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Key Views Global Monthly October 2026

The global economy remains resilient in the face of a succession of shocks. While the energy shock is back with a vengeance, its effects are more idiosyncratic now, and more impactful for Europe than the US. Meanwhile, a capex troika centred around AI, defence and the energy transition are continuing to drive growth, which is expected to hold roughly around trend rates in advanced economies. The global investment surge is also supporting growth in China, although imbalances there continue to fan 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, Fed and BoE expected to raise rates further. Our base case sees central banks resuming rate cuts in late 2027.

Eurozone - Rising bond yields temper the ECB’s rate hike pace

September PMIs point to strong growth momentum, though this is unlikely to be sustained. Spain’s election impact limited in the near-term; tighter immigration could weigh in the medium term. Rising (French) bond yields are tempering the pace, but we still expect two more hikes from the ECB.

Global Monthly - Will the bond sell-off derail the economy?

The global economy has shrugged off repeated shocks, but rising bond yields are emerging as a new challenge to the expansion. Bond markets are mostly pricing higher neutral rates, with fiscal concerns adding to yield increases in France, Belgium and the UK. Higher rates may slow the expansion, but they are unlikely to derail the US or eurozone economies on their own. The growth impact will be bigger in fiscally vulnerable economies, with France facing the twin challenge of consolidation and bigger rate rises. Markets may be overestimating how long policy rates will stay elevated, leaving room for bond yields to fall back next year. Regional updates: Rising yields temper rate hike pace in the Eurozone. We raise our growth forecast in the Netherlands following a strong H1. In the US, narrower inflation reduces the urgency of the Fed to hike. Growth gains momentum in China helped by targeted fiscal support

France: Not yet a crisis, but pressure is building

France’s bond market stress has escalated sharply in recent days. In this first in a series of notes, we lay out the current state of fiscal play, previewing what to expect from the 2027 budget negotiations as well as next year’s presidential election. France faces a toxic combination of rising interest rates, weak growth, political paralysis, and limited room to raise revenues. PM Lecornu has announced a €54bn fiscal effort (1.7% of GDP) with the goal of containing the deficit to 5% of GDP for 2027. Fiscal consolidation is likely to be considerably diluted, but we do expect a 2027 budget to be pushed through in some form this year. Le Pen continues to lead polling for the 2027 presidential election. Despite attempts to convince markets she is a fiscal hawk, generous promises around pensions continue to suggest otherwise.

Eurozone inflation hits 3 year high; 4%+ by year-end

Bank of England: Hawkish shift means rate hikes to come

Updating our scenario: Higher for longer

The recent escalation in the Middle East likely means higher for longer energy prices, inflation and interest rates. Energy supply through both Hormuz and the Saudi East-West pipeline is likely to remain constrained in the coming months. The higher profile for energy prices leads to an upward revision to our inflation forecasts, with a longer period of above-target rates. Economic growth remains resilient near term; will be dampened next year on higher energy prices, interest rates and slower AI capex growth. Faced with a longer period of above-target inflation, central banks are likely to move monetary policy into moderately restrictive territory. We expect 50bp of rate hikes from both the Fed and the ECB before year end, while the door could open for rate cuts by the end of next year. Bond yields are seen heading lower over our horizon as there are more hikes priced in than we expect in our new base case. Rising term premia should drive curve steepening.

FX Weekly - Yen surges, central banks in focus

The yen strengthened sharply as markets increased their expectations for Bank of Japan rate hikes… but higher energy prices later weighed on the currency. The euro gave back some gains as rising energy prices and US Treasury yields supported the US dollar. The ECB’s 25-basis-point hike had little impact on the euro. The Bank of England is likely to adopt a slightly more hawkish tone next week. A near-term rate hike remains unlikely, but risks are rising. The UK government is expected to use targeted tax increases to address fiscal pressures while avoiding major spending cuts. We expect EUR/GBP to rise modestly and GBP/USD to remain slightly stronger, with end-2026 forecasts unchanged at 0.86 and 1.36, respectively.

ECB Watch - ECB rate hike cycle looks far from over

Global economic forecasts as of 7 Sept 2026

Group Economics writes regularly about developments in the macro economy. Here are our latest forecasts on interest rate and currency developments, energy prices and the economic trend in developed and emerging markets.