Steady growth despite headwinds

The global economy is holding up remarkably well despite the impact of higher energy prices caused by the war in the Middle East. Growth surprised to the upside over the summer by continuing around potential, not least in the euro area, driven by stronger manufacturing activity. The global services PMI stood at 52.5 in July and manufacturing at 52.1, indicating sturdy growth. The rise in energy prices has weighed on consumer spending and led to higher market rates, but these negative effects have been offset by rising demand from other sources. The surge in AI investment is concentrated in the US but is having a global impact on manufacturing, not only in chips and IT equipment but also in heavier industries. In Europe, indicators also point to somewhat stronger-than-expected demand growth from public investment and spending. We expect the positive demand effects from AI-related investment to continue at least over the coming year, although the longer-term outlook remains highly uncertain.

Energy prices increased again over the summer following the collapse of the US-Iran "Memorandum of Understanding", with crude oil rising to around USD 90/bbl and European natural gas prices to EUR 70/MWh. For consumers, the increases have been even larger as crack spreads—the difference between crude oil and refined product prices—have widened. This pushed inflation higher over the summer, with euro area and US inflation reaching 3.3% y/y in August and July, respectively. A surprising feature of the rise in inflation is that higher energy costs have not visibly fed through to other goods and services, including food. Core inflation declined to 2.4% y/y in the euro area and 2.5% y/y in the US. We still expect higher energy prices to have indirect effects on other prices, but the spillovers may be smaller than usual because the current environment makes it difficult for businesses to raise prices given the low consumer confidence.

Expectations for central bank policy rates have also increased markedly during the summer, reflecting the combination of higher energy futures and resilient growth. A 25bp hike by the ECB in September is fully priced in, while markets see a 65% probability of a Fed hike in September. We have revised our ECB call and no longer expect the ECB to cut rates in 2027. We still expect a final 25bp hike in September, taking the deposit rate to 2.50%, but now expect the ECB to keep it there throughout 2027 rather than cut it back to 2.00%. For the Federal Reserve, we continue to expect two hikes, as inflation remains well above target. For an update on our central bank views and latest economic projections for 2027, please see our new Nordic Outlook: New sources of growth, 4 September 2026.

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