AT the time of writing, while the US-Iran military conflict, which started on Feb 28, has passed 100 days into a war, an imminent peace deal between the United States and Iran to end the conflict and allow the reopening of the Strait of Hormuz will be signed anytime soon.
Since an April 8 truce paused the war, sporadic fire continues, and talks have repeatedly collapsed.
A slew of current and lead indicators points to a mixed performance. While the global growth lost momentum, the broader economy continues to expand, albeit unevenly amid high volatile energy prices, costs pressure and supply chain disruption inflicted by the Middle East conflict.
Both manufacturing and services purchasing managers’ indexes remained in expansion territory, but momentum softened in output and new orders.
Manufacturing production and exports have been supported by front-loaded orders, inventory rebuilding, and supply risk hedging, while services are showing clearer signs of demand weakness.
The forward manufacturing purchasing for May points to weaker growth of purchasing and production in the coming months due to the supply shortages that not only subdue growth but also sustain further price pressures.
While output increased in the business and financial services sectors, business activity contracted in the consumer services for the third month in a row in May.
Mixed results
Advanced economies demonstrated uneven performance in the first half of financial year 2026 (1H26).
The United States led major peers, posting annualised real gross domestic product (GDP) growth of 1.6% in the first quarter of financial year 2026 (1Q26) which was 0.5% in 4Q25.
This was buoyed by upturns in government spending and exports, as well as an acceleration in artificial intelligence (AI)-driven investments. Consumer spending was a soft spot (1.4% in 1Q26 vs. 1.9% in 4Q25) as they faced uneven hiring and rising inflation.
The annual inflation rate accelerated to 3.8% in April 2026, the highest since May 2023, on higher jumps in energy costs (petrol and fuel oil) as well as services inflation.
Growth in the eurozone slowed down significantly to just 0.1% quarter-on-quarter and 0.8% year-on-year (y-o-y) in 1Q26, driven by a stagflationary shock and renewed energy price pressures due to an oil shock.
Japan’s economic growth expanded an annualised 1.8% in 1Q26, on weaker capital expenditure while private consumption remains steady. Japan remains vulnerable to energy shocks, and the risk of downturn remains if the Strait of Hormuz remains closed.
China’s economy accelerated to a resilient headline GDP growth of 5% y-o-y in 1Q26 (4.5% in 1Q25), primarily underpinned by robust tech exports, especially the AI-related technology demand.
However, challenges that remain are weak domestic consumption and a bifurcated economy.
While the new and tech-driven economy heats up, the old economy remains sluggish, affecting jobs and suppressing retail sales.
The government continued to navigate domestic real estate challenges as property investment contracted by 11.2% y-o-y in 1Q26.
The global energy market remains volatile amid prices easing from recent highs.
Global oil prices (Brent spot price) have eased to between US$97.29 and US$101.69 per barrel range in the early weeks of June, a significant pullback from the severe spikes to US$138.21 per barrel on April 7, 2026, during the peak of the Middle East conflict.
Volatile energy sector
Despite the prices cooling off, global energy markets remain highly volatile, heavily influenced by the relentless geopolitical risks and risk premium, soft supply-demand fundamentals and rapid growth of clean energy generation.
Should a credible peace deal be declared and the conflict ends in the days to come, oil prices typically take three to six months to cool down following a massive shock.
Retreating completely to pre-shock levels often takes 12 to 24 months, depending on the state of oilwells, refineries and ports in the Persian Gulf and the repairs of damaged infrastructure facilities.
It also takes time to fire up refineries to start processing crude oil.
Market data and international maritime reports indicated that around 1,600 to 2,000 commercial vessels remain stranded in the Persian Gulf amid the US’s “Project Freedom” to free the stuck ships.
Sources indicated that a trickle of five to 10 ships are currently transiting strait daily.
Maritime experts and industry analysts broadly shared that traffic through the Strait of Hormuz will not return anytime soon to pre-war levels when 130 to 140 vessels crossed daily.
Additionally, it is estimated that the logistics of clearing the backlog and repositioning fleets could take at least three to five weeks.
That said, it is expected that a credible deal to end the Middle East conflict should lead to a material increase in the passage through of ships daily.
Energy price shocks are a cost shock for producers and consumers. Inflation concerns have resurfaced, and inflation expectations are rising, prompting central banks in advanced and emerging economies to reassess their monetary policy stance.
Firms are facing higher fuel, transport and input costs, and these energy and increased costs often pass through into goods (especially food prices) and services prices, imports costs and thus generating a squeeze on households’ purchasing power. Simultaneous costs pressure from the goods sector, strong labour growth and firmed wages as well as firms’ pricing power could push core inflation higher.
Global central banks have pivoted toward hawkish monetary policy to combat renewed inflation. While there is a global divergence, major central banks are adopting cautious, data-dependent stances.
The European Central Bank (ECB) led the charge among major central banks in the developed world in hiking its interest rate (refinancing) by 25 basis points (bps) to 2.4% in June, to counter inflation while maintaining its hawkish stance, suggesting that the ECB will continue to adjust rates to anchor inflation expectations.
The Bank of Japan (BOJ) is heavily pressured to raise its policy interest rate by 25bps to roughly 1%, driven by rising wholesale inflation, imported energy costs, and the Japanese yen’s persistent weakness hovering near the 160 per US dollar threshold.
The Federal Reserve (Fed) is expected to adopt a “wait-and-see” approach, as it maneuvers a delicate balancing act, torn between sticky inflation and a resilient labour market.
We expect the benchmark Fed funds rate to be held steady at 3.5% and 3.75% in 2Q26 and 3Q26, and the Fed will probably start to hike interest rates on a measured pace in 4Q26 and in early 2027 should headline inflation continue to run persistently above 2%.
A material shift in the United States interest rates has immediate ripple effects across global markets, especially generating negative spillovers to emerging markets — capital flows realignment, exchange rates depreciation due to an interest rate differential, and tighter financial conditions due to the strengthening of the US dollar and higher global risk as well as a higher debt service payment of the dollar-denominated debt.
Two primary forces are currently driving aggressive monetary tightening among central banks in emerging markets.
Firstly, the inflationary effects from the energy shocks, especially for those net importer of energy; and secondly, sticky US inflation expectations lifting the US Dollar Index outlook in anticipation of a higher Fed fund rate ahead, forcing the central banks in emerging markets to tighten more in preventing their home currencies from a rapid depreciation and also to defend financial stability against global capital outflows.
In conclusion, while the global economic momentum has softened in 1H26, the confluence of data shows global economic activity will continue to expand at a moderate pace in 2H26, dismissing fears of a broad-based sharp economic deceleration or contractions.
Assuming a credible US-Iran peace deal is successfully finalised in June, the navigation of the global economy in 2H26 and beyond will pivot from extreme uncertainty and volatility to a fragile certainty.
This is amid the on-going geo-economic fragmentation-induced volatility, shifting trade policies and frictions, inflation risks, AI adoption, risk in global private credit markets and the central banks’ delicate balancing act between ensuring price stability and sustaining economic growth.
While the reopening of the Strait of Hormuz brings much-needed positivity to global energy security and supply chains, it is also important not to overlook the systemic vulnerabilities, damage repairs for oil infrastructure facilities, and the lingering compounding effects that sustain shipping delays will persist long after ships and vessels resume operations.
While it is reckoned that the AI drive increases in productivity, efficiency, and profits, one must be aware of the financial risks associated with AI, in terms of meeting expectations of high value creation impact (valuation versus actual return on investment) and its potential disruptive forces on economic structures and labour displacement.
Climate change remains one of the largest systemic risks to the global economy.
As a powerful, or “super” El Nino is now highly probable for this year, lasting into 2027, there is a heightened risk of a shock to global food supply chains, disrupting global commodities and key cash crops.
A double whammy impact is that this time round El Nino will occur during an already major fertiliser shortage caused by the Middle East conflict.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
