Midyear Economic Check-In

This was the core economic theme of The age of agility report for 2026, which was published in November last year. The theme was prominent in our thinking for three key reasons, all of which remain pertinent:

• First, the potential for geopolitical developments to have a negative impact on economic conditions. The shift in US trade policy and related increases in tariffs during 2025 was a high-profile example, followed by the conflict in the Middle East this year (of which more later).
• Second, and related, some prior economic “anchors” such as subdued inflation, low and stable interest rates, and frictionless trade have become more unstable and uncertain.
• Third, we also wanted to highlight some underlying vulnerabilities that could pose a material threat to economic prospects. For example, the parlous state of the public finances in many major economies, which constrains governments’ ability to mitigate the effects of adverse shocks and is also a source of risk in itself.

The constraints have been apparent in relation to the fallout from the Middle East conflict, with some of the economies most vulnerable to the shock — including several in Western Europe — having insufficient fiscal space to limit its effects.

In a severe adverse case, a loss of confidence in debt sustainability could see yields soar and governments come under acute market pressure to rapidly reduce their budget deficits. In a less adverse scenario, investors would require more compensation for holding longer-term debt, pushing up yields and, in turn, borrowing costs for households and businesses.

For planning teams, this reinforces the need to account for higher financing costs and reduced fiscal flexibility when assessing downside scenarios.

Based on developments over the first half of the year, several of our key insights are on track. These include:

• Solid US growth. Our prediction in December 2025 was that 2026 would be another year of close-to-potential economic growth in the US despite persistent talk of recession from some forecasters. Our current projection for US annual real GDP growth this year is the same as 2025’s growth rate and broadly matching our estimate of potential.
• Growth underperformance in Western Europe. The headwinds to growth we identified for this year included stronger currencies, higher tariffs on exports to the US and a structural loss of export market share in mainland China and third markets, amid long-standing competitiveness issues. These all still apply, although the Middle East conflict has played a key role in the deterioration of high-frequency indicators — including S&P Global’s Purchasing Managers’ Indexes (PMIs®) — which are generally indicative of weak growth momentum in many of the region’s economies and real GDP contractions in some, including the eurozone.
• Moderating growth in India. The Indian economy was somewhat more resilient than expected in early 2026, although a more pronounced slowdown is projected over the remainder of the year, given the fallout from the Middle East conflict and a likely deficient monsoon. While still relatively strong in a regional context, the latest manufacturing PMIs point to a further weakening of already slowing industrial production growth, while new export orders expanded at the slowest rate in over a year, reinforcing the view of export weakness. 
• Higher long-term interest rates. This view was driven by a combination of persistent large budget deficits, elevated debt burdens and political obstacles to effective consolidation measures in many major economies. The deterioration in the inflation outlook and related shift in monetary policy prospects due to developments in the Middle East — which we did not predict — have also been driving long-term interest rates upward. 
• Monetary policy divergence. We predicted that the central banks that had cut their policy rates relatively swiftly in 2025 would sit tight this year. In contrast, we expected those that had been more cautious, including the US Federal Reserve and the Bank of England, to deliver rate cuts.  Their respective monetary policies have diverged, although not quite in the way that we were predicting. We also predicted that some of the central banks that had run the most defensive monetary policies in 2025, including those in Brazil and Russia, would lower their policy rates this year. This has largely been borne out.

The risk of geopolitical developments spilling over to economic conditions was pivotal to our core theme for 2026 of shaky economic foundations. However, the Middle East conflict and its material consequences for oil prices and broader supply chain disruption have blown three related predictions off course.

• Lower oil prices. The view that excess supply would drive down the price of crude oil this year — with Dated Brent forecast to fall below US$60 per barrel — has been the biggest “miss” of 2026’s predictions to date. The abundance of supply prior to the Middle East conflict has arguably been a contributory factor to crude oil prices remaining below their historic peaks
• Lower inflation. In lockstep with the view on oil prices, we predicted somewhat lower annual average consumer price inflation rates in many economies in 2026. We also highlighted some notable national exceptions to the predicted downward trend in inflation, including the US (tariffs) and India (food prices). In addition, disinflationary forces were expected to persist in mainland China and its consumer price inflation rate has remained comparatively low despite the rise in oil prices.
• Policy rate cuts. The core view was that many central bank easing cycles had further to go given the effect of lower oil prices on headline inflation rates, although the scope for rate cuts would vary considerably depending on the economy. As highlighted above, the prediction of rate cuts by some of the central banks that had very defensive monetary policies in 2025 came good.

For a few predictions, the year-to-date picture has been mixed. Some aspects initially fell into place, only to be disrupted by the Middle East conflict and its effects. While our views — and their fundamental drivers — remain valid, the lingering effects of the conflict risk delaying them or blowing them off course.

• US dollar depreciation. The dollar weakened markedly in early 2026. Amid increased uncertainty and financial market volatility related to the conflict, the dollar index rebounded in March, along with other traditional safe-haven currencies. Consistent with various fundamental drivers, we continue to favor a resumption of the depreciating US dollar trend. 
• Slower growth and rebalancing in mainland China. The year got off to a robust start, although there are signs of growth slowing from the second quarter. This looks to be at least partly due to the consequences of the Middle East conflict. The weakness of domestic demand in some areas, while consistent with the prediction of an overall slowdown in growth, is running counter to the theme of rebalancing growth in mainland China away from exports. Although there is room for pro-consumption policy stimulus to step up further, high household savings and weak labor market conditions may hinder the expected pickup in consumer demand. In tandem with support for exports from the AI investment cycle and the global energy transition, this leans toward a later transition to domestic demand-driven growth than we had been predicting.
• Growth in developing economies to outperform larger emerging economies. Export growth rates in many larger emerging economies were forecast to slow this year. Developing economies typically have a lower vulnerability to US tariffs due to their lesser integration into global supply chains. Accordingly, the downturns in their export growth rates in 2026 were forecast to be less pronounced. With the global demand outlook less favorable following the conflict in the Middle East, this comparative advantage is now less relevant. Domestic demand growth in both categories of economies was expected to benefit from moderating inflation and more accommodative monetary policies, although this too has been undermined by developments in the Middle East.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.