The desk posits that the second half of 2026 will be critically shaped by inflation trends, U.S. dollar dynamics, and evolving geopolitical contexts, as outlined in the research by Standard Chartered. The report underscores pressing risks emerging from energy markets and AI developments which could profoundly influence financial market stability. Per the full note, with central banks continuing to navigate these turbulent waters, attention will be necessary on how these pressures unfold. As such, maintaining a strategic view on dollar positioning will be crucial, especially given potential volatility on the horizon.
What the desk is arguing
The desk argues that global economic resilience will be rigorously tested in H2 2026. The insights provided by Standard Chartered's experts highlight critical influences ranging from persistent inflationary pressures to shifting U.S. dollar valuation, scrutinizing the broader implications for financial markets.
Recent trends on inflation may see the U.S. Federal Reserve maintaining a vigilant stance, particularly as inflation rates persist at elevated levels. The commentary suggests that inflation could remain above 2%, compelling action that impacts currency markets directly.
Where it sits in our coverage
Currently, the consensus target for the USD/EUR pair is set at 1.075, falling within a range of 1.04 to 1.12. Significant contributors to this consensus include: - jpmorgan: 1.10 target for Mar26 - bofa: 1.04 target for Mar26
This assessment aligns with the prevailing sentiment among major banks, suggesting that fluctuations could hover around the midpoint of the range as economic risks are recalibrated in response to incoming data.
How other firms see it
Several firms, such as jpmorgan and citi, maintain similar bullish views on the U.S. dollar based on robust economic activity and inflation forecasts. In contrast, bofa holds a more cautious stance, anticipating potential downside risks driven by softer growth metrics.
The trajectory of EUR/USD remains a key watch point as both central banks reassess policy positions in light of evolving economic scenarios stemming from global pressures. Movements in energy prices and AI-driven sectors are also indicative of shifting investor sentiment impacting currency values.
01Economists warn of a resilience test for global markets in H2 2026 due to inflation and geopolitical pressures.
02Critical financial market implications may arise from changing U.S. dollar dynamics and energy market fluctuations.
03Diverging views across major financial institutions suggest heightened market volatility ahead.
04Investors should closely monitor inflation trends as they might substantially influence monetary policy.
Market implications
Traders should be vigilant for movements around the 1.075 level in the USD/EUR pair, especially as inflation data releases could catalyze significant volatility. The potential for policy shifts at central banks in response to rising inflation will be pivotal in shaping currency valuations.
Risks to this view
A decisive reversal in this call could follow if inflation data significantly underperforms or if geopolitical tensions accidentally escalate, leading to unanticipated shifts in market sentiment that undermine current forecasts.
stanchart
Hello, and welcome to the Standard Chartered Global Outlook for the second half of 2026 podcast. We're recording this on the 15th of July, and I'm your host, Manisha Tank. With me are Eric Robertson, Global Head of Research and Chief Strategist, Razia Khan, Head of Research for Africa and the Middle East, and Edward Lee, Chief Economist and Head of FX of ASEAN and South Asia.
Now, despite high interest rates and geopolitical tensions, global markets have shown remarkable resilience, but will the tailwinds that supported global growth in the first half last through the second? In this episode, our global research team breaks down the key macroeconomic drivers for the second half of 2026. So, let's begin.
Now, Eric, your second half Outlook report is titled A Test of Resilience. So, what makes the second half such an important test for the global economy and financial markets, especially after the unexpected strengths that we saw in the first half? It's a great question, Manisha, and you would think we had enough tests of resilience in the first half of the year with the crisis in the Gulf and the spillover implications for the global economy.
But really, what we're driving at is a couple of points. We've made a downgrade to our global GDP forecast for the year, which is really just an accounting adjustment to reflect the weakness in the Middle East in the second quarter. But we also have to be conscious of the fact that set against the crisis in the Middle East and the economic spillover that we did see, especially in the commodity space, there were a couple of other factors that provided important offsets.
And obviously, one of them is the tech story around AI investment, the very strong export momentum we saw from a handful of economies, especially in Asia. But we also had much better than expected economic performance in the U.S. And so we've had this kind of juxtaposition of incredible economic and commodity uncertainty as a result of conflict in the Middle East.
But we've also had this incredible structural event of investment in AI, the capex related to that story, the export momentum that we've seen, and to your point, the resilience of a number of financial markets. And so really, it's a question of how that juxtaposition works itself out in the second half of the year. Now, as we look forward, we think inflation is an ongoing risk for the global economy, both in developed and emerging economies.
Lingering in the background is the risk of tariffs. We have the U.S. midterm elections coming up in November. And so there is always the possibility of a resurgence of tariff tensions.
And I guess the final point that I would make is that we have moved into a world of higher interest rates and higher inflation. And how central banks respond to those risks, I think, is a really key theme for H2 and even into 2027. We have moved from a world of what I would call global monetary easing.
And we're now shifting towards one of, for the most part, global monetary tightening. Now, there are, of course, exceptions. But I think it is really important for us to understand and to try and explore how much central banks may need to hike policy rates in the second half of the year, and what that might mean for some of our economies and markets.
Rathia, let me take it to you. In the context of Africa and the Middle East, where do you see that resilience most clearly? And how do you expect economies across the region, particularly in the Gulf, to navigate the Middle East conflict?
So let's look at the outlook for Gulf economies, first of all. As Eric mentioned, a lot of our global growth downgrade for 2026 really reflected what has already happened in the Middle East. But even as we speak right now, the focus is fully on the future of the likely bounce back in 2027.
We know that oil production has been impacted adversely. There's every expectation that we will see further increases in hydrocarbons output across the board as infrastructure recovers, as there's a conscious effort to ramp up production come 2027. But it's not just about that.
The Middle East has been noted for the strength of its reforms in the recent past. If we think back to the last few occasions when the resilience of the region was tested, the shale-related oil price shocks and the COVID shock and much lower oil prices, on each of those occasions, we've seen an ushering in very significant reforms across the region, with some economies, of course, stronger reformers than others. So we think of Saudi Arabia and its broad plans for economic diversification, introducing VAT, tripling the rate of VAT during the COVID crisis.
We think of the UAE as well, which has been proceeding in a very full-throttled way with the adoption of reforms, residency reforms, different micro reforms that would unlock growth in different sectors, with a clear vision for where the economy would like to position itself in the future. And I think this resilience is what we're seeing a lot more of across the Gulf at this point in time. So it's not just about the physical recovery of hydrocarbons infrastructure, and when we might see that playing a bigger role in contributing more to growth.
We are seeing a great deal of investment by the region's sovereign wealth funds, rerouting trade, creating more resilience when it comes to straight-of-hormuz bypass infrastructure, looking at the threat that these economies have faced and saying, well, there's a way to do this differently in the future. And that resilience, the strength of reform, is very much coming to the fore again. So it's not just a mechanical expectation that because there's a likely contraction this year, we're going to be seeing a healthy bounce-back of more than 6% growth in 2027.
It's much more that this is going to be consciously driven by a deepening of reform across the region. Well, bearing all of that in mind, Edward, let's talk about Asia. Despite the energy price shock, exports continue to hold strong.
So what is behind that? And how do you see the outlook for the second half for Asian economies? If we think back when the straight-of-hormuz closed, we all got worried, especially in Asia. 80% of the energy supply that comes out from the straight comes to Asia and we are large energy importers.
So really two big things, how Asia was resilient in the first half. One was certainly inventories. There were some policy measures that the government implemented, for example, finding new sources for the energy supply, rerouting, some soft rationing and of course also subsidies being imposed direct or indirect to shelter the economy from the high inflation.
But really we think inventories has certainly delayed potentially more severe economic impact. At the start of the conflict, Korea, Japan has over 200 days of oil inventory. China, not clear, but we know it does have its strategic reserves and even up to now, it's certainly still importing less.
Southeast Asia, South Asia, less about one to three months. Singapore, not so clear. So there's certainly that worry.
And it's not just oil. It's also industrial materials. Asia, we are a big manufacturing hub and a lot of the industrial materials could have been affected.
So I think a key reason is that we have oil inventory. So I think that helped. And that really brings back to the point that the fragility of the ceasefire and, you know, I think it's important for Asia that the Strait of Hormuz reopens again.
I think the second thing I'll highlight is as you rightly noted, exports continue to be very strong. If I take a look at the last three months of Asia's total exports, roughly it was like up 20% year on year. But if we strip out electronics, it's really only growing by six to 7%.
So electronics is actually growing close to 60% year on year. So I think quite clearly there's this AI related demand, some direct, some indirect, which has really helped to mask the overall Asia picture, which is a bit uneven in terms of the growth. Certainly the average growth rate has been brought up because of this AI related demand.
In Taiwan, for example, we had the 14% growth rate earlier in the year, probably 10% point of that came from AI. We also have Korea at the forefront of the AI supply chain, close to 4% growth, close to half of that probably came from AI related demand. And for Singapore, first half GDP data, maybe 40 to 50% of that has been supported by AI.
But very briefly then, Edward, does that present a problem? Does that present a test of resilience? Because you have so much reliance on that electronics export story.
Every cycle, there is a new driver. And at this moment, the clear driver is AI capex, AI supply chain. It's a single counterparty risk, to put it more simply.
It's an area where it's very concentrated in one sector. Now, besides the risk of, say, the sector faltering, we also need to consider our resources being all directed to this sector. It's that sector crowding out other sectors' investments.
So it's also something for policymakers to be aware of. Now, Eric, of course, this is all about a test of resilience. Let's talk about prices and inflation, which continues to be sticky.
The Fed has a new chair, and he seems to have a very unique set of problems to deal with. What do you think he's thinking about? Look, there's the US story and there's the global story.
And let's try and unravel it piece by piece. The broader global inflation story is one of sticky inflation. The price level, for the most part, remains, I think, uncomfortably high relative to central bank's preferred range or preferred target.
And that's not just oil prices. It is a combination of commodity prices more generally. It is services prices.
It is the fact that global trade, while still flowing quite aggressively, has hit certain frictions, especially in certain supply chains. And so the broader price level is still arguably too high. And that's what central banks have started to respond to over the last couple of months.
Now, the AI story is filled with conflict with regards to inflation, because, as you say, there are enormous demands on energy, electricity, raw materials, et cetera, for the build out of AI. But then on a more long term basis, there's a question of will AI become a utility, a very cost effective, cost efficient utility for large parts of the population? And the new Fed chair, Kevin Walsh, has talked about that.
But I don't think we're there yet. I think we're still in the stage of the AI sort of revolution where it is in all likelihood going to push prices higher. And I think for Kevin Walsh as the new Fed chair, he's come in with quite a balanced approach, which is to say that he still thinks inflation is too high relative to the Fed's target.
He has not come out and said that if inflation remains too high, he will hike rates, which is a key missing ingredient. But as you say, he's got a challenge in front of him. The markets are priced for about a single rate hike, maybe a little bit more between now and the end of the year.
Our forecast is that there are enough competing forces in the US economy that will allow the Fed to stay on hold for this year and in all likelihood for next year. But as you say, this tug of war between the commodity story, the AI story and the lack of inflation buffer is presenting real challenges for many central banks around the world, not just the Fed. Razia, what about African economies?
How exposed have they been to these elevated energy prices and the threat of inflation, whilst so many reform programs are beginning to bear fruit? So this is really important, Manisha. And when we look at sub-Saharan Africa, inflation expectations, broadly speaking, have yet to be properly anchored, which really raises the challenges facing central banks across the region.
One of the things that we saw in a widespread fashion soon after the conflict began was different governments across the region waiving levies, waiving excise duties on imported fuel to try to cushion consumers against the rising cost of fuel. But these measures were generally time-bound, relatively small, couldn't really deal with the full consequence of the energy price shock on inflation. And for African economies where food plays a very important role in CPI baskets generally, there could be additional shocks down the line.
The interruption to fertilizer supply, how that has changed planting practices of farmers, the additional threat of an El Nino season, which we think might impact West Africa more severely than Southern Africa or East Africa at this point. All of these are threats that central banks will need to be vigilant about. Now, before the conflict in the Middle East, there was a broad based expectation that we were seeing a significant disinflation episode in the region.
We had seen broad tightening in the past. We were seeing disinflation across a number of different economies, Ghana, Nigeria, Zambia. The expectation was that there would be significant multiple, multi-year episodes of easing.
And we've generally seen those central bank easing cycles being interrupted. Now, there'll be a need to carefully consider the threats. Central banks will have to pay very careful attention to inflation expectations.
It's only last year that the South African Reserve Bank adopted a 3% inflation target. And early this year, the belief was that they would meet it very comfortably. Enter a fuel price shock, household inflation expectations changed dramatically.
On a 12-month basis, those have risen to 6%, twice the level of the inflation target. And on a five-year basis, they're running at around 9%. So, central banks certainly have their work cut out for them in terms of anchoring inflation expectations, acting forcefully, in the case of South Africa, perhaps tightening in a more front-loaded manner.
The short answer to your question, Manisha, is African economies are at risk, whatever the fiscal measures that we've seen put in place so far. Inflation is a threat, energy inflation, food inflation. And where expectations are not well anchored, there will be a need for real vigilance on the part of policymakers.
And on that note, Razia, you've spoken to me previously about what all of this will mean for frontier markets, particularly when it comes to currencies and the stability of currencies in an elevated price environment. But by extension, what that means for the dollar. So, let's just focus on the dollar for a second.
What does it mean from the prism of the African economies for the US dollar? This is a really interesting topic, Manisha. And year to date, the surprising feature has been the stickiness of capital inflows into frontier markets.
Risk appetite has broadly been supported for a number of reasons. We've seen the benefit of that. Portfolio investors remain engaged in African markets.
And if anything, we've seen a tendency for local currencies to actually appreciate against the dollar. The second half of the year, however, could bring different challenges. From a growth perspective, the US looks different to other developed market counterparts.
It's been benefiting from the AI boom, the expectation of productivity gains in a way that isn't yet the case for many different economies. And the key thing for frontier markets, as much as we can say, well, there's been significant appeal of these high yielding markets. Therefore, inflows have been resilient.
Let's keep a very close eye on US Treasury yields, because we know that anything that pressures US Treasury yields higher could upset all of the trades that have been put in place so far. So, Africa has been resilient year to date. The key question is whether this resilience will continue in the second half.
Eric, perhaps then more broadly, how do you see the US dollar's trajectory with this backdrop? The Treasury market is, I think, exhibiting some of the challenges that are front and center for many economies around the world. And that is this combination of a higher level of inflation, but also significant concerns about the trajectory of fiscal balances.
Effectively, over the last handful of years, and it really got quite stark during COVID, then with the start of the Russia, Ukraine crisis, we have governments intervening quite a bit more to try and support their economies. That involves the issuance of more debt. Debt globally, both in absolute terms and versus GDP, continues to make new highs.
And so there's this challenge of an increased amount of debt in the system, which is pushing up long term borrowing costs. And the US is no exception to that. More recently, with the crisis in the Middle East, the impact on EM, we've seen, in some cases, both currencies weakening and bond yields going higher.
And in our opinion, that reflects an increase in the sovereign risk premium. And again, the US Treasury market may not be immune to that, even though it is the benchmark for safe haven fixed income. And I guess where the rubber meets the road, and this is the point that Razia was coming on to, if we were to see a further deterioration in long term interest rates, which is part of our base case, the risk to higher yielding EM markets becomes much more significant, they start to have to compete with the Treasury for marginal investor dollars.
And let's not forget one factor, we have seen a record amount of investment grade debt issuance from corporations around the world, especially in the US. So just a lot more bond supply to contend with. And some of it's coming from issuers who have never really been major issuers in the market before.
And so the supply demand balance in fixed income is deteriorating. And that is going to push long term interest rates higher over the balance of the year Edward, let's talk about Asia and that play against the US dollar and how that's going. In terms of flows for Asia or from a currency perspective, one thing that has not helped is that if we consider where US yields were before versus Asian currency yield, it's a lot higher than before.
So the carry offered by Asia has not been that attractive. I think that's a number one thing. The second thing is that Asia this year, exports have been doing very well, but yet you don't see Asian currencies doing very well.
That is partly linked to the carry and higher yields because corporates are keeping their dollars. So you can see dollar deposits across various economies going higher, if not staying high. But on the import side, we are all energy importers and oil is largely traded on dollars.
So certainly that dollar demand has been strong. And the third point, which is a bit against Asia as well, is everybody still thinks the grass is greener the other side. We take a look at Japan, Korea, the resident outflow, especially going to equities, remains quite strong.
We see that also in places like Thailand, where resident accumulation of offshore assets continue. When we put it all together from Asia FX, from both the current account and the capital flow perspective, it hasn't been too good a story. Alright, well, let's talk about China and India.
How have they fared in the first half of the year? And then how are they lining up in the months ahead? China first half, Q1 was very good.
Q2 was not good. Q2 4.3% year on year within our expectations. And really for China, it's a very uneven growth landscape.
It's doing very well on the export side. It's doing very well in the high-tech side. That's where they are trying to grow.
And if we take a look at the Q2 export numbers, 20% up. But really electronics account for a quarter to even half of that exports. It may not be high-end chips, but we know that capacity is stretched elsewhere.
And certainly China is benefiting from that maybe second tier chip demand. But when you flip it to the domestic side, it's still weak. Q1 was good, but in Q2, we saw a pullback even in infrastructure investments.
In May, we actually saw a contraction in the retail sales data, highlighting that the consumption, the domestic demand side is weak. Job markets is weak. Housing market remains a drag.
If you take a look at the land sales revenue, it's still contracting at a double digit year on year pace, giving perhaps less fiscal resources, especially for the local governments for their projects. So in a sense, it's a very uneven landscape. So overall, we are looking at a full year growth at about 4.6%.
And if we consider second half, a couple of things on the external side, we continue to expect it to do well. But we also know of certain risk tariffs. Eric alluded to that earlier.
We may have forgotten about it, but it's certainly still there. And while there appears to be a more balanced situation between US and China, there's also EU, which is negotiating with China on what to do with their unbalanced trade. On the domestic side, there still is a lot of the 2026 budget, which has so far not been implemented.
And we do think that full implementation of the 2026 budget will help in terms of bringing up the domestic growth. So looking forward, Q2 was a bit slow, but on a balance, 4.6% growth, not necessarily a very negative picture. Now coming quickly to India, I think the way we look at India is that it entered this crisis on the relatively strong footing.
If we consider last year's fiscal year, 2026, we are looking at 7.7% growth. Coming into this year, yes, we expect some moderation, 6.6%, but we think that's still a very decent growth rate. While we think things are a bit slower, a couple of things, right?
First, there's a bit of a mechanical effect, base effect. Last year, we had a bit of a boost. We had the income tax cuts, we have interest rate cuts, monetary policy support, which could have added 0.6% point to growth.
But we do think mechanical effect, this fade in the quarters ahead. And we're also slightly concerned of El Nino. People are talking about a probability of a super El Nino this year.
And look, India has a large agriculture sector and certainly rural incomes could be affected if we have this high inflation and also a severe El Nino cycle. On the external side, certainly that got a bit more attention earlier for India as oil prices moved high and India is a large oil importer. But we do think that with the policy measures enacted by the authorities to attract capital flow, which we think could be in the tune of 50 to 60 billion, turning our balance of payment forecast into a surplus, we think things are a lot more stable now.
For the final question, I want to go to you, Eric. Coming out of COVID, many policymakers realise the importance of having a very agile, a very nimble system that can respond to shocks. And this is done by creating a buffer zone.
Where are we with that buffer zone? And is there a risk that we're actually approaching the end of it? How would you describe the risk profile of the coming months?
I love that usage of the word buffer, because at the risk of stating the obvious, we live in a world of significant economic uncertainty, significant policy uncertainty, and the potential for financial market volatility. Now, those things are less of a problem when you have a significant buffer and a significant buffer can be manifest in a number of different ways. It could be that the policy setting, interest rates, for example, is extremely loose, in which case you have already quite a bit of support flowing through the global economy.
It could come from the fact that financial markets are priced for a really bad outcome, in which case a lot of that bad news that could come is potentially reflected in the price. It could be in the form of the buffer of inventories of key resources, strategic oil reserves, strategic reserves of other commodities. Our concern as a team is that by many of those measures, there isn't much buffer.
Various measures of volatility, whether it's traditional vol, credit spreads, et cetera, show relatively little concern in financial markets. We've seen a pretty big drawdown of oil inventories. If we were to see a resurgence of oil prices and a further supply shock, those inventories may become vulnerable.
I also think that the buffer in terms of policy flexibility has been whittled away. What I mean by that is if we continue along the path of weaker currencies, imported inflation, central banks are going to have to make really awkward decisions about whether they tighten monetary policy to keep a lid on inflation and to protect their currencies, but knowing that will hurt growth or do they sit on their hands and take risks on the inflation side. I think we're now in a world where there's a lot less buffer than there should be.
I think markets may have forgotten to take notice of that. Well, what a place to end it. Let's wrap things up there.
Our thanks as ever to Eric, Razia, and Edward. Thank you so much to all of you, our audience, for listening from wherever you are in the world. I'm Aneesha Tank.