Executive Summary

The global economy continues to send mixed signals. Inflation is easing and consumers remain relatively resilient, but growth momentum is softening and geopolitical uncertainty remains elevated. With energy markets still vulnerable to disruption, central banks face an increasingly difficult balance between supporting growth and containing inflation.

In recent months, the ongoing geopolitical ambiguity and economic volatility engendered by the tensions in the Middle East have understandably exercised the minds of headline and leader writers around the world. In the spring, the price of Brent crude peaked at just over $118 a barrel and has since eased, stabilizing at around $80 per barrel—although the balance remains fragile and vulnerable to renewed volatility. Higher energy costs inevitably affect food, manufacturing, and transport costs, threatening an unwelcome combination of rising headline inflation and depressed economic growth, which in turn sap consumer sentiment and business confidence.

Returning to today’s macroeconomic situation, we see that inflation has moderated slightly across key developed economies due to lower oil prices, with market-based inflation expectations also easing and returning to approximately pre-conflict levels—however, recent Gulf developments are likely to push them up again in the coming months. The US consumer price index (CPI) was up 3.5% year over year in June, after rising 4.3% in May. Core inflation rose 2.6% (annualized). In June, median inflation expectations at the one-year ahead horizon increased to 3.7% and to 3.3% at the three-year-ahead horizon—the highest level since June 2022. In the UK, Inflation delivered a downside surprise. Headline CPI moderated to 2.6% in June from 2.8%, while services inflation eased to 3.6%; core CPI, however, was sticky at 2.6%.

In contrast, inflation accelerated across most major emerging economies, with China a clear outlier as weak price pressures persist. Indeed, consumer inflation remains unusually subdued, with headline and core CPI increases at around 1%, pointing to limited pricing power and still-cautious domestic demand. Producer prices, by contrast, have recovered materially from last year’s deflation, suggesting that conditions on the production side are normalizing faster than they are for households. Meanwhile, India’s retail inflation in June remained within the Reserve Bank of India’s (RBI) 2–6% band but surpassed its 4% midpoint target for the first time since January 2025; core inflation was estimated at 3.9%. CPI inflation for 2026–27 is projected at 5.1%, with core inflation projected at 4.7%.

Growth has been affected by the Middle East conflict. In the United States, real GDP increased at a 1.5% annualized rate in the second quarter, slowing from 2.1% in Q1. This reflected a downturn in government spending and decelerations in investment and exports that were partly offset by an acceleration in consumer spending. Imports rose more in the second quarter than in the first. In the UK monthly GDP rose 0.1% in May, with services growth of 0.3% offsetting declines in production (–0.5%) and construction (–0.8%). Output grew 0.7% in the three months to May and was up 1.1% on the same period a year ago.

At the same time, consumer confidence remains subdued—mostly a reflection of global geopolitical and economic uncertainty—although it improved in the United States. June’s retail and food services sales (adjusted for seasonal variation and holiday and trading-day differences) reached $768.6 billion, up 0.2% from May’s revised $766.9 billion. The Consumer Confidence Index (Conference Board) edged up to 91.2 in June from a downwardly revised 90.6 in May. And in the UK too, household spending showed signs of resilience. Retail sales volumes rose 1.0% in June—above expectations—and were up 4.2% from a year earlier, while volumes increased 0.6% over the second quarter. Consumer confidence also improved in the first half of July, with the GfK index rising six points to –17, its highest level since January, though still in negative territory.

Given these mixed signals, most central banks are continuing with their wait-and-see approach. In July, Russia’s central bank was the only major central bank to cut rates, while others continue to hold as they assess the situation.

June’s activity indicators find both the global manufacturing and services sectors still in expansion territory with manufacturing growth holding. However, signs of moderation are emerging as the earlier boost is fading. Russia and Brazil both expanded while the US remains resilient, with the industrial production index edging up to 102.6. Notably, S&P’s manufacturing purchasing managers’ index (PMI) for the US was revised up slightly to 53.9 in July (matching June), signaling another month of solid expansion. In the eurozone, business activity signals are mixed but improving at the margin. The S&P Global Eurozone Composite PMI was revised up to 50.0 in June, signaling stable private sector output, with manufacturing in expansion at 51.4 for a fifth consecutive month. However, industrial production declined 0.2% month on month in May, reversing April’s modest gain.

Services activity expanding much faster in emerging markets than developed economies, primarily due to strong growth in China and India. In the eurozone, the services PMI edged up to 49.4—just below expansion.

Looking at employment, we see that US non-farm payroll employment rose by 57,000 in June. Employment continued to trend up in professional and business services, social assistance, and healthcare. Leisure and hospitality lost jobs. Unemployment dropped slightly to 4.2%.

July saw some stabilization across financial markets; Russia remains the notable exception with domestic equities deteriorating further. In the United States, the S&P 500 was down 0.1% in July, bringing the one-year return to approximately 19.6%; the Dow Jones climbed 0.3% over the month and posted approximately an 18.9% one-year return. July’s CBOE Volatility Index edged down to 16.0 (after rising to 16.3 in June). Volatility in oil contracts spiked in early August, although the increase was more contained than at the onset of the Middle East conflict. The cost of capital increased across most countries, reflecting growing concerns over inflation and the growth outlook.

Commodity trends have seen gold and livestock heading lower, while energy prices remain elevated despite easing from last month’s levels. The downward trend in gold prices extended into August, dropping to around $4,100 per ounce. It’s a more divergent picture for base metals, with copper rallying while aluminum gave back its war premium. Overall, food prices remained broadly stable despite a recent surge in vegetable oil prices, as declines across other food commodities offset this increase.

Turning to trade, we see that global export momentum remained uneven in early 2026, with strong growth in China, Mexico, and the United States. Import trends tell a different story, with a divergence in early 2026: imports to China, India, and Mexico grew, while US imports normalized from 2025 highs. US exports in June reached $314.7 billion, down $2.9 billion from May’s figure, with imports at $388.0 billion, $7.3 billion less than in May. The monthly deficit fell 5.6% to $73.3 billion. By contrast, the eurozone experienced a sharp deterioration in its goods trade balance, recording a €7.8 billion deficit in May 2026—a dramatic worsening from the €1.0 billion deficit in April, driven by a 10% year-on-year surge in energy imports with export volumes broadly flat versus May 2025. The cumulative goods trade surplus in January–May 2026 stands at just €3.3 billion, compared with €78.7 billion in the same period of 2025, a drop that underscores the structural damage from elevated energy import bills.

Among emerging economies, China’s trade surplus remains above $100 billion a month, whereas India posted a current account deficit of $2 billion in May 2026, versus a $0.7 billion surplus a year earlier, as surging imports outpaced exports. In Brazil, June’s trade balance recorded a surplus of $9.7 billion, up from $7.6 billion in May. However, the US has imposed 25% tariffs on Brazilian products, including furniture, ethanol, machinery, footwear, sugar, and other goods, starting July 22. Beef, coffee, aircraft, and other goods are exempt. Mexico’s trade surplus halved to $2.3 billion in May from $4.5 billion in April, driven by a sharp pullback in overall export activity. This rapid compression of the trade balance was anchored by acute weakness across the country’s industrial core, as non-automotive manufacturing exports dropped $1.9 billion and automotive shipments declined by $789 million in a single month. Effective July 24, the United States implemented a targeted 10% tariff on approximately 20% of Mexican exports, applying specifically to goods that fall outside the 2020 United States-Mexico-Canada Agreement (USMCA) duty-free provisions, while explicitly exempting commodities already subject to Section 232 tariffs (including steel, aluminum, and automotive products).

Beyond these immediate geopolitical and macroeconomic pressures, attention is increasingly turning to a more structural force reshaping the global economy: AI. This disruption is manifesting itself in multifarious ways, not least on the markets where it is a major driver of stock valuations, trade flows, and investment decisions, but also in the wider economic sphere where it is simultaneously remodeling the world of work while also introducing a significant source of concern for workers worried about their jobs. AI disruption has become something of a double-edged sword, boosting stock prices for infrastructure providers and chip manufacturers while depressing the wider tech and knowledge sectors (now the “old-school economy”) with the threat of replacement by new insurgents
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Regional and Country Summary

US real GDP increased at a 1.5% annualized rate in Q2; eurozone goods trade deficit deepened to €7.8 billion in May; UK monthly GDP rose 0.1% in May.

United States

Real US GDP increased at a 1.5% annualized rate in Q2 2026, slowing from 2.1% in Q1; inflation was up at 3.5% in June.

Real GDP increased at a 1.5% annualized rate in Q2 2026, slowing from 2.1% in Q1. This reflected a downturn in government spending and decelerations in investment and exports that were partly offset by an acceleration in consumer spending. Imports rose more in the second quarter than in the first.

The consumer price index (CPI) was up 3.5% year over year in June, after rising 4.3% in May. Core inflation rose 2.6% (annualized). In June, median inflation expectations at the one-year ahead horizon increased to 3.7% and to 3.3% at the three-year-ahead horizon—the highest level since June 2022.

The industrial production index edged up to 102.6 in June. S&P’s manufacturing purchasing managers’ index (PMI) was revised up slightly to 53.9 in July (matching June), signaling another month of solid expansion.

June’s retail and food services sales (adjusted for seasonal variation and holiday and trading-day differences) reached $768.6 billion, up 0.2% from May’s revised $766.9 billion. The Consumer Confidence Index (Conference Board) edged up to 91.2 in June from a downwardly revised 90.6 in May.

On the housing market, the 30-year fixed-rate mortgage increased slightly to 6.7% in July. Existing home sales decreased by 2.4% in June, while housing residential starts rose to 1,427,000 (above May’s estimate of 1,199,000)—a 19.0% increase. Completions in June were up 3.3%, at 1,392,000, compared with the May estimate of 1,347,000.

Exports in June reached $314.7 billion, down $2.9 billion from May’s figure, with imports at $388.0 billion, $7.3 billion less than in May. The monthly deficit fell 5.6% to $73.3 billion.

Non-farm payroll employment rose by 57,000 in June. Employment continued to trend up in professional and business services, social assistance, and healthcare. Leisure and hospitality lost jobs. Unemployment decreased slightly to 4.2%.

In July, the S&P 500 was down 0.1%, bringing the one-year return to approximately 19.6%; the Dow Jones climbed 0.3% over the month and posted approximately a 18.9% one-year return. July’s CBOE Volatility Index edged down to 16.0 (after rising to 16.3 in June).

The Federal Open Market Committee (FOMC) held interest rates steady at 3.50%–3.75% in July, delaying any potential rate cut as inflation remained above its 2% target. According to the FOMC, solid economic activity and stable employment continued despite price pressures from energy and other supply shocks.

The United States and Japan carried out a coordinated foreign-exchange intervention to support the yen after it fell to a 40-year low against the dollar. The U.S. Treasury said it bought yen alongside Japan to limit currency volatility, underscoring concerns that a weaker yen could raise import costs in Japan and spill over into broader Asian currency markets.

Eurozone

HICP inflation fell to 2.8% in June; goods trade deficit deepened to €7.8 billion in May; ECB holds rates on July 23 ahead of Q2 GDP data.

Harmonised Index of Consumer Prices (HICP) inflation fell to 2.8% year on year in June 2026, down from 3.2% in May, the first meaningful deceleration since the Middle East energy shock took hold earlier in the year. The easing reflects a moderation in energy prices, which had been rising at double-digit annual rates in previous months. Core inflation held at approximately 2.2% in May, suggesting second-round effects remain contained for now—while encouraging, prices have stayed above the ECB’s 2% target and a resurgence of Strait of Hormuz tensions in mid-July represents a renewed upside risk.

The improvement in inflation is being offset by a sharp deterioration in the goods trade balance. The eurozone recorded a deficit of €7.8 billion in May 2026, a dramatic worsening from the €1.0 billion deficit in April, driven by a 10% year-on-year surge in energy imports with export volumes broadly flat versus May 2025. The cumulative goods trade surplus in January–May 2026 stands at just €3.3 billion, compared with €78.7 billion in the same period of 2025, a drop that underscores the structural damage from elevated energy import bills.

Business activity signals are mixed but improving at the margin. The S&P Global Eurozone Composite PMI was revised up to 50.0 in June, signaling stable private sector output, with manufacturing in expansion, at 51.4, for a fifth consecutive month and services edging up to 49.4. Industrial production declined 0.2% month on month in May, reversing April’s modest gain.

Consumer-facing data show a tentative improvement. Retail sales volumes rose 0.2% month on month in May, recovering from a 0.4% decline in April, while consumer confidence improved to –15.9 in July, marking three consecutive monthly gains from April’s multiyear low of –20.6. The unemployment rate fell to 6.2% in May 2026, a multiyear low, supporting household income resilience. Nonetheless, confidence remains in negative territory, well below the long-term average, and the pass-through of falling energy prices into real disposable income will be gradual.

At its July 23 meeting, the European Central Bank (ECB) Governing Council held all three key rates unchanged, with the deposit facility at 2.25%—its first pause after eight consecutive cuts and one hike. The council cited persistent energy price uncertainty, noting the outlook remains well above pre-conflict levels, and reiterated a data-dependent, meeting-by-meeting approach without pre-committing to a rate path. The September meeting, when new Eurosystem staff projections will be available, is now the key decision point for any further tightening; Q2 GDP and July inflation will be central inputs to that assessment.

Three upcoming releases will shape the September policy decision: Q2 GDP, July inflation, and the August composite PMI. The interplay between easing inflation and the deepening trade deficit remains the central tension for the eurozone through the remainder of 2026.

United Kingdom

New prime minister inherits economy with modest growth and easing inflation, alongside elevated risks and limited fiscal space.

The UK economy is showing tentative signs of stabilizing. Monthly GDP rose 0.1% in May, with services growth of 0.3% offsetting declines in production (–0.5%) and construction (–0.8%). Output grew 0.7% in the three months to May and was up 1.1% on the same period a year ago. Forward-looking business surveys point to a moderate improvement in activity: the flash composite Purchasing Managers’ Index (PMI) rose to 52.1 in July from 49.3 in June, returning to expansion for the first time since April, with manufacturing outperforming services.

Household spending showed signs of resilience. Retail sales volumes rose 1.0% in June, above expectations, and were up 4.2% from a year earlier, while volumes increased 0.6% over the second quarter. Consumer confidence also improved in the first half of July, with the GfK index rising six points to –17, its highest level since January, though still in negative territory. Labor market slack kept building: unemployment held at 4.9% in the three months to May, but payrolled employment was 71,000 lower than a year earlier in June, and vacancies remained below pre-pandemic levels at 712,000. Regular pay grew 3.4% year on year, but just 0.3% after inflation (including housing costs).

Elevated borrowing costs continued to weigh on households: the quoted 10-year fixed mortgage rate (75% loan-to-value) eased to 5.18% but was still well above its level a year earlier.

Inflation delivered a downside surprise. The headline Consumer Price Index (CPI) moderated to 2.6% in June from 2.8%, while services inflation eased to 3.6%; core CPI, however, was sticky at 2.6%. Near-term pressures are building: July’s roughly 13% Ofgem price-cap increase has lifted household energy bills, while the ongoing US–Iran conflict continues to drive energy-market volatility.

The Bank of England (BoE) held the Bank Rate at 3.75% by a 6–3 vote, with three members favoring 4%—a hawkish shift from June’s 7–2 split. Despite continued underlying disinflation and a loose labor market, the Monetary Policy Committee judged inflation risks tilted to the upside as the Middle East conflict kept energy prices elevated and volatile. BoE now expects inflation to peak at around 3.2% later this year—slightly below its earlier 3.5% projection—and upgraded its 2026 growth forecast to 1.1%. Markets have pushed back expectations for rate cuts, and some lenders have already repriced fixed mortgage deals higher.

Fiscal conditions stayed tight. June borrowing of £16 billion was down a third on the year and just below the Office for Budget Responsibility (OBR) forecast. But year-to-date borrowing of £57.6 billion was £2.7 billion above forecast, and net debt is nearing £3 trillion, around 95% of GDP. OBR warns that public finances are on an unsustainable long-term path without corrective action, reflecting demographic, health, and defense pressures.

Former mayor of Manchester, Andy Burnham became prime minister on 20 July—the seventh in a decade—after Sir Keir Starmer resigned as Labour leader. His early moves included cutting VAT on domestic electricity bills, signaling support for additional drilling at already licensed North Sea fields, and pledging to reform adult social care, while not ruling out future tax rises. He also highlighted rising youth economic inactivity, with 1.0 million 16–24-year-olds (13.5%) outside work or education in Q1 2026. He pledged to maintain Labour’s fiscal rules, with the Autumn Budget expected to test how the government balances investment ambitions with fiscal discipline. The 10-year gilt yield rose above 5% following the borrowing data and the new government’s spending signals.

China’s growth slowed to 4.3% in Q2; Russia cut policy rate to 14% in July; Mexico’s peso softens and trade surplus narrows.

China

China’s growth slowed to 4.3% in Q2 as weak investment, property stress, and consumer caution increasingly weighed on domestic activity—this despite resilient exports and manufacturing. July indicators suggest the recovery remains uneven, with factory activity contracting again and inflation remaining subdued.

Real GDP growth dropped below the government’s 5% ambition. That said, China’s economy was supported by industrial activity and a still-powerful export engine. Beneath the headlines, however, momentum is softer. The manufacturing purchasing managers’ index (PMI) slipped back below the 50 neutral line in July with industrial production having moderated from last year’s pace. Meanwhile, the prolonged real estate market correction continues to weigh on investment, household wealth, and local-government finances.

The inflation picture reinforces this divide. Consumer inflation remains unusually subdued, with headline and core consumer price index (CPI) increases around 1%, pointing to limited pricing power and still-cautious domestic demand. Producer prices, by contrast, have recovered materially from last year’s deflation, suggesting that conditions on the production side are normalizing faster than they are for households.

Households remain the missing piece of the recovery. Labor-market conditions have improved modestly, with urban unemployment declining in recent months, but this has yet to translate into a meaningful rebound in spending. Retail sales growth is still subdued and consumer confidence continues to sit below neutral levels. Persistent declines in home prices are likely reinforcing precautionary saving and limiting the wealth effect that policymakers would normally rely on to support consumption. The result is an economy in which employment conditions are gradually improving, but households remain reluctant to spend.

This leaves policy operating within an increasingly narrow corridor. The People’s Bank of China has kept benchmark lending rates unchanged, balancing the need to support growth and the property sector against pressure on bank margins and the currency. Bond yields remain low, consistent with subdued domestic demand and inflation expectations, while equity markets have struggled to sustain momentum. Fiscal policy is carrying more of the burden, but here too the room for maneuver is narrowing—government debt has risen above 74% of GDP as weak land sale revenues and support for local governments add to balance-sheet pressures.

China’s external strength is helping bridge the gap. The trade surplus remains above $100 billion a month, and exports continue to provide an important source of demand.

India

India remains one of the world’s fastest-growing major economies, though ongoing Middle East conflict continues to be a key uncertainty; June saw the central bank lower its 2026–27 real GDP growth projection to 6.6% (100 basis points below the 7.6% of 2025–26) with the downgrade reflecting prolonged supply-chain disruptions, global financial-market volatility, and weather-related shocks.

The HSBC Flash India Manufacturing PMI dropped to 53.9 in July from 54.2 in June, signaling a below-trend improvement in factory conditions. The slowdown was centered on services, where expansion fell to a 53-month low of 53.1, pulling the composite PMI down to 54.3 from 57.1—the weakest private-sector activity since March 2022.

Under the revised 2022–23-base, nine-industry Index of Core Industries (ICI) series, core-sector output grew 5.0% year on year in June, up from a back-cast 3.2% in May. It was led by iron ore, cement, and electricity, up by 43.9%, 9.8%, and 9.8% respectively. Steel rose 4.6% and coal 1.4%, while natural gas fell by 7.4%, refinery products by 4.7%, crude oil by 4.2%, and fertilizers by 3.3%. Iron ore and electricity have been the major drivers of ICI growth in recent months.

Retail inflation rose to 4.38% in June, an 18-month high, up from 3.93% in May, on higher fuel and food costs amid Middle East conflict-driven supply disruptions and a delay in seasonal rains—with food inflation climbing to 5.32% from 4.78%. The steepest price gains in June were concentrated in a handful of items—silver jewelry (133.21%), ginger (50.41%), gold/diamond/platinum jewelry (36.82%), tomatoes (31.92%), and raisins (20.52%).

Retail inflation remained within the RBI’s 2–6% band but surpassed its 4% midpoint target for the first time since January 2025; core inflation was estimated at 3.9%. Consumer price index (CPI) inflation for 2026–27 is projected at 5.1%, with core inflation projected at 4.7%.

Equity markets fell with the Sensex down 2.68% to 76,059.77 on July 24 from 78,151.48 on July 17, as Brent crude reached around $100 a barrel, amid rising Middle East tensions, so denting investor sentiment.

The rupee closed at 96.56 on July 24, near its all-time low of 96.96 in late May. Forex reserves rose $1.080 billion to $676.2 billion in the week ended July 17; foreign-currency assets climbed $4.5 billion even as gold holdings fell $3.5 billion. The merchandise trade deficit widened to $30.4 billion in June, with imports rising to $70.8 billion (+31% year on year) and exports to $40.4 billion (+15.5% year on year), weighed down by Strait of Hormuz shipping disruptions linked to the Middle East conflict.

The India–UK CETA and the Agreement on Social Security entered into force on July 15, providing zero-duty market access for nearly 99% of India’s exports and covering almost 100% of trade value. India and the Maldives concluded the first round of negotiations for a proposed free trade agreement (FTA), working toward a broad-based, balanced, and comprehensive agreement guided by fairness and reciprocity. India and Israel concluded a second round of FTA negotiations, making further progress toward a balanced, comprehensive, and mutually beneficial deal.

India posted a current account deficit of $2 billion in May 2026, versus a $0.7 billion surplus a year earlier, as surging imports outpaced exports. With the outlook expected to improve once the Middle East conflict eases, the Reserve Bank of India held the repo rate at 5.25% and favored a wait-and-see approach over an early policy pivot.

Brazil

Brazil’s inflation and unemployment both tilted mildly down, while central bank makes 25 bp rate cut.

Inflation was down in May, touching 4.64% (4.72% in April), and above the central bank’s upper target limit of 4.50%. On June 30, the Federal Government ended one of its policies designed to relieve pressure on fuel prices caused by Middle East tensions: a BRL 0.35 (approximately $0.068) per liter subsidy on diesel. Other incentives, such as the BRL 0.44 ($0.086) per liter subsidy for gasoline producers and importers, are still in place.

The three-month moving average unemployment rate edged down toward 5.6% in May, compared with April’s 5.8%.

On the financial markets, the average monthly real–dollar exchange rate was BRL 5.12 per USD in June (versus BRL 4.98 in May). The Bovespa equities index trended down in June, sliding 1%; performance has recently been improving mildly, with the index up 0.9% as of July 16.

Consumer confidence stayed below the neutral 100 mark, with FGV’s seasonally adjusted June reading moving down to 88.7. Meanwhile, business confidence improved to 92.7. Construction confidence was down at 91.7.

Brazil’s manufacturing production increased: the Monthly Industrial Physical Production (PIM) Index increased from 101.9 in April to 107.2 in May (above the neutral 100 line). Factory production increased 5.6%, while extractive production increased 2.5%. On aggregate, however, May 2026’s results were stable in comparison with those from the same period last year.

The Monthly Services Survey (PMS) revenue index increased to 130 in May from 128.1 in April (above the neutral 100 mark). This was mirrored in the volume index, which rose to 108.7 (from 107.2). The largest revenue increase was in audiovisual services (up 9.4% since May), followed by other non-specified services (up 8.1%). Meanwhile, audiovisual services’ volumes were up 9.5%, while the other non-specified services segment increased 8.1%.

June’s trade balance recorded a surplus of $9.7 billion, up from $7.6 billion in May. The bigger surplus was the result of a larger increase in exports ($36.2 billion in June, up from $31.7 billion in May) than the increase in imports ($26.5 billion in June, up from $24 billion in May).

In a unanimous decision on June 17, Banco Central do Brazil’s Monetary Policy Committee (Copom) decided to cut the Selic rate by 25 basis points, to 14.25%. Copom noted for the first time the “need for smoothing economic activity levels and promoting full employment.” However, various factors, including the conflict in the Middle East, are noted as reasons to be cautious for emerging economies such as Brazil.

Starting on July 22, the US will impose 25% tariffs on Brazilian products, including furniture, ethanol, machinery, footwear, sugar, and other goods. The strategy is dependent upon Section 301 of the Trade Act of 1974, related to unfair trade practices. Beef, coffee, aircraft, and other goods are exempted from the tariffs. Brazil’s president Lula da Silva described the tariffs as a “regrettable milestone” amid frictions in the relationship with Donald Trump, with Brazil’s government set to retaliate against the US with its own tariffs.

Russia

Central bank faces increasingly difficult trade-off as price pressures build and activity slows.

Russia’s economy is entering a more difficult phase. The war-driven expansion has effectively stalled, with real GDP contracting by 0.01% year on year in Q1 2026. While the decline itself is marginal, the broader trend is more significant: growth has slowed sharply from around 5% in 2024. Pockets of resilience remain—the manufacturing purchasing managers’ index (PMI) rose to 50.7 in July—but industrial production was only 0.6% above year-ago levels in June. The picture is increasingly one of stagnation rather than broad-based contraction.

Meanwhile, the disinflation that gave the Central Bank of Russia (CBR) room to begin cutting rates is becoming less convincing. Headline inflation accelerated to 6.0% in June, while core inflation remained at 5.0%. Producer prices were 10.5% above year-ago levels and more recent indicators suggest that inflationary pressures may be broadening again. Manufacturers reported the fastest increase in input costs since January, while household inflation expectations jumped to 14.7% in July from 12.4% in June. Fuel shortages and transport disruptions have added another source of supply-side pressure just as domestic inflation had begun to normalize.

This leaves monetary policy caught between increasingly conflicting signals. CBR cut its policy rate by a further 25 basis points to 14% in July, even as it raised its inflation forecast to 6–7% and lowered its 2026 growth outlook to 0–1%. The move therefore looks less like a declaration that inflation has been defeated and more like an acknowledgment that maintaining exceptionally restrictive policy is becoming increasingly costly for an economy that has effectively stopped growing. Further easing may become harder to justify if the recent rise in inflation and inflation expectations proves persistent.

Households present a similarly mixed picture. The labor market remains historically tight, although there are signs that some of the extraordinary pressure created by wartime labor shortages is beginning to ease. At the same time, consumer sentiment has weakened and inflation expectations have risen sharply. Consumption has so far held up better than investment and production, but deteriorating confidence raises questions about how long that resilience can persist as high borrowing costs and renewed price pressures weigh on purchasing power.

Russia’s external position remains an important counterweight. The merchandise trade surplus widened to $14.2 billion in May as exports strengthened, continuing to generate hard-currency inflows that have helped support the ruble. The fiscal picture, however, is moving in the opposite direction. The federal budget deficit reached 5.73 trillion rubles, or 2.5% of GDP, in the first half of 2026—already above the government’s full-year plan. Elevated spending is therefore adding to demand pressures and making the central bank’s task of bringing inflation down increasingly difficult.

Mexico

Mexico outlook supported by domestic resilience, with easing inflation and continued formal job creation, though external momentum is cooling as peso softens and trade surplus narrows sharply.

The Bank of Mexico maintained the policy rate at 6.5% throughout June and July. Annual inflation eased to 3.4% in June from 3.9% in May, driven primarily by an unprecedented 4.6% plunge in agricultural inflation, including a near 9.0% drop in fruit and vegetable prices. The peso depreciated marginally to MXN 17.4 per USD in June from MXN 17.3 per USD in May.

Mexico’s manufacturing sector returned to expansion in June as the purchasing managers’ indicator (PMI) rebounded to 51.3 from 49.6 in May, marking its highest reading since March 2024. The improvement was driven by the strongest increase in new orders in 27 months and supported by FIFA World Cup–related demand. While output and employment contractions eased significantly, persistent margin pressures remain a constraint, as elevated input costs have accelerated selling price inflation to a six-month high.

Mexico’s labor market remained resilient. The unemployment rate rose to 2.7% in May from 2.6% in April. In June, formal employment reached 22.8 million workers, with payrolls increasing by 61,023 jobs. Permanent positions accounted for 87% of total formal employment.

Mexico’s trade surplus halved to $2.3 billion in May from $4.5 billion in April, driven by a sharp pullback in overall export activity. Total exports retreated to $69.5 billion in May from $72.0 billion the previous month, an outsized $2.5 billion contraction that far outpaced a marginal $0.2 billion softening in imports, which ticked down to $67.3 billion from $67.5 billion in April. This rapid compression of the trade balance was anchored by acute weakness across the country’s industrial core, as non-automotive manufacturing exports dropped $1.9 billion and automotive shipments declined by $789 million in a single month.

Effective July 24, 2026, the United States implemented a targeted 10% tariff on approximately 20% of Mexican exports, applying specifically to goods that fall outside the 2020 United States-Mexico-Canada Agreement (USMCA) duty-free provisions, while explicitly exempting commodities already subject to Section 232 tariffs (including steel, aluminum, and automotive products). The US administration states that the tariff is intended to strengthen enforcement against forced labor in supply chains and protect domestic competitiveness. Although the direct impact is relatively limited, the measure raises trade costs for affected exporters, increases uncertainty around investment decisions, and adds pressure to Mexico’s export-oriented manufacturing sector.

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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, Sofía Córdoba, Gabriel Marini, Tomasz Mataczynski, Frances Matamoros, Alejandro Morales, Beatriz Oliveira, Debdoot Ray, Nikita S, Vanshika Tandon, and Valeria Valverde 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.