the US dollar to weaken more broadly. However, we have made a modest adjustment to our EUR/USD forecasts because of two developments. First, our economists have revised their ECB view. We now expect one more rate hike this year. At the same time, our Fed view remains more dovish than the market expects. Second, we expect the French elections in April 2027 to weigh on the euro in Q4 2026 and Q1 2027. However, we also expect the US mid-term elections to bring policy risks and uncertainty in the US back into focus. Taken together, these factors point to slightly less upside for EUR/USD this year and next year. Our new year-end forecast is 1.18 for 2026 and 1.23 for 2027.