The global economy in search of a new balance

The easing of geopolitical uncertainty following the signing of the agreement between the US and Iran and its immediate impact on energy prices has rebalanced the short-term risk map, just as we are entering the time of year when financial variables are most sensitive to any disturbance. The energy channel’s response to the nascent reopening of Hormuz has been more intense than expected. Indeed, oil prices have almost returned to their starting point (around 70 dollars), and futures are anticipating average prices through to the end of 2027 well below the assumptions used in most baseline forecast scenarios. It is too early to declare victory, as we are only at the end of the beginning of the long process that will involve the reconfiguration of geopolitical balances in the Middle East. The agreement is not a definitive treaty, but a memorandum of understanding (MoU) which marks the start of a 60-day period to negotiate three key aspects: the reopening and management of the Strait of Hormuz (for now, traffic remains limited), the release of frozen Iranian assets (plus reconstruction aid), and the resolution of the conflict in Lebanon.

Therefore, we cannot rule out the possibility of the negotiations being drawn out and remaining subject to high volatility. However, in the delicate task of making economic forecasts in recent times, the fall in energy prices has automatically reduced tail risks and the likelihood of the most negative scenarios (stagflation), while increasing the likelihood that all the instability accumulated since February will be limited to a moderate supply shock. Following the turmoil of recent months, the improvement in the energy channel is thus leading to downside risks for inflation and upside risks for activity. It is also improving the composition of nominal growth as the gap between supply and demand narrows, particularly in certain segments of the commodities markets.

Indeed, the inflation data for June in Europe (2.8% vs. 3.2% in May) indicate that easing energy prices could quickly relieve price pressures, with declines in harmonised inflation in three of the four largest economies (France, Germany, and Italy). The most significant development, however, has been the sharp decline in short-term inflation expectations on both sides of the Atlantic. This reflects the effectiveness of the moderate monetary tightening carried out in recent months and it grants central banks more flexibility in their response while they assess the intensity of second-round effects on prices. The outcome of all this has been an easing of the monetary policy outlook, with markets now anticipating only one more interest rate hike in the US and Europe, following the ECB’s 25-bp increase and the Fed’s communication strategy shift with Warsh’s arrival. The general perception is that central banks will maintain a restrictive course until doubts surrounding the complex international scenario are resolved. That said, based on oil and gas futures prices at the end of June, the direct impact of energy on headline inflation in 2026 could be reduced by some 0.3 pps compared to estimates from a month ago.

There is slightly less visibility on the economic activity front, pending the national accounts data for Q2. However, it seems that the negative effects on growth will be moderate, especially if the latest signs of improvement in consumer and business confidence indicators are confirmed. This once again reflects the resilience of the global business cycle, as well as the fresh investment boom. Indeed, after a decade and a half of stagnation, investment is now taking over from private consumption in the short term, driven by AI deployment, defence spending, the energy transition, and the final stages of NGEU in Europe. The shift from prioritising efficiency in economic policy to focusing on national security, industrial resilience, and technological competition between blocs will come at a very high cost. Now, we just need to secure funding and assess how this process could affect the delicate balance between fiscal and financial fragility, as recently highlighted by the BIS. Hopefully, this search for a new equilibrium in the global economy will conclude successfully, once the positive AI shock on productivity more than offsets the negative shocks of recent years. The global economy is entering a new era marked by two parallel seismic shifts: geoeconomic fragmentation and technological revolution. In this context, the challenge for economic policy is to maintain the resilience of an increasingly complex, interconnected and uncertain economic system. As Keynes warned, the challenge lies not so much in developing new ideas as in escaping old ones, thus freeing ourselves from inherited mental frameworks.