Geopolitical Risk Brief: August 2026

Our country risk experts provide insight into key geopolitical events that could impact the economic environment in August.

Key geopolitical risks center on rising potential for US legislative gridlock following progressive candidate victories in primary elections.

Concurrently, Mainland China is shifting its response to US trade restrictions, moving from broad tariffs to targeted measures aimed at sanctions enforcement and technology dependencies.

These developments unfold against a backdrop of global economic uncertainty, with headwinds from potential inflation, oil flow disruptions and climate-related events challenging recent growth.

The current risk landscape is shaped by recent, distinct events creating a complex and uncertain environment. In the US, primary election outcomes reflect a shift in the Democratic voter base, increasing the probability of future legislative friction.

In parallel, new US trade restrictions in July prompted a strategic pivot in Mainland China's economic response. These political and trade tensions are amplified by fragile global economic conditions, where signs of recovery are threatened by persistent inflation risks, ongoing shipping disruptions, and geopolitical flashpoints like US-Iran relations.

Core analysis

US midterm elections

On Aug. 4, Progressive Democrat Abdul El-Sayed was chosen as the Democratic candidate for Michigan’s US Senate seat in the Nov. 3 general election. El-Sayed’s victory follows other recent wins by more left-wing Democrats. Victories by more progressive candidates likely reflect current Democratic voters’ frustration with establishment candidates and incumbents, slightly decreasing the likelihood that Democrats will secure a Senate or House majority.

If Democrats obtain a narrow House or Senate majority in the upcoming 2026 midterm elections, a sizable number of left-wing Democrats could leverage their votes to extract concessions for their support on must-pass legislation, such as appropriations, debt ceiling extensions and budgetary continuing resolutions, increasing the risk of future government shutdowns and debt default brinkmanship. 

US-Mainland China trade relations

Mainland China’s Ministry of Commerce (MOFCOM) announced measures on Aug. 5 following US restrictions in July on imports of mainland Chinese-produced robots and power inverters, as well as the addition of several mainland Chinese companies to the US’ “forced labor” blacklist. These measures include controls on uncrewed aerial vehicle (UAV) exports to the US, the blacklisting of US companies related to supply chain due diligence and certification, and a one-year national security investigation into imported printers and copiers that run foreign-developed software.

The measures indicate a strategic shift by mainland China from broad tariffs or direct sanctions toward targeted efforts to degrade US sanctions enforcement capabilities and reduce reliance on imported US technology. The announced investigations into imported products with embedded software establish a new mechanism for mainland Chinese regulators to restrict foreign technology on national security grounds.

While the measures significantly expand mainland China’s economic security tool kit, their current application appears deliberately calibrated to avoid jeopardizing near-term stabilization efforts ahead of a potential Trump-Xi summit.  

The durability of the improvement in global economic conditions. Stronger-than-forecast global growth in the second quarter of the year aligned with improving global Purchasing Managers’ IndexTM (PMITM) data since April. The broad-based pickup in July’s PMI data, including in some of the perennially underperforming Western European economies, was also an encouraging signal for third-quarter growth. Potential headwinds ahead include rising uncertainty over the US-Iran situation, related impacts on oil flows and prices, and climate-related problems, such as lengthy summer heatwaves and a possible super El Niño.  

The evolution of underlying price pressures. Regarding inflation and growth, recent PMI data was encouraging. Manufacturing input price indexes have tumbled, and output price indexes have moderated to a lesser extent. Core consumer price inflation rates in most major economies have also remained broadly stable relative to February’s pre-oil-shock levels, although it is too soon to sound the all-clear. Rebounding oil prices could stall or reverse the moderation in the PMI price indexes, while higher input costs can take a long time to fully filter through to consumer prices. Food inflation rates could also be driven up by the climate issues already highlighted. 

Uncertainty over shipping disruptions and oil flows. Tracking data suggests that the pickup in oil flows through the Strait of Hormuz following the signing of the US-Iran memorandum of understanding (MOU) in mid-June has stalled amid a lack of progress toward a longer-term agreement. However, comments from the US administration in mid-August referenced a marked rise in oil flows. Houthi attacks on vessels in the Red Sea are an additional risk to trade flows. 

What is the significance of recent progressive Democrat wins in the US? Recent primary victories by more left-wing Democratic candidates, such as Abdul El-Sayed in Michigan, suggest a growing frustration among Democratic voters with establishment figures. This trend slightly decreases the probability of Democrats winning a legislative majority. If a narrow majority is achieved, a progressive bloc could leverage its position on must-pass legislation, increasing the risk of government shutdowns and debt-related brinkmanship.

How has Mainland China's trade strategy evolved? In response to US trade restrictions, Mainland China has shifted from broad tariffs to more targeted measures. These include export controls on strategic products like uncrewed aerial vehicles (UAVs), blacklisting US firms involved in supply chain certification, and launching national security investigations into select foreign technology. This new approach is designed to weaken US sanctions enforcement and reduce China’s reliance on imported US technology.

What are the main headwinds for the global economy? Despite stronger-than-forecast growth in the second quarter, the global economy faces several headwinds. These include rising uncertainty over the US-Iran situation and its impact on oil flows, climate-related disruptions like heatwaves and a potential super El Niño, and persistent inflationary pressures from energy and food prices.

What do recent Purchasing Managers’ Index™ (PMI™) data indicate? Recent PMI data signal an improvement in global economic conditions, with a broad-based pickup in July supporting a positive outlook for third-quarter growth. On inflation, PMI price indexes show a significant drop in manufacturing input prices and a moderation in output prices. However, risks of a reversal remain if oil prices rebound or climate issues drive up food costs.