Executive Summary

Middle East tensions have pushed energy markets back into focus with higher oil prices feeding through to production costs and household budgets. While growth is losing some momentum, the broader economy continues to expand, leaving central banks in a wait-and-see mode as they balance inflation risks against softer activity.

The Middle East conflict continues to dominate global energy markets. The closure of the Strait of Hormuz has turned a regional conflict into a global oil shock, disrupting a route that normally carries around 20 million barrels per day and more than one-quarter of global seaborne oil trade. The UAE’s May 1 decision to leave OPEC adds another layer of uncertainty: while the immediate market impact may be constrained by the Hormuz disruption, the move could weaken OPEC’s longer-term market position.

The energy shock is currently feeding through to the broader commodity complex. Oil and gas prices remain elevated and volatile, while fertilizer and metals prices have also come under pressure. This matters because the shock is no longer only about energy supply; it is becoming a cost shock for producers and consumers. Manufacturing firms are facing higher fuel, transport, and input costs, while emerging economies are particularly exposed because higher energy prices often pass through into food prices, import costs, and household purchasing power more quickly. S&P Global noted that emerging-market manufacturing costs rose sharply in March as the Middle East conflict lifted fuel, transport, commodity, and dollar-denominated import prices.

Real GDP in the US increased at an annual rate of 2.0% in the first quarter of 2026, up from the 0.5% posted in Q4 2025. This real GDP increase reflects upturns in government spending and exports, and an acceleration in investment, partly offset by a deceleration in consumer spending. China was even more buoyant, reporting a resilient growth rate of 5.0% year on year for the first quarter of 2026, outpacing the fourth quarter of 2025 (4.5%). In contrast, global uncertainty has resulted in lowered GDP growth forecasts for the eurozone: Oxford Economics now expects just 0.8% this year (down by 0.2 pp compared to March), while the International Monetary Fund anticipates 1.1%.

Consumers may feel under siege: higher prices are eroding real incomes, while uncertainty is weighing on confidence. Retail sales and consumer spending may still look resilient in nominal terms—especially where energy prices lift total spending values—but the actual picture is weaker. In real terms, higher fuel and food prices are likely crowding out discretionary consumption, especially in energy-importing and lower-income economies. Nevertheless, in the US, the Consumer Confidence Index edged up to 92.8 in April from an upwardly revised 92.2 in March.

Nominal retail sales in March increased due to higher oil prices but, in real terms, overall consumer spending slowed significantly. In the US, March retail and food services sales in the US (adjusted for seasonal variation and holiday and trading-day differences) were $752.1 billion, down 1.7% from February’s revised $739.8 billion.

Inflation expectations are rising, especially at the five-year outlook, which reached almost 3%—levels last seen in 2022–23. March saw US median inflation expectations at the one-year-ahead horizon rise to 3.4% (from 3.0%), while expectations at the three-year-ahead horizon increased to 3.1%.

Consumer inflation has accelerated across the board, driven primarily by higher energy prices. Notably, consumers in emerging economies faced higher prices, driven not only by higher energy costs but also by rising food prices. Among developed economies, the US Consumer Price Index (CPI) was up 3.3% year over year in March, after rising 2.4% in February; core inflation rose 2.6% (annualized). Similarly, consumer price inflation in the eurozone climbed sharply to 2.6% annually in March, the highest rate since July 2024. The rise was almost exclusively driven by higher fuel prices, even after some countries implemented tax cuts to cushion consumers from the impact. Among emerging economies, retail inflation in India rose to 3.40% in March, a ten-month high under the new CPI series (base year 2024), and up from 3.21% in February. The rise reflected higher fuel costs and the West Asia conflict premium, especially in energy and transport, with food inflation firming to 3.87% after prior months of contraction.

Central banks are now caught between weaker growth and renewed inflationary pressure. Commentators indicate that the Iran war has paused the global easing push in April, with major central banks holding rates steady amid concern that higher oil prices could lift inflation expectations. Confirming this picture, it appears that most major central banks have adopted a “wait and see” posture, as the energy shock complicates the earlier easing narrative. Nevertheless, both Brazil and Russia cut interest rates further in April to boost domestic demand and economic activity. Russia cut its key rate to 14.5%, although its central bank noted that underlying price growth remains elevated and uncertainty is still high.

After a tumultuous March, in which crude oil volatility reached its second-highest level since 2008, April has seen financial markets rebound from the previous month’s sell-off; however, this rebound looks conditional rather than decisive. Global equity markets have recovered as investors priced in a greater chance of a de-escalation in tensions, but many remain below previous levels and continue to be volatile. The S&P 500 was up 10.5% in March, bringing the one-year return to approximately 31.1%; the Dow Jones rose 7.2% over the month and posted a 24.2% one-year return. During March, the CBOE Volatility Index (VIX), which aims to measure market risk and investor sentiment, spiked at 31.05 on March 27 but subsided to close at 16.9 in April. Meanwhile, the cost of capital has been moving sideways.

Gold prices have retreated from recent highs, to below $4,700 an ounce, as safe-haven demand became less one-way. Still, gold remains sensitive to the same forces driving the broader market: geopolitical risk, oil-linked inflation expectations, the US dollar, and prospects for interest rates.

Base metals prices reflect additional aspects of uncertainty. Copper rose on supply-related concerns and structural demand, while aluminum moved toward historical highs as Gulf supply disruptions and higher energy costs tightened physical markets. European aluminum billet premiums have risen sharply since the US–Iran conflict started, reflecting the region’s dependence on Gulf supply chains and the energy-intensive nature of aluminum production. Finally, higher oil and fertilizer prices are adding upward pressure on global food prices.

The activity data show the same tensions: headline growth has not collapsed, but momentum is becoming more fragile. Both manufacturing and services purchasing managers’ indexes (PMIs) remained in expansion territory, but momentum softened as the Middle East conflict pushed up input costs, disrupted supply chains, and slowed growth in output and new orders.

Manufacturing has been supported in some markets by front-loaded orders, inventory rebuilding, and supply-risk hedging, but services are showing clearer signs of demand weakness. The overall picture points to resilient but uneven industrial activity, with energy cost pressures and supply-chain disruptions increasingly weighing on new orders and confidence. In the US, the industrial production index increased slightly to 101.8 in March, while S&P’s Manufacturing PMI climbed to 54.5 in April (52.3 in March). Meanwhile, India remains a standout with the HSBC India Manufacturing PMI rising to 55.9 in April from 53.9 in March, according to preliminary data.

March saw services momentum weaken across most major economies, with India and China still expanding solidly, but the eurozone and UK barely above neutral. In the US, services activity expanded only marginally—with the services PMI rising to 51 in April (49.8 in March—while new business fell for the first time in two years as the Middle East conflict and inflation hit demand. In the eurozone, services activity fell back into contraction in April; the services PMI dropped to 47.6 from 50.2 in March, as weak demand and higher energy costs weighed on firms. By contrast, India saw its services PMI firm to 57.9 in April, from 57.5 the previous month.

Global labor markets remain broadly resilient but are softening at the margins: unemployment is still low or stable in the US and eurozone, while the UK shows weaker vacancies and higher unemployment than a year ago. US non-farm payroll employment increased by 178,000 in March, the biggest rise in 15 months. Job gains were recorded in healthcare, construction, and transportation and warehousing, while federal government employment continued to decline. The unemployment rate changed little at 4.3%. In Asia, the picture is more uneven: India’s labor market remains broadly stable despite a small rise in unemployment, while China continues to face pressure from elevated youth unemployment and softer hiring demand.

Export growth remained broad-based into early 2026, led by China, Mexico, and the US. Import trends diverged in early 2026, with growth in China, India, and Mexico but softer demand in Europe and US. In early 2026, container throughput pulled back slightly from elevated levels amid geopolitical tensions. Supply-chain pressures rose modestly in March, climbing above normal levels. In the US, exports reached $314.8 billion in February, $12.6 billion more than the previous month. February imports reached $372.1 billion, $15.2 billion more than in January. The monthly deficit rose by 4.9% to $57.3 billion. China’s cross-border trade saw a robust rise in the first quarter, registering a year-on-year growth rate of 18.0%, compared with 3.4% in Q4 2025. Specifically, growth in both exports and imports recorded double-digit expansion—at 14.7% and 22.7% respectively—against 3.7% and 3.0% in the final quarter of last year.

Regional and Country Summary

US real GDP growth reaches 2.0% in Q1; early 2026 activity data for eurozone disappoints; UK economy was stabilizing but recovery challenged by energy inflat.

United States

Q1 2026 real GDP growth reaches 2.0% (up from 0.5% in Q4 2025); non-farm employment increases by 178,000; inflation climbs to 3.3% year over year.

Real GDP increased at an annual rate of 2.0% in the first quarter of 2026, up from the 0.5% posted in Q4 2025. This real GDP increase reflects upturns in government spending and exports, and an acceleration in investment, partly offset by a deceleration in consumer spending.

Non-farm payroll employment increased by 178,000 in March, the biggest rise in 15 months. Job gains were recorded in healthcare, construction, and transportation and warehousing. Federal government employment continued to decline. The unemployment rate changed little at 4.3%.

The Consumer Price Index (CPI) rose 3.3% year on year in March, after rising 2.4% in February. Core inflation rose 2.6% (annualized). In March, median inflation expectations increased at the one-year-ahead horizon, to 3.4% from 3.0%. Three-year-ahead expectations rose to 3.1%; the five year-ahead horizon remained at 3.0%.

On the markets, the S&P 500 was up 10.5% in March, bringing the one-year return to approximately 31.1%; the Dow Jones rose 7.2% over the month and posted a 24.2% one-year return. During March, the CBOE Volatility Index closed at 17.0 (24.5 in March).

The Federal Reserve held rates steady for the third straight meeting, at the 3.5–3.75% target range. Fed board members split over whether the next move should be a cut or a longer pause.

March exports reached $320.9 billion, $6.2 billion more than February’s exports. March imports were $381.2 billion, $8.7 billion more than in February. The monthly deficit increased by 4.4% to $60.3 billion.

The industrial production index increased slightly to 101.8 in March. S&P’s Manufacturing PMI (purchasing managers’ index) climbed to 54.5 in April (52.3 in March); the services PMI rose to 51 in April (49.8 in March).

March’s retail and food services sales (adjusted for seasonal variation) were $752.1 billion, up 1.7% from February’s revised $739.8 billion. The Consumer Confidence Index edged up to 92.8 in April from an upwardly revised 92.2 in March.

On the housing market, the 30-year fixed-rate mortgage decreased slightly to 6.3% in April. Existing home sales fell by 3.6% in March, while housing residential starts rose to 1,502,000 (above the revised February estimate of 1,356,000)—a 10.8% increase. Completions in March were slightly up, reaching 1,366,000, compared with the revised February estimate of 1,356,000.

US gasoline prices rose above $4 a gallon in April as crude oil traded near or above $100 a barrel. The increase directly affected consumer energy costs, while any broader inflationary impact depends on how long crude prices remained elevated.

US president Donald Trump says he will meet Chinese president Xi Jinping in China on May 14–15, in what would be the first visit to China by a US president in nearly ten years.

Eurozone

Early 2026 activity data disappoints; early signs of stagflation in eurozone economy amid Middle East tensions—impact on inflation already visible in March figures alongside lowered GDP outlook.

Hard data confirms stagnant industrial production in early 2026, at levels just below Q4 2025. With resolution of the Middle East conflict unclear, disruption to supplies of natural gas, oil, fertilizers, and other goods is tempering near-term prospects for the sector. Additionally, consumer spending had already been losing momentum prior to the Middle East situation—it was down by 0.2% month on month in February.

As a result, leading indicators dropped. The Sentix investor sentiment index fell in April to a level last seen in April 2025, when “liberation day” tariffs were announced. At the same time, surveys show an increase in input prices and inflationary expectations. This combination of slowing activity and rising inflation expectations is emerging as a similar pattern across the main eurozone economies.

Consumer price inflation rose sharply to 2.6% annually in March, the highest rate since July 2024. The rise was almost exclusively driven by higher fuel prices, even after some countries implemented tax cuts to cushion consumers from the impact. Still, continued disruption is likely to push inflation further in the coming months even if spillover effects remain contained at this point. Inflation and activity data over coming months will be key in determining whether this remains true. They will also be important in shaping the stance of the European Central Bank (ECB), which needs to balance elevated inflation expectations against muted signals from real activity.

The uncertainty has resulted in lowered GDP growth forecasts: Oxford Economics now expects just 0.8% this year (down by 0.2 pp compared to March), while the International Monetary Fund anticipates 1.1%. The initial impact from high inflation will come via a direct hit to consumers through a real income shock, weaker sentiment, more precautionary savings, and possibly higher interest rates. While direct impact may not be deep, it could linger. With a negative fiscal policy impulse in many countries, little monetary policy support, and slowing labor markets, consumers have few incentives to spend. Energy shocks affect consumers unevenly, with lower-income households worse off, squeezing the consumption of goods. Elevated uncertainty and tighter financial conditions may affect lending, reinforcing the picture of limited support from private credit to consumption and growth. The longer the conflict, the higher the risk that activity in other sectors could be negatively affected.

Meanwhile, a decision by the United Arab Emirates to leave Vienna-headquartered oil cartel OPEC on May 1 has potential ramifications for the energy sector.

Finally, following a landslide election victory on April 12, Péter Magyar has Viktor Orbán as prime minister of Hungary—an outcome likely to be welcomed in Brussels. He was officially sworn in May 9.

United Kingdom

UK economy appeared to be stabilizing but recovery now challenged by renewed inflationary pressures, especially from energy prices, prompting reassessment of policy outlook.

Growth has shown tentative improvements: GDP was up 0.5% in February and also on a three-month basis, driven primarily by services. Production has shown some resilience, but construction remains weak. Retail sales volumes rose 0.7% month on month in March, 1.6% quarter on quarter in Q1, and 2.7% year on year in Q1.

That said, much of the consumption strength reflects temporary factors, including higher fuel sales as motorists brought forward purchases amid rising prices linked to Middle East tensions. April’s flash composite purchasing managers’ index (PMI) rose to 52.0 from 50.3, as the manufacturing PMI reached 53.6, a 47-month high—but the same survey points to rising input costs and weakening business confidence. Consumer confidence fell for a third month in a row, to reach its lowest point since October 2023. Underlying momentum is subdued, with growth forecasts for 2026 at around 0.5–0.8%. Persistent structural constraints, including weak productivity growth and subdued business investment, are limiting the economy’s underlying growth potential.

Headline inflation rose to 3.3% in March (February: 3.0%), partly driven by higher motor fuel prices and stronger food inflation. Meanwhile, core CPI edged down to 3.1% as services CPI rose to 4.5%—so domestic disinflation continues only slowly. April’s regulated energy price cut offers only temporary relief, with bills likely to rise again in July. Renewed increases in global energy costs are expected to feed through to fuel, utility, and transport prices. Overall, inflation is likely to remain elevated. Simultaneously, unemployment dropped to 4.9% in the three months to February (from 5.2% previously), while vacancies fell to around 711,000—their lowest level since 2021. Wage pressures are easing, with regular pay growth below 4%; real earnings remain modestly positive at around 0.5%. Most 2026 pay settlements are agreed at around 3.5%, limiting near-term second-round effects.

This presents the Bank of England with a policy dilemma: inflation is set to rise further, even as the labor market softens and activity remains weak. Voting has shifted rapidly—from a 5–4 split favoring cuts in February to a unanimous hold in March and an 8–1 hold in April, with one vote for a hike. It has now moved from an easing bias to an “active hold” stance.

Market developments reinforce this shift. Longer-term borrowing costs have risen, with 10-year gilt yields increasing to around 4.8% from 4.5% and touching 5%—their highest level since 2008. Mortgage rates on new fixed-rate products (eg, 10-year, 75% LTV quoted rates) have moved higher, from around 4.5% at the start of the year to close to 4.8% recently.

Externally, the trade picture remains weak with the overall balance little changed on a quarterly basis. A wider goods deficit was offset by a stronger services surplus, indicating that trade is not providing a meaningful boost to growth. Subdued global demand and persistent post-Brexit trade frictions continue to weigh on performance, while trade with the United States has remained relatively weak since the introduction of tariffs in April 2025. Sterling has been volatile; if it were to weaken, it would provide some support to exporters but also raise import costs, adding to inflationary pressures over time.

Fiscal constraints further limit scope for policy support. Public borrowing in the previous financial year was £132 billion, below expectations but still elevated by historical standards. Public debt remains high (around 94% of GDP), while rising debt-servicing costs continue to limit fiscal headroom.

UK local elections on May 7 have resulted in Labour losing hundreds of local council seats as well as control of devolved legislatures in Scotland and Wales, where pro-independence parties are in the ascendancy.

China GDP up 5.0% in Q1; RBI raises India’s FY 2025–26 growth estimate to 7.6%; Brazil and Russia cut interest rates.

China

China’s resilient economic performance continued in Q1, with GDP up 5.0%, though investment growth showed a visible decline; trade regained significant momentum; the real estate market remains weak.

In the first quarter of 2026, China’s GDP reported a resilient growth rate of 5.0% year on year, outpacing the fourth quarter of 2025 (4.5%). This could represent a promising start to the year, considering the annual GDP target of 4.5–5.0% set by government in March. Over 60% of GDP growth in Q1 was contributed by services sectors, followed by industrial sectors (approximately 34%), suggesting an ongoing structural shift in the Chinese economy.

In the first quarter, fixed-asset investment growth posted 1.7% on a yearly basis, a significant bounce back from Q4 2025 (–12.8%). The recovery was largely underpinned by fast growth in infrastructure investment (8.9% year on year compared with –10.3% in Q4 2025). The manufacturing sector retained a stable growth rate at 4.1% (versus –7.3% in Q4 2025), while real estate investment remained muted (–10.6% in Q1 compared with –30.4% in Q4 2025).

Looking more closely at the real estate sector, we see that market growth continued to dip in the first quarter of 2026. On the demand side, sales revenue for new residential properties declined −18.7% in Q1 (–26.9% in Q4 2025). On the supply side, floor space started fell −21.8% in Q1, slightly narrowing the contraction from Q4 2025 (–24.8%).

In the first quarter of this year, new credit increased to RMB 14.8 trillion, up from RMB 5.5 trillion in Q4 2025. However, it declined –2.6% on an annual basis in Q1. Total social financing reached RMB 456.5 trillion by March, marking an 8.0% year-on-year increase.

The overall surveyed urban unemployment rate dropped to 5.4% by the end of the first quarter (5.1% in Q4 2025). The youth unemployment rate was relatively stable at 16.9% in March (16.5% in December).

Cross-border trade saw a robust rise in the first quarter, registering a year-on-year growth rate of 18.0%, compared with 3.4% in Q4 2025. Specifically, growth in both exports and imports recorded double-digit expansion—at 14.7% and 22.7% respectively—against 3.7% and 3.0% in the final quarter of last year. According to data released by the Ministry of Commerce, foreign direct investment (FDI) inflows into China decreased by –7.3% in the first quarter of this year, similar to the pace seen in Q4 2025 (–6.3%).

The 2026 “Two Sessions”—the annual plenary meetings of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC)—opened in March and set a GDP growth target of 4.5%–5% as outlined in the Government Work Report. The adoption of a growth range reflected policymakers’ acknowledgment of economic uncertainty and a shift toward prioritizing high quality development.

India

India’s economy showing resilience despite heightened geopolitical uncertainty and evolving structural pressures; RBI notes strong growth momentum, with real GDP growth for FY 2025–26 estimated at 7.6%, up from earlier 7.4% estimate.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 55.9 in April 2026 from 53.9 in March, preliminary data shows. The reading signaled improving operating conditions and marked a solid expansion, supported by renewed growth in output and new orders. The services PMI firmed to 57.9, from 57.5 the previous month.

However, India’s infrastructure output contracted 0.4% year on year in March 2026, marking the first decline in five months. Crude oil declined by 5.7% while refinery products edged up 0.1%. Natural gas grew by 6.4% as coal output declined by 4.0%. Fertilizers fell sharply by 24.6%, while cement and steel grew at 4.0% and 2.2%, respectively. Electricity generation slipped 0.5%. This is a notable deterioration from February’s 2.8% growth, reflecting concentrated weakness in energy and input-intensive core sectors that form 40% of the industrial production base.

Retail inflation rose to 3.40% in March, a ten-month high under the new Consumer Price Index (CPI) series (base year 2024), and up from 3.21% in February. The rise reflected higher fuel costs and the West Asia conflict premium, especially in energy and transport, with food inflation firming to 3.87% after prior months of contraction.

This keeps inflation well within the Reserve Bank of India’s (RBI) 2–6% tolerance band, maintaining improved price stability for consumers. However, RBI raised its CPI forecast for financial year 2026–27 from 4.2% to 4.6%, maintaining a cautious outlook regarding potential energy price volatility from the West Asia conflict. Despite an 11% correction in March, the Indian market showed resilience, with the SENSEX surging 7% in April.

Overall, the recovery was supported by improving forex reserves of $703.3 billion and reinforced by the Securities and Exchange Board of India’s (SEBI) new Mutual Funds Regulations, 2026 (effective April 1), which strengthen fund governance and investor protection. India’s merchandise trade deficit narrowed to $20.67 billion in March 2026 amid declining oil and gold imports linked to the West Asia conflict, with imports at $59.59 billion and exports at $38.92 billion.

India and the EU continued legal vetting of their comprehensive free-trade agreement concluded on January 27, 2026, with implementation expected in early 2027. Meanwhile, negotiations toward a trade deal between India and the United States resumed in Washington over April 20–22. However, the agreement faces major restructuring following a US Supreme Court ruling that altered the tariff landscape.

RBI held its easing cycle steady, maintaining the policy repo rate at 5.25% and retaining a neutral stance in its April 8 review. Markets view 5.25% as the terminal rate for this cycle, with focus shifting to liquidity management and fine-tuning operations amid elevated geopolitical uncertainty.

Brazil

Despite inflation and unemployment data pointing higher, Brazil’s central bank cuts Selic rate by 25 bps for a second consecutive month.

In a unanimous decision on April 29, Banco Central do Brazil’s Monetary Policy Committee (Copom) decided to cut the Selic rate by 25 basis points, to 14.50%. Copom noted that, despite inflation projections rising above target, various factors, including the war in the Middle East, mean that uncertainty around the projections is higher than expected. Inflation was up in March, touching 4.14% (3.81% in February) but below the central bank’s upper target limit of 4.50% for a fifth month in a row.

The three-month moving average unemployment rate edged upwards towards 5.8% in March, compared with February’s 5.4%. Real average incomes grew 14.6% in 2025, reaching BRL 2,316.00.

On the financial markets, the average monthly real–US dollar exchange rate was BRL 5.22 per USD in March (BRL 5.19 in February). The Bovespa equities index trended lower in March, losing 0.7% in value; however, performance has recently been improving with the index up 5.4% as of April 16.

Consumer confidence stayed below the neutral 100 mark, although FGV’s seasonally adjusted March reading moved up to 88.1. Meanwhile, business confidence slowed slightly to 91.9. Construction confidence reached 93.6, up from February’s 91.5.

Brazil’s manufacturing production fell: the Monthly Industrial Physical Production (PIM) Index slipped from 95.1 in January to 92.8 in February (deeper below the neutral 100 line). Factory production slowed 1.4%, while extractive production dropped 7.7%. On aggregate, however, February 2026’s results were only 0.7% below those from the same period last year.

The Monthly Services Survey (PMS) revenue index decreased to 119.34 in February from 123.81 in January (while remaining above the neutral 100 line). This was mirrored in the volume index, which dropped to 101.7 (from 106.1). The largest revenue decrease was in lodging services (down 21.6% since January), followed by air transportation services (down 18.2%). Meanwhile, air transport services volumes slid 25.3%, while the lodging services segment decreased 22.2%.

March’s trade balance recorded a surplus of $6.4 billion, up from $4 billion in February. The bigger surplus was driven by a faster increase in exports ($31.6 billion in March, up from $26.2 billion in February) than the rise in imports ($25.1 billion in March, up from $22.1 billion in February).

Brazilian president Luiz Inácio Lula da Silva met US President Donald Trump at the White House on May 7, where the two leaders discussed tariffs and trade plus other economic issues including rare earth metals, foreign policy, and combating organized crime and drug trafficking.

Russia

GDP growth decelerated in Q4 2025 with activity set to stay weak; estimated contraction in first months of 2026; front-loaded spending worsens fiscal balance; monetary easing despite stalled disinflation; mounting oil trade uncertainty.

Revised national accounts data confirm GDP growth slowing to 0.7% year on year in Q4 2025 from 1.0% in Q3 and 1% for the whole of 2025, marking a sharp slowdown from 2024’s 5%. That translates into 0.7% of sequential growth in Q4 versus 0.3% in Q3.

The latest forecasts anticipate Russia’s GDP growth remaining close to last year’s 1% pace. The expected weak dynamics are explained by several factors. Private demand will weaken, affected by a lower rise in real wages, reduced household purchasing power, and tight credit conditions. State stimulus measures applied in previous years yield diminishing returns as the labor force is nearly fully employed. Fixed investments will slow amid weak profitability, the tax burden, general uncertainty about economic conditions, and tight monetary policy. Investment in human and physical capital needed for the war effort will continue, while “civilian” activities are unlikely to see any expansion.

The preliminary output assessment showed contraction of around 0.9% year on year and 3% quarterly. The two-ppts hike in the VAT rate in January weighed on both consumer and business sentiment. Industrial output maintained sequential growth of 1% quarterly, driven by sectors serving the military-industrial complex, while output in other industries contracted. Retail sales fell by 1.1% on a quarterly basis, suggesting consumer spending is no longer accelerating even as nominal wages still support purchasing power.

The federal budget was deep in deficit in the first quarter, which more than doubled compared with the previous year, as the government frontloaded annual spending, which was up 17% while revenues dropped by 8%. Even though the rise in commodity prices caused by the Middle East turmoil will afford the government slightly more room, the budget balance is likely to remain in deficit.

Consumer price inflation remained at 5.9% in March, the same level as February, and still above the Central Bank of Russia’s (CBR) 4% inflation target. Despite a break in the disinflation cycle, CBR continued easing interest rates, bringing the key interest rate to 14.5% and cumulative cuts to 650 basis points since June last year.

In March, Ukraine intensified attacks on Russian oil and gas export infrastructure in the Black Sea and the Baltics, affecting physical capacities. However, soaring global oil prices largely offset their impact on export earnings. Moreover, oil export volumes rose after the temporary lifting of US sanctions that affected India’s imports of Russian oil. Soaring global crude prices and crude oil shortages caused by the US/Israel war with Iran helped to lift the average Urals oil price to $78.4 p/b from $45.0 p/b in February.

Mexico

Mexico’s economy weakens across sectors, while exports rebound, the peso remains resilient, and inflation stays above target.

Mexico’s economy presented a weaker picture during the early part of 2026. The national statistics institute estimates that economic activity contracted 0.8% quarter on quarter and grew 0.2% year on year in the first quarter of 2026. On a quarterly basis, primary activities fell 1.4%, industrial activity declined 1.1%, and services dropped 0.6%, indicating that the contraction was broad-based across sectors.

Annual inflation rose to 4.6% in March from 4.0% in February, driven by an increase in food and services prices. Banxico kept the policy rate unchanged at 6.75% in March and maintained this level through late April. The peso appreciated again in April, with the exchange rate averaging MXN 17.4 per USD, compared with MXN 17.8 in March and MXN 17.2 in February. Manufacturing conditions remained weak, although the pace of deterioration eased. The S&P Global Mexico Manufacturing Purchasing Managers’ Index (PMI) rose to 48.9 in March, from 47.1 in February, but remained below the 50.0 neutral threshold. Firms continued to report falling orders and subdued demand, although the contraction was the slowest in five months.

Labor market conditions remained relatively stable but showed signs of moderation. The unemployment rate rose to 2.8% in March. Formal employment increased by only 32,930 jobs in March, bringing total employment to 22.7 million jobs; year-to-date formal job creation reached 207,604 positions, with permanent jobs accounting for most of the increase.

On the external front, Mexico saw a strong improvement in March. The trade balance moved to a $5.9 billion surplus, from a $0.5 billion deficit in February, as exports increased to $70.7 billion and imports to $64.8 billion. The improvement was due to a stronger non-oil surplus for exports (up 29.6% year on year), partly offset by a wider oil deficit, as oil exports declined 20.4%.

In April, the Mexican government announced initiatives under Plan México to strengthen the steel industry and improve investment conditions. The plan includes a historic public-private agreement to boost domestic steel production, reduce import dependence, and address unfair competition, while promoting investment, modernization, job creation, and regional development. At the same time, it seeks to facilitate investment more broadly by cutting bureaucracy, simplifying permits through a “one-stop shop,” setting clear approval timelines, and prioritizing strategic projects, with the aim of increasing efficiency, predictability, and overall economic growth.

Persistent housing affordability pressures in Mexico have been exacerbated by sustained price dynamics, with housing inflation remaining elevated at approximately 8–9% annually throughout 2025. This environment has intensified the financial vulnerability of mortgage holders, particularly within the public sector, by increasing the real burden of debt and limiting repayment capacity over time.

McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks, as well as focused insights on the latest national and regional developments. Detailed visualized data for the global economy, with focused reports on selected individual economies, are also provided as PDF downloads on McKinsey.com. The reports available free to email subscribers and through the McKinsey Insights App. To add a name to our subscriber list, click here. GEI is a joint project of McKinsey’s Strategy and Corporate Finance Practice and the McKinsey Global Institute.

Shubham Singhal is the Chair of McKinsey's Global Institute and a senior partner in the Detroit office;  Arvind Govindarajan is a partner in the Boston office. The data and analysis in McKinsey’s Global Economics Intelligence are developed by Jeffrey Condon, a senior expert in McKinsey’s Atlanta office;  Krzysztof Kwiatkowski  is an expert in the Boston office.

The authors wish to thank Nick de Cent, as well as Masud Ally, José Álvares, Roman Büschgens, Darien Ghersinich, Gabriel Marini, Tomasz Mataczynski, Frances Matamoros, Alejandro Morales, Beatriz Oliveira, Debdoot Ray, Erik Rong, Vanshika Tandon, Valeria Valverde, and Sebastian Vargas for their contributions to this article.

The invasion of Ukraine continues to have deep human, as well as social and economic, impact across countries and sectors. The implications of the invasion are rapidly evolving and are inherently uncertain. As a result, this document, and the data and analysis it sets out, should be treated as a best-efforts perspective at a specific point of time, which seeks to help inform discussion and decisions taken by leaders of relevant organizations. The document does not set out economic or geopolitical forecasts and should not be treated as doing so. It also does not provide legal analysis, including but not limited to legal advice on sanctions or export control issues.