Issuu

August 2026 GLOBAL GROWTH OUTLOOK

Iran war curbs global expansion Central banks tackle inflation shock

Wachstum 2026 schwächelt weltweit KI-Boom überdeckt strukturelle Eintrübung ▪

Global economic growth is set to drop to three percent this year. The Iran war is delaying the underlying recovery of the global economy, curbing world trade and industrial production and lowering investment activity and consumption expenditure.

▪

The Iran war is triggering a stagflationary shock. The war is expected to cut global economic growth by just under half a percentage point and bring global inflation up by a good one percent to over 4.5 percent. With the conflict continuing, risks for growth and inflation remain high.

▪

The US economy should grow by two percent on the back of the AI boom, while China is heading for comparatively low growth of 4.6 percent.

▪

The Euro area economy is projected to grow 0.8 percent in 2026. Investment and foreign trade remain weak due to volatile energy prices, and growth is below its potential.

▪

The German economy is on track to expand 0.6 percent this year. The slightly more stable industrial development should help avert a recession. The fiscal stimulus is expected to lift growth by a good one percent next year.

▪

Most countries have refrained from using their fiscal firepower in the Iran war. This was the right path to choose. Budget deficits and debt ratios are rising tangibly and so are the yield requirements of creditors. Budgetary problems are growing while consolidation remains the exception.

▪

Central banks still face the difficult task of balancing growth and inflation. The energy price shock has increased global inflationary pressure, encouraging a less accommodative monetary course in the United States, the Euro area and in Japan, while China’s policy remains more expansionary.

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

Content Iran war curbing growth across the world ............................................................................................. 2 Continuing uncertainty on oil and gas markets ..................................................................................... 2 Degree of drag differs widely among regions ........................................................................................ 3 Growth supported by AI investment boom while curbed by China shock ............................................. 3 Global economic growth drops to three percent ................................................................................... 4 Growth in the world’s three major regions ............................................................................................. 4 Global trade loses considerable steam ................................................................................................. 9 Divergent effects on industrial production ........................................................................................... 10 Crisis mode in the short term and consolidation in the medium term ................................................. 12 Monetary policy: global disinflation stalls for the time being ............................................................... 13 Financial markets ................................................................................................................................ 15 Financing conditions remain favourable overall .................................................................................. 15 US dollar appreciates slightly against the euro and the yen ............................................................... 15 High valuations increase stability risks ................................................................................................ 16 Sources ............................................................................................................................................... 17

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

Iran war curbing growth across the world Hopes at the beginning of the year that the global economy would pick up received a major setback in February with the outbreak of the war in Iran. Global economic growth is now set to drop down to three percent this year if the security situation in the Strait of Hormuz stabilises this summer. Growth will be considerably lower if the conflict continues and passage through the Strait is impeded further. The effects of the Iran war on global energy markets and co-products are still marked by high uncertainty, especially as fighting has continued despite the provisional agreement and is expected to continue disrupting the extraction and preparation of oil and gas through war damage and disruptions to transport routes and shipping. It is still unclear whether the passage through the Strait will be subject to unlawful tolls. Economic trends over the rest of this year and the next will also include a general and gradual recovery of domestic demand components and particularly dynamic investment in the field of artificial intelligence, primarily in the United States and supplier countries. While fiscal policy remains slightly expansionary worldwide, monetary policy has already become tighter in many countries in response to the heightened inflation. Continuing uncertainty on oil and gas markets The global economy has proven relatively resilient over the first five months of the Iran conflict and the energy price shock. While the temporarily higher oil and gas prices and restricted availability of certain product categories has lifted the prices of some other commodities and co-products, the broader repercussions on inflation expectations and financing conditions have been relatively mild so far. Oil prices nonetheless fluctuated considerably from early March to early June, at between 25 and 60 percent higher than before the war and a good 50 percent higher than anticipated last year for 2026 overall and over a quarter higher than anticipated for next year. Gas prices were even as much as 60 percent higher than expected this year and around 20 percent higher than expected next year. Prices for refined products such as diesel and kerosine were between 60 and 120 percent higher than expected. Even steeper price increases were only avoided through drawdowns from commercial inventories and the release of strategic reserves of around 300 million barrels of oil. The oil price did drop from around 90 to just under 70 US dollars per barrel of Brent within the first three weeks after the first ceasefire of 15 June, partly because the oil cargoes of ships stranded in the Strait of Hormuz finally reached the market. Prices then rose again steeply until the end of July due to the continued fighting, before falling back down to below 80 US dollars in early August. Oil and gas are nonetheless still in short supply. The global production of oil is still estimated to be a good ten percent short (or around 15 mb/d) and around 15 percent in the case of LNG. Oil futures signalise moderate prices of around 85 US dollars per barrel of Brent, which would result in an annual average price of just under 80 US dollars per barrel, but it is difficult to predict as things stand. Negative surprises cannot be ruled out. The shortage of supply on the oil market has so far only been met by alternative producers to a limited extent with a good half by reducing consumption and a quarter by reserves. The situation on the gas market is not much clearer. The production of LNG, in particular, is expected to pick up slightly in autumn but the most recent fighting has already lifted the gas price in Europe by more than 30 percent to above the 50 euro mark as both the expectations of reliable and rapidly

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

increasing supplies on the markets have been disappointed and the purchasing strategies for the winter in Europe and Asia are likely to entail expensive reserve refill costs. The IMF is not alone in rightly warning (IMF 2026b, see also Bruegel 2026) that some of the factors that have been stabilising the market will peter out over the next few months, particularly the use of commercial inventories and strategic national oil reserves as these will soon be reaching their limits, at least among OECD countries. Other factors include the seasonally changing feed-in requirements of gas reserves, the starting point of surplus production before the war and further production increases of some oil exporting countries (United States, Venezuela, Guayana, Russia). The renewed escalation of fighting since the middle of July could also again drastically reduce shipping volumes. Buffers are therefore running low and markets can be expected to respond to continuing disruptions in production with substantial price increases. Degree of drag differs widely among regions Furthermore, on account of the differences between the energy markets around the world, fuel prices have continued to rise particularly steeply in the ASEAN states, followed by Europe and the United States. The prices on the gas markets in the three dominant regions of the world have also been affected very divergently. While the United States has only seen prices increase by a good ten percent, prices in Europe have risen by a quarter and, in Asia, prices for LNG have risen dramatically, increasing by half. Europe, above all, has proven to be somewhat more resilient than when the last energy price shock hit four years ago. EU’s dependency on fossil fuels is lower than it was 2022/23, the electricity price has barely been affected and gas prices have only risen relatively mildly as direct imports from the region are low and oil markets did not experience any availability risks as such but rather a substantial reduction in supply and corresponding price increases. It is still unclear whether more persistent disruptions in oil and gas production and supply will have significant effects on base chemicals, fertilisers, helium and rare gases, methanol, urea, copper, aluminium, food, kerosine and diesel (OECD 2026). The short-term effects were certainly tangible, and it remains to be seen if and when these segments will recover. Growth supported by AI investment boom while curbed by China shock The global economy is currently marked by two large contrary trends. On the one hand, the investment boom in artificial intelligence is fuelling investment in plant and equipment, and boosting growth and stock markets, primarily in the United States and among suppliers from all over the world, particularly the producers of semi-conductors, transformers, data centres and their energy suppliers and propping up the economies of South Korea, Taiwan and Japan. This boom is also supporting the relatively robust level of global trade, more than compensating for the contractionary effects of Trump’s tariff policy. The boom in AI also harbours financial markets risks on account of the massive volume of investment involved, stock issues, valuation levels, financial investment cycles and equity investments. On the other hand, the China shock is sending waves across the OECD world (see also OECD 2026, European Commission 2026, Tordoir and Setser 2026, Rhodium Group 2026, Deutsche Bank Research 2026, Bayoumi and Gagnon 2026, vbw 2026). The divide between producer prices has been expanding since 2021/22. Deflation and devaluation in China (property crisis, weak demand, surplus capacities, exchange rate manipulation) and inflation in Europe and the United States (Ukraine war

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

and now Iran war) has caused a delta of around 40 percent in producer prices between the United States and the EU on the one hand (and of around 20% compared to Japan, South Korea, Taiwan) and China on the other hand (converted to US dollars) (Bayoumi and Gagnon 2026). Over the last few years, this has resulted in Chinese companies gaining sizeable market shares at the cost of OECD producers. Exports from China have veritably boomed in the last few quarters with corresponding upheavals in the importing countries particularly as Chinese imports from OECD countries increased much less on account of the weak domestic expenditure components. Although the renminbi has appreciated most recently and producer prices in China are rising slightly, the situation remains extremely unbalanced. Global economic growth drops to three percent Without the war, the pick-up in demand and boom in AI would probably have lifted global economic growth up to between 3.3 and 3.4 percent (up from 3.2% in 2025). The general consensus is that the Iran war has cost the global economy at least half a percentage point in growth this year and three quarters of a percentage point at most. Half a percentage point corresponds to around 650 billion US dollars or the GDP of Argentina or Israel. The investment boom in AI is turning out to be larger than expected, partially compensating for the dampening effect of the war. The situation would otherwise be a lot worse. The world economy still managed to grow three percent in the first quarter of the year. Growth next year will also be lower than it would have been without the war. The war has triggered considerable disruptions to the production and supply of oil, gas and co-products. Furthermore, the increase in energy prices among energy importers has led to a loss of real purchasing power, higher interest rates and bond yields, unsettling both consumers and investors. Growth in the world’s three major regions There are a great number of regional differences. While the United States is set to grow a good two percent, the Euro area is undergoing a weak phase and will barely manage growth of 0.8 percent, with Japan also on track for a similar rate of growth (0.6%). Other industrialised countries of the Western world are also expecting half a percentage point of growth or less. China is set to continue growing at 4.6 percent, fuelled by extraordinarily high exports. Similar to the Euro area, growth in India and the ASEAN states will be tangibly dampened and the region of the Middle East and North Africa will lose a good four percentage points in growth, while Latin America and Sub-Saharan Africa will barely be affected. United States: AI boom masks weaknesses in other sections of the economy The US economy faced several downward factors at the start of 2026. The dominant concern was the economic effects of the conflict in the Middle East and the resulting higher energy prices. The situation was compounded by the knock-on effects of higher tariffs, a more restrictive immigration policy and the reduction of the public sector workforce (OECD 2026; IMF 2026; European Commission 2026). Despite this challenging environment, the US economy remained robust in the first quarter 2026. Real gross domestic product (GDP) increased at an annual rate of 2.1 percent compared to the previous quarter, according to the third estimate of the Bureau of Economic Analysis (BEA), following growth of only 0.5 percent in the fourth quarter 2025 (BEA 2026a). Growth was driven primarily by an expansion in corporate investment activity, which increased by more than one percent while private consumer spending was weaker. In the second quarter, the US economy only grew at an annual rate of

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

1.5 percent, buoyed by robust private consumer expenditure (up 2%) and a small increase in investments, while public consumption expenditure and foreign trade pulled growth down (BEA 2026b). The IMF also emphasises the major role of investments in AI and intellectual property in providing growth momentum (IMF 2026). The future course of US trade policy remains uncertain. The average effective tariff on US imports is currently at around 9.6 percent, which is lower than the intermittent level of around 14 percent (OECD 2026). Inflation in the United States is still elevated even though it has dropped slightly most recently. In June, the consumer price index was 0.4 percent down compared to the previous month with the energy component decreasing 5.7 percent (BLS 2026). Year on year, inflation was still at 3.5 percent and core inflation at 2.6 percent (BLS 2026). The reduction in energy prices was a consequence of the drop in oil prices following the agreement between the United States and Iran. The yardstick for inflation preferred by the Federal Reserve, the PCE price index, also signalised the persistent pressure on prices most recently. In May, PCE inflation over last year was at 4.1 percent and core inflation (without food and energy) at 3.4 percent, before falling to 3.7 percent in June (BEA 2026). Inflation is therefore still above the target of the Federal Reserve, with energy price inflation in July representing an upside risk. On the labour market, the growth in employment slowed down tangibly over the course of last year, although this has not yet translated into a clear deterioration of the unemployment rate, which remained largely stable at 4.2 percent in June 2026 (FRED 2026). According to the OECD (2026), this is primarily because of the waning labour force and the lower number of new jobs consequently needed to keep the unemployment rate steady. At the same time, productivity growth is slightly above its long-term average and well above the level in the years directly preceding the crisis. The OECD (2026) interprets this as a consequence of capital deepening linked to AI-related investment. Early indicators signalise a continuing but less dynamic expansion all in all. The purchasing managers’ index for manufacturing dropped from 55.1 to 53.9 points in June, while the corresponding index for services improved slightly to 51.2 points. Both indicators therefore remain above the threshold to expansion of 50 points. Overall, the US economy should continue to grow moderately in 2026. The OECD expects growth of two percent, the IMF 2.3 percent and the European Commission 2.2 percent (OECD 2026; IMF 2026; European Commission 2026). Upward factors include the role of the United States as net energy exporter and the persistently high level of investment in AI-related technologies. Downward factors, on the other hand, are higher energy prices that eat into the purchasing power of private households and the continued uncertainty regarding the further course of US trade policy (IMF 2026; European Commission 2026). In view of the weak performance in the second quarter and the pressure on prices, we only expect growth of two percent in real terms. Euro area: slight brightening despite continuing weakness Economic growth in the Euro area remained subdued at the start of 2026. According to Eurostat, seasonally adjusted gross domestic product stagnated in the first quarter 2026, compared to the previous quarter. Year on year, seasonally adjusted GDP was 0.5 percent higher. In the second quarter, the economy was unexpectedly robust and expanded by 0.4 percent compared to the previous quarter and by one percent compared to the same quarter last year. Excluding Ireland, the Euro area

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

economy still grew by 0.3 percent. Germany, France and Italy all expanded by 0.2 percent, while Spain grew by 0.7 percent. The labour market remained robust despite the weak economic momentum. The seasonally adjusted unemployment rate has stayed steady at 6.3 percent since March 2026 (Eurostat 2026b). At the same time, the pressure on prices remains heightened. Inflation was at 2.9 percent in July 2026, following 2.8 percent in June and at over three percent in April and May. The main factor for the slight reduction in inflation was the somewhat more moderate increase in energy prices in June following the provisional agreement between the United States and Iran of 15 June 2026. The increase in energy prices was still a good ten percent year on year in July and 8.7 percent in June, but less pronounced than the increases of over ten percent recorded in the two preceding months, April and May. Core inflation remained stable at 2.2 percent in June and July (Eurostat 2026c and 2026d). Early indicators signalise continued moderate growth at best. The S&P Flash Eurozone Composite PMI rose to 51.9 points in July, up from 50 points in May. The index for the manufacturing sector registered its strongest growth since early 2022 and the index for the service sector also saw a solid recovery after three months of downturn. Price and cost indicators have also risen less sharply most recently, which signalises a slight easing of the pressure caused by energy prices. There is still reason for caution though, these figures are from between 9 and 22 July which is before the renewed escalation of the conflict in the Middle East and the most recent increase in energy prices. The surprisingly strong PMI data should therefore be regarded in perspective, and a setback in August is not out of the question. The outlook has brightened up slightly compared to our May growth outlook for Europe. Although the environment for foreign trade remains weak, investment levels subdued and geopolitical risks high, energy prices are still lower than the record levels seen in spring even with the most recent spike. The resulting burdens on private households and companies should therefore be slightly lower than assumed in our European Growth Outlook in May. We now expect the Euro area to grow by 0.8 percent in 2026, slightly up from our May forecast (0.7%). The Euro area is therefore still expanding well below potential growth. In Germany, seasonally adjusted gross domestic product rose 0.4 percent in the first quarter 2026 compared to the previous quarter. Growth at the start of the year was fuelled by public consumption expenditure and net exports. While the contribution to growth of private consumer spending was neutral, gross fixed capital formation pulled down growth. Construction investment was particularly weak due to the harsh weather, resulting in a negative contribution to growth of 0.3 percentage points. Year on year, seasonally adjusted GDP increased by 0.8 percent. This was the third consecutive rise. The labour market tread water as of the middle of the year. Seasonally adjusted, the number of unemployed people was at 2.99 million in July 2026, almost unchanged compared to June. Year on year, unemployment was up slightly (+0.9%). The increase in prices accelerated again in July 2026 up to 2.8 percent (HICP), following the termination of the discount on petrol at the end of June. Industrial production in the first two months of the second quarter 2026 was 0.4 percent higher than in the first quarter of the year following seasonal and calendar adjustment but 2.4 percent lower year on year. Within the industrial sector, energy-intensive industries were able to expand their production for the fifth month running in May 2026. The capacity utilisation rate of the manufacturing sector was up 0.2 percentage points at the start of the third quarter. At 78.0 percent at last count, the utilisation of

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

production facilities was still 4.7 percent lower than on average over the last ten years (82.8%). The purchasing managers’ index for manufacturing increased by a slight 0.2 percentage points in June 2026 and a clear 1.9 percentage points in July 2026, after moving downwards in the two preceding months. At 52.2 points, the index has now been above the threshold to expansion of 50 points for the last six months. The ifo business climate index has recovered slightly from the shock of the Iran war over the last three months but is still signalising recession with most companies rating both their current situation and expectations as deteriorated. In late July 2026, the German Federal Statistical Office published its first estimate for GDP in the second quarter 2026, according to which economic output in Germany increased by 0.2 percent in the spring quarter compared to the previous quarter following seasonal and calendar adjustment. Calendar adjusted GDP increased 0.9 percent year on year. This was the seventh consecutive rise. The German economy has digested the shock of the Iran war better than we feared in spring. In view of the development of the German economy so far this year and the brighter sentiment indicators, we have upwardly adjusted our forecast slightly and now expect GDP to increase 0.6 percent in real terms compared to the previous year (up from 0.4%). China: exports strong while domestic economy remains weak The Chinese economy lost steam tangibly in the second quarter of 2026. Real GDP growth slowed down to 4.3 percent compared to last year, following five percent in the first quarter. The growth rate most recently was therefore lower than the target corridor of between 4.5 and five percent set down by the government for 2026. The divergent development among the demand components remains striking. While foreign trade and export-oriented industries continue to contribute strong growth momentum, domestic demand remains weak (DB Research 2026). This trend continued in July with the purchasing managers’ index for manufacturing and services dropping below the threshold to expansion in July. The weak development of the domestic economy is reflected in both consumption and investment levels. Although the disposable income of households increased by 5.6 percent compared to last year in the second quarter, which is the strongest growth seen here since late 2024, the rise in private consumption expenditure was lower, at only 3.8 percent. At the same time, the savings ratio climbed to 32.7 percent, reaching its highest level since the end of 2022. This indicates continuing low consumer confidence and highly cautious behaviour on the part of private households (DB Research 2026). Investment levels also remain weak. Investment in fixed assets, according to Chinese authorities, was ten percent lower year on year in June, with the slump in property investments (down 24.2%) continuing and infrastructure investment (down 10.2%) turning down (DB Research 2026). The property sector remains the central burdening factor for the Chinese economy. Prices for new and existing properties in June were 0.2 percent and 0.3 percent lower respectively in June compared to the previous month. Although the annual reductions in prices have slowed down slightly, prices are still well below last year’s level (down 3.5% on the primary market and down 5.6% on the secondary market) (DB Research 2026). The OECD (2026) therefore expects investment in property and property prices to continue to drop in the further course of the year.

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

The primary upward force of the economy, on the other hand, is still foreign trade. Industrial production accelerated in June, reaching the highest growth rate seen in several months at 5.3 percent over last year. Export-oriented industries such as machinery and plant manufacturing and communication equipment benefited particularly from the ongoing high demand for technology-intensive products and AI-related applications (DB Research 2026). The OECD also emphasises the important role of technology-related products, pointing to the steep increase in the production and export of semiconductors. The volume of Chinese exports already grew by around eleven percent in 2025, fuelled by higher technology expenditure and a stronger demand from emerging countries (OECD 2026). Price levels are showing the first signs of stabilisation. According to OECD figures, producer price inflation turned positive in the first quarter 2026 for the first time in many years. This indicates that the lengthy period of deflation is gradually subsiding and that the measures to stabilise prices are starting to work. At the same time, consumer price inflation remains low. The IMF expects inflation to rise from its very low level, while the OECD forecasts inflation of 1.5 percent for 2026. Although increased energy prices raised the pressure on prices most recently, state-mandated price ceilings, strategic reserves and a stronger diversification of energy imports are curbing the upward effect on consumer prices. Inflationary pressure is therefore limited overall despite the increased uncertainty on the energy markets (IMF 2026, OECD 2026). We expect the Chinese economy to grow 4.6 percent overall in 2026. Our forecast matches that of the IMF (4.6 percent) and is slightly higher than the OECD forecast (4.5 percent). This forecast is bolstered by the robust development of exports and additional economic stimulus measures expected in the second half of the year (DB Research 2026). At the same time, the OECD expects domestic demand to grow by only 2.9 percent in 2026, while exports are anticipated to expand by 10.5 percent. Following on from a growth rate in exports of around eleven percent in 2025, foreign trade will thus continue to be the dominant force of Chinese economic growth in 2026 (OECD 2026). China’s growth outlook continues to depend largely on whether the country can succeed in overcoming the stubborn weakness of the property sector and sustainably strengthening domestic demand.

Purchasing Managers` Index World 60

Manufacturing PMI

Services PMI

Composite PMI

Source: Macrobond

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

Purchasing Managers` Indices 70

60 Euro area

Germany 60 50

50 40

Manufacturing PMI Services PMI Composite PMI

Manufacturing PMI Services PMI Composite PMI 60

USA

Manufacturing PMI Services PMI Composite PMI

China

Manufacturing PMI Services PMI Composite PMI

Source: Macrobond

Global trade loses considerable steam Over the last few years, global trade has grown robustly on the back of economic recovery and particularly on account of the investment boom in artificial intelligence. East Asian producer countries of intermediates for data centres are benefiting especially. The first quarter of the current year was also strong, with the global trade of G20 states increasing by a robust 5.5 percent while services expanded less than two percent. The global trade in goods (in terms of volume) only increased by 3.6 percent compared to the previous quarter and decreased in March (-2.3% compared to February). The second quarter is likely to have been considerably weaker. The war in Iran has not just affected direct trade routes, goods flows and transport services (air and sea) but has also dampened demand. The international economic organisations are therefore expecting the pace of growth in global trade (goods and services, in real terms) to drop down from five to a good three percent this year. Growth will continue to be fuelled by the massive investments in AI, data centres and intermediates. China’s trade is on a very high growth path on account of the country’s macroeconomic parameters, particularly the pronounced undervaluation of the renminbi. Europe’s foreign trade is set to remain weak, smothered by problems regarding price competitiveness, energy costs and its limited participation in

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

AI value chains (European Commission 2026). US foreign trade will be propped up by lower trade barriers (particularly its effective tariff rates) and the AI boom (OECD 2026). Divergent effects on industrial production Global industrial production increased by more than three percent year on year in each of the first two months of the current year. The start of the war in Iran then sharply reduced year on year growth in March (+1.1%), April (+1.3%) and May (+1.0%). In the region of Africa and the Middle East, industrial production in each of the months between March and May 2026 was down on the previous year by a good one fifth. In the first five months of the current year, industrial production among advanced economies was 1.2 percent higher than in the same period last year. The strongest growth was recorded by the advanced Asian economies (excluding Japan) at 8.3 percent. While industrial production in the United States (+1.0%) and in Japan (+1.3%) continued to grow, output in the Euro area was down by one percent. China’s industry (+5.4%) and the remaining Asian emerging countries (+4.9%) displayed the strongest growth among emerging countries as of May 2026, followed by the region of Central and Eastern Europe (+3.3%). In Latin America, industrial production was only one percent higher year on year. The Iran war caused industrial output in the region of Africa and the Middle East to plunge 9.8 percent.

World: Industrial production*, Purchasing Managers Index 60

55 10 50 0

45 -10 40

Emerging economies Advanced economies Purchasing Managers Index seasonally adjusted (left axis)

-20 2020

2021

2022

2023

2024

2025

2026

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

Growth of real gross domestic product in 2026 compared to previous year (in percent)

Global economy

+3.0

Euro area

+0.8

World trade

+3¼

+1.0

USA

+2.0

Japan

+0.6

VR China

+4.6

Germany

+0.6

Source: BDI

Forecast summary: Growth in real GDP 2026/27 in percent 20256

2027

IMF1

OECD2

EUCOM3

IMF1

OECD2

EUCOM3

World

3.0

2.84

2.8

3.4

3.14

3.2

USA

2.3

2.0

2.2

1.8

2.1

China

4.6

4.5

4.1

4.3

4.4

Japan

0.6

0.7

0.8

0.6

1.2

1.1

1.4

Euro area

0.9

0.8

0.9

1.2

Germany

0.7

0.6

1.0

1.1

0.9

France

0.6

0.7

0.8

0.9

0.8

1.1

Italy

0.5

0.6

Spain

2.1

2.2

2.4

1.8

1.7

1.9

U. Kingdom

1.0

0.9

0.7

1.3

1.1

1.2

India

6.45

6.3

6.1

6.75

6.4

Brazil

2.4

1.6

2.0

2.2

2.1

1.8

Russia

1.1

0.6*

1.3

1.1

0.8*

1.1

1: IMF (2026), July. 2: OECD (2026), June, *March, Forecast for India for fiscal year beginning April. 3: European Commission (2026), May. 4: Forecast on basis of 70 percent world GDP (PPP of 2013). 5: Information on India for the fiscal year in current prices. .

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

Crisis mode in the short term and consolidation in the medium term The stagflationary shock caused by the war is problematic for fiscal policy. Any additional stimulation of growth will negatively affect the stability of price levels. Governments and parliaments should therefore only provide targeted and temporary support measures to households with very low incomes and energy-intensive companies, preserve price signals, avoid controlling prices where possible and closely monitor their macroeconomic policy (IMF 2026b). The fiscal policy responses to the Iran war and the rising energy prices have remained limited, at around 0.1 percent of GDP worldwide and in the EU (IMF 2026c). Risks nonetheless remain for the next quarters if oil and gas markets remain under stress without buffers and governments deem further protection measures politically necessary. Fiscal policy will be largely neutral across the world, with slight expansion in many industrialised countries and slight tightening in many developing and emerging countries. The Iran war itself will lead to an increase in budget deficits this year of a good quarter of a percentage point up to 4.75 percent (IMF 2026) due to weaker growth and the energy-related extraordinary expenditure. Lower growth and higher deficits will, in turn, increase debt ratios slightly. This represents a renewed setback to the precrisis prospects of bringing debt ratios back down following the spike triggered by the Covid pandemic through growth and gradual consolidation. Although a crisis is not imminently on the horizon, alongside the overdue consolidation in the United States and China, Germany will clearly also need to take steps towards consolidation, at least in the medium term, following its expansionary course in military and infrastructure expenditure. There is no prospect in the United States of plausibly reducing its budget deficit to well under four percent (with potential growth and target inflation both at 2%), on the contrary, it is set to linger at well over seven percent in 2026 and 2027. In China, the crisis in the domestic economy is encumbering any steps towards consolidation with the comparable overall state deficit rising steeply. India and Brazil have primarily adopted energy measures which burden the public budget. Japan has initiated stimulus measures this year but is planning to consolidate again next year. In the United Kingdom, fiscal policy is still not sufficiently robust despite Starmer’s moderate budgetary stance. The OECD regards consolidation measures as necessary to stabilise the debt ratio in the short term to the level of almost four percent of GDP in the United States, Brazil, Poland and Estonia and of well over two percent of GDP in 13 further countries including France, the United Kingdom, Germany and Korea (OECD 2026). Germany has slightly more fiscal space due to its better initial position but will have to consolidate solidly in the medium term, apart from in defence and infrastructure, to meet EU rules. The new fiscal rules according to the overhauled EU Semester that have been in place for one year have started off well in the main. The EU’s fiscal stance is slightly expansionary this year and set to be neutral again next year, which the European institutions regard as appropriate. The deficits in the Euro area will increase from 2.9 to 3.3 and 3.5 percent (2025-2027), (EU: 3.1; 3.5; 3.6%), primarily due to lower tax revenues and higher interest expenditure on account of rising policy rates and bond yields (European Commission 2026). The challenges facing fiscal policy remain very high in countries with very high deficits and/or debt ratios, above all in some Eastern European countries (Poland, Romania, Hungary, Slovakia), but also in France and Belgium which both have deficits over five percent. The prospects for budget consolidation in France remain unclear due to the upcoming elections. Italy and Spain will have to cope with the termination of funds from the recovery facility in their budgets. In addition, the higher defence expenditure in some countries is burdening their fiscal viability, whether expenditure in this area is exempted from fiscal rules or not. The defence expenditure of the EU is projected to rise from 1.6 to two percent by 2027. The fiscal course in the Euro area is stable in the

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

short term but problems are in the pipeline in the medium term with debt ratios rising once again (up around three percentage points between 2025 and 2027) and will require a painful consolidation process that is likely to dominate the end of the decade with the number of countries with excessive deficit procedures set to exceed the current level. The major challenges facing policymakers in the defence sector and in the transition of the economy and in the form of the burgeoning social expenditure caused by the demographic shift will make it exceeding difficult to steer public budgets in the direction of consolidation particularly with the pressure coming from the populist fringes of the political spectrum unless structural reforms tangibly and swiftly strengthen growth.

Budget deficit 2026/27 in percent of GDP 0 -1 -2 -3 -4 -5 -6 -7

2026

2027

-8 -9

*Central budget, excluding debt provinces and state-owned enterprises Source: IMF

Monetary policy: global disinflation stalls for the time being The global disinflation that took place since early 2024 has temporarily stalled in 2026, mainly because of the effects of the Middle East conflict on energy and commodity prices. The IMF expects global overall inflation to increase from 4.1 percent in 2025 to 4.7 percent in 2026, before dropping back down to 3.9 percent in 2027 (IMF 2026). In its economic outlook published in early June (OECD 2026), the OECD forecasts consumer price inflation in the G20 states to increase from 3.4 percent in 2025 to four percent in 2026, before dropping back down to 3.1 percent in 2027. As the OECD projections were published before the agreement between the United States and Iran of 15 June, they are unlikely to have fully factored in the consequent easing on the energy markets. According to the assessment of the IMF, the repercussions of the conflict on commodity prices, inflation expectations and financing conditions have so far been lower than initially feared. At the same time, the transmission of these effects is still in the early stages. Furthermore, the most recent escalation of

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

tensions between the United States and Iran despite the agreement clearly show that risks for energy supply and associated price hikes remain substantial. The global inflation figures also mask the considerable divergence between individual economies. Even though the international oil and gas markets are closely interconnected, national import prices and their transmission to consumers differ depending on the economy’s procurement structure, supply relations, sanction regimes and national tax, subsidy and regulatory structures. Emerging Asian countries are experiencing especially steep increases in fuel prices, while LNG prices have risen particularly in Asia and Europe (IMF 2026). The higher energy prices have not just caused overall inflation rates to increase directly but have also influenced inflation expectations. While overall inflation increased substantially between February and April, short-term inflation expectations rose particularly. Increases in core inflation, on the other hand, have been comparatively limited in most economies so far (IMF 2026). With this backdrop, monetary policy around the world is likely to be less expansionary than expected at the start of the year. The IMF expects policy rates in the United States and the Euro area (despite possible further nominal rate hikes) to remain largely stable in real terms, while monetary policy in Japan will edge towards a more neutral level. At the same time, both the IMF and the OECD emphasise that the appropriate monetary course will largely depend on whether the current price impulses turn out to be temporary or whether they become anchored more broadly in the economy through inflation expectations and second-round effects. Countries in which inflation risks remain visible may keep monetary policy restrictive for longer, while countries in which demand and price pressure lessen significantly will have more scope for a looser stance (IMF 2026, OECD 2026). In the United States, inflation prospects have most recently tangibly shifted upwards again. According to the projections of Federal Reserve Board members and Federal Reserve Bank presidents of June 2026, PCE inflation for this year is expected to be 3.6 percent, up from the 2.7 percent projected in March. Core inflation is anticipated to be 3.3 percent (Federal Reserve 2026). The IMF expects core inflation in the United States to only return to target in late 2027. Market expectations are currently pointing towards a rate hike by the Federal Reserve before the end of 2026. Given the persistently high level of inflation, we also regard the risk of a somewhat more restrictive monetary stance as elevated. At its meeting at the end of July, the US central bank left its policy rate unchanged but indicated that a hike may be necessary in September. This prompted a hefty response from the market with a robust rise in bond yields. For the Euro area, the ECB expects inflation of three percent for the current year, according to its projections from June 2026. As these projections are based on the data available as of 21 May they do not factor in the later agreement between the United States and Iran. In a milder scenario, which may be closer to actual developments if energy prices settle down at a lower level, inflation in 2026 would be 0.1 percentage point lower and decrease considerably more than in the baseline scenario again in 2027. In a severe scenario, on the other hand, inflation could reach around four percent (ECB 2026). The ECB continues to highlight the high level of uncertainty regarding possible second-round effects and the not yet fully visible repercussions of the energy price shock. With this in mind, the ECB left its policy rates unchanged in its meeting of 23 July 2026. Market expectations are currently anticipating an increase in the ECB deposit rate to around 2.75 percent by the end of 2026, with the ECB expected to implement a hike at its meeting in September. Interest rate expectations responded clearly to the volatile development of energy prices and were intermittently as low as 2.50 percent

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

when oil prices were down (DB Research 2026c). In our opinion, a deposit rate of 2.50 percent by the end of the year is more plausible as the latest inflation data does not yet show any broad or persistent second-round effects from the energy price shock. In Japan, the Bank of Japan has flagged increasing upside risks even though consumer price inflation was below two percent most recently. In particular, the Bank of Japan highlighted the relatively fast progression of the price pass-through from higher energy prices in corporate pricing and rising medium to long-term inflation expectations, with a risk that underlying inflation will exceed the inflation target of two percent (Bank of Japan 2026). The IMF therefore expects monetary policy in Japan to continue its gradual course towards a more neutral rate (IMF 2026). The financial markets largely expect the policy rate to rise to 1.25 percent by the end of 2026. In view of the increasing inflation risks and rising inflation expectations, we regard this as plausible but not strong enough. In late July, the Bank of Japan refrained from taking any steps and kept the interest rate at one percent but signalised further rate hikes going forward. Furthermore, Japan’s central bank and the US government intervened to stabilise the yen, with the United States selling euros to boost the yen. In view of the nervousness regarding US bonds, this move sent a negative signal to the US bonds market (Eichengreen 2026). China, in contrast, is still marked by weak domestic demand. China’s central bank is therefore sticking to its accommodative monetary stance, referring to the imbalance between supply and demand and the persistent geopolitical and foreign trade uncertainties. The IMF nonetheless expects inflation in China to gradually rise from its current low level (IMF 2026).

Financial markets Financing conditions remain favourable overall Global financing conditions have deteriorated slightly since the escalation of the Middle East conflict but are still comparatively favourable in historical comparison. Corporate bond spreads remain low despite increased uncertainty, lending rates in the advanced economies were still robust at last count and stock markets have made up for intermittent losses. The financial markets continue to be propped up by solid macroeconomic fundamentals and expectations of productivity gains through the application of artificial intelligence (IMF 2026, OECD 2026). At the same time, financial markets have factored in higher inflation risks and a longer period of higher policy rates. This has caused particularly government bond yields to rise. In the United States and in the major European economies, yields of ten-year government bonds have risen by around half a percentage point or more since the start of the Iran war and remain elevated. Government bond yields have also continued to increase in Japan, while yields in China remain largely stable on a relatively low level of around 1.7 percent. Overall, financing costs have increased slightly without substantially jeopardising the generally favourable financing conditions (OECD 2026). US dollar appreciates slightly against the euro and the yen On the currency markets, the US dollar has appreciated against the euro and the Japanese yen since the escalation of the Middle East conflict. The US dollar appreciated around three percent against the euro between the middle of April and the middle of June. It remained largely unchanged against the British pound, while depreciating slightly against the Chinese renminbi.

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

The appreciation of the dollar is connected to the increased geopolitical uncertainty and higher energy prices. In contrast to former energy price crises, the United States is meanwhile partially benefiting from the rising oil and gas prices as the country has become a net exporter of energy over the last few years. Higher energy prices therefore generally improve the external position of the US economy and can support the US dollar. For many emerging countries, in contrast, a stronger US dollar tightens financing conditions as it makes the servicing of foreign currency debt more expensive, increases import costs and can lead to higher capital outflows (OECD 2026).

Exchange rates against the US dollar 1.30 1,30

0,84 0.84

170

7,5 7.5

0.82 0,82

1,20 1.20

7.3 7,3 0.80 0,80

160

1.10 1,10 0.78 0,78

7.1 7,1

1.00 1,00 0.76 0,76

150 6,9 6,9

0.90 0,90

0,74 0.74

0.80 0,80

0,72 0.72

Euro (left axis) Pound Sterling (right axis)

6,7 6,7

140

Yen (left axis) Renminbi (right axis)

Source: Macrobond

High valuations increase stability risks The risks for financial market stability remain heightened. A renewed escalation of the Middle East conflict could lead to a tangible tightening of global financing conditions through rising energy and commodity prices, higher market volatility and new burdens on supply chains. Countries with high public or external financing requirements and constrained economic policy space would be particularly affected (IMF 2026). Furthermore, the valuations on many asset markets still seem ambitious. The stock markets are increasingly propped up by a small number of very large technology and AI corporations. If the expected productivity and earnings gains turn out to be too optimistic this could trigger an abrupt market correction. Higher risk premiums, capital outflows and a general deterioration of financing conditions would additionally exacerbate the consequences of such a re-evaluation (IMF 2026). Parts of the non-banking sector harbour additional vulnerabilities. High-growth private credit and private equity fonds, in particular, are increasingly attracting the attention of supervisory authorities on

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

account of high valuations, rising refinancing costs and their close partial intertwinement with the technology sector. Abrupt adjustments on the financial markets could thus have repercussions over and beyond individual market segments (OECD 2026).

Sources Bank of Japan (2026). Change in the Guideline for Money Market Operations. June. Tokio. Bayoumi, Tamim und Joseph E. Gagnon (2026). Prospects for Global Imbalances in 2026 and Beyond: Another China Shock?. February. Peterson Institute for International Economics. Washington, D.C.. Bruegel (2026). Europe must prepare for a possible oil price crunch. 15. June. Brussels. Bureau of Economic Analysis (BEA) (2026). GDP (Third Estimate), Industries, Corporate Profits, State GDP, and State Personal Income, 1st Quarter 2026. Suitland. Chong-En Bai, Gita Gopinath, Hélène Rey, Axel Weber (2026). G7 Economists Memo on Global Imbalances. Evian G7 meeting. Evian. Deutsche Bank Research (2026). Europe and China Shock 2.0. June. Frankfurt. ---(2026b). Q2 GDP: Catalyzing a Policy Pivot. China Macro. July. Frankfurt. ---(2026c). ECB Preview: Hike-Pause-Hike and the ‘measured’ tightening strategy. July. Frankfurt Eichengreen, Barry (2026). Yen intervention contains troubling message for dollar. Financial Times. 5 August. Page 9. European Central Bank (2026). Eurosystem staff macroeconomic projections for the euro area, June 2026. June. Frankfurt. Eurostat (2026a). GDP down by 0.2% and employment up by 0.1% in the euro area. June. Luxembourg. ---(2026b). Unemployment statistics. July. Luxembourg. ---(2026c). Euro area annual inflation down to 2.8%. July. Luxembourg. ---(2026d). Euro area annual inflation up to 2.9%. July. Luxembourg. Federal Reserve Bank of St. Louis (2026). Unemployment Rat e. June 2026. St. Louis, Missouri. International Monetary Fund (2026a). World Economic Outlook June Update. Global Economy in Crosscurrents of War and Technology. Washington, DC. ---(2026b). IMF Blog. The oil market absorbed the war shock, but buffers are running low. 15 July. Washington, D.C..

Iran war curbs global expansion | Central banks tackle inflation shock 17/08/2026

---(2026c). Euro Area Policies. IMF Country Report 26/177. Washington, D.C.. OECD (2026). Economic Outlook. June. Paris. European Commission (2026). European Economic Forecast. Spring. May. Brussels. Rhodium Group, US Chamber of Commerce (2026). China’s Next Generation Industrial Policy. May. Washington, D.C.. Tordoir, Sander, Brad Setser (2026). China Shock 2.0. The cost of Germany’s complacency. CER. London. US Bureau of Economic Analysis (2026a). Personal Income and Outlays, May 2026. News Release. June. Washington, DC. ---(2026b). GDP Advance Estimate. 2nd Quarter 2026. June. Washington, D.C.. US Bureau of Labour Statistics (2026). Consumer Price Index Summary. Economic News Releases. July. Washington, DC. Vereinigung der bayerischen Wirtschaft (vbw) (2026). Handels- und Industriepolitik für eine neue Zeit. IW-Studie. Jürgen Matthes. Munich. Imprint

Editorial / Graphics

Federation of German Industries e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu

Marta Gancarek T: +49 30 2028 1588 m.gancarek@bdi.eu

German Lobbyregister Number R000534 Authors Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu Frederik Lange T: +49 30 2028 1734 f.lange@bdi.eu Thomas Hüne T: +49 30 2028 1592 t.huene@bdi.eu

This report is a translation based on „Globaler Wachstumsausblick, „Iran-Krieg dämpft globale Expansion | Notenbanken stellen sich dem Inflationsschock“, as of 7 August 2026.