For much of the year, the economic outlook has been shaped by the conflict in the Middle East. The main concern was that a prolonged conflict, by keeping energy prices high, would inflict heavy damage on advanced economies. So far, however, advanced economies have showed surprising resilience, expanding despite the energy supply shock. Yet, fragilities persist; ongoing inflationary pressures, elevated fiscal deficits and rising interest rates threaten momentum. All in all, the outlook remains cautiously positive.

Despite ongoing tensions in the Middle East, particularly the US-Iran standoff over the Strait of Hormuz, global economic resilience has surprised analystsmarker. Oil prices remain elevated at USD 85–90 per barrel, yet advanced economies continue to expand, with household consumption and business investment holding steady.

The AI-driven investment boom, primarily originating from the US, has bolstered growth, while households in the US, UK and Western Europe have absorbed energy price shocks by reducing savings, supported by rising equity markets and house prices.

In brief

  • Resilient but debt-fueled growth: Advanced economies expanded despite the energy shock, driven by AI-related investment and household spending. However, the resilience is increasingly debt-dependent, with tech firms and governments borrowing heavily, risking higher long-term interest rates.
  • Fragile balance: We expect the expansion to continue as we expect the Middle East conflict to muddle through without full-blown escalation. Broadening inflationary pressures and a further rise in interest rates could derail momentum.
  • Central banks remain cautious: Although there is pressure on central banks to hike their policy interest rates, we expect both the Fed and BoE to say on hold. However, we do expect a final rate hike from the ECB.

Despite ongoing tensions in the Middle East, particularly the US-Iran standoff over the Strait of Hormuz, global economic resilience has surprised analysts. Oil prices remain elevated at USD 85–90 per barrel, yet advanced economies continue to expand, with household consumption and business investment holding steady.

Also read the Q3 Emerging Markets Outlook

Unresolved risks amidst pockets of resilience

The AI-driven investment boom, primarily originating from the US, has bolstered growth, while households in the US, UK and Western Europe have absorbed energy price shocks by reducing savings, supported by rising equity markets and house prices.

Recent data, including PMI surveys, suggests growth accelerated in August, with economic performance exceeding expectations in most regions. However, weak spots are emerging: July’s US jobs report showed net job losses and retail sales disappointed, hinting at potential consumer fatigue. Meanwhile, bond markets face pressure from fiscal deficits, sizable government spending plans, AI debt issuance and inflation concerns, pushing long-term interest rates higher. Tech companies, increasingly reliant on debt financing, could face valuation risks if rates stay elevated.

Key support pillars for growth

  1. Business investment: AI-related spending is projected to exceed USD 1 trillion by 2026 (0.9% of global GDP), though higher borrowing costs may strain the cycle.
  2. Household consumption: If oil prices stay below USD 100 per barrel, purchasing power pressures should remain manageable. However, consumption also depends on labour markets, asset prices and savings behaviour. US households’ equity exposure is near record highs, making confidence vulnerable to market swings.
  3. Policy backdrop: The Fed is unlikely to hike rates soon, given softer labour data and contained core inflation (2.5% in July). The ECB will likely raise rates once more, while the Bank of England and the Bank of Japan are expected to hold. Fiscal policy remains loose, with Europe and the US boosting defense and infrastructure spending, though elevated deficits risk further longer-term interest rate increases.

Risks and fragility

The outlook hinges on the Middle East conflict not escalating. A prolonged crisis could push oil above USD 100 per barrel, reigniting inflation and forcing central banks to tighten further. Higher rates would strain debt-laden governments, households and AI-driven investments. While the baseline scenario remains mildly positive, risks are skewed downward, with potential for consumer pullback, disrupted AI spending or fiscal instability if conditions worsen. The bottom line is that growth persists, but geopolitical and financial vulnerabilities could derail momentum if the conflict intensifies or inflation resurges.

Read the full Q3 Advanced Economies outlook here.