Mid-Year Outlook: the Permacrisis Era?

"2026 is a year of crisis; not one after the other, not one on top of the other, but a perma-crisis. Last week marked a turning point with de facto control of the Strait of Hormuz, signaling a path toward the end of the conflict. The global geopolitical and macroeconomic situation will change - maybe not for the best, but certainly for the better."

Jean-François Robin, Global Head of Natixis CIB Research, opened the traditional mid-year outlook with this encouraging statement, where he and his experts discussed hot topics, macro risks, and market impacts for the remainder of the year.

Both English and French replays of the three panels from this one-hour webinar are available. Tune in now!

By and large, Natixis CIB economists have revised up their central scenario, as a faster normalization than projected at the start of the year is now underway. The Strait of Hormuz is set to reopen, and oil and gas prices are stabilizing below original estimates, with oil hovering around $80 a barrel. This limits inflation pass-through, steering the outlook toward stagflation.

In this environment, key trends are accelerating. Defense comes first, with countries stockpiling amid maxed-out order books and tight supply chains. Next is electrification - still driven by climate goals, yet now primarily as a matter of sovereignty and energy independence. This trend is particularly acute in Europe, which is speeding up this transition to replace imported energy with home-grown power.

The US enters the second half of 2026 facing heightened uncertainty. The upcoming midterm elections are expected to result in a divided Congress - with the House of Representatives likely flipping to the Democrats while the Senate remains Republican. The main hurdle will be for future budget legislation.

While last year’s focus was on tariffs, this year was dominated by the conflict in Iran and its impact on inflation. Although headline inflation rose, core inflation remained relatively shielded from this energy shock and is expected to trend downward in the coming quarters. Inflation is projected to end the year at 3.8% for headline CPI and 3.3% YoY for core CPI.

The US economy remains resilient, bolstered by massive investments in technology and AI. The Magnificent Seven’s gigantic $700 billion CapEx announcement is translating into GDP growth, forecasted at 1.9% for 2026. However, growth is being dragged down by a decline in consumer confidence - US consumers were ultimately hit hardest by rising prices at the pump.

While this led to rate cut expectations, last week’s FOMC meeting turned unexpectedly hawkish. Newly appointed Kevin Warsh focused heavily on inflationary pressures and announced his intention to shrink the Fed's balance sheet, signaling a prolonged pause on interest rates.

Moving to Asia, China appears to emerge as the big winner of last year’s tariff war and this year’s Iranian conflict, boasting 5% GDP growth and a trade surplus skyrocketing by 20% to $1.2 trillion.

The reality, however, is much more nuanced. China's growth remains deeply unbalanced: while its trade surplus reaches record highs, domestic demand is plunging, with retail sales down 0.6% YoY and investments dropping over 4%.

To sustain growth, Beijing must export its way out, putting downward pressure on the Yuan. This creates a paradox: on a purchasing power parity (PPP) basis, the Chinese currency should be appreciating massively. A weaker Yuan is also fueled by falling Chinese interest rates, as a widening yield gap with the US drives capital outflows.

Europe bears the brunt of this influx of Chinese goods, prompting a European Commission mandate to regulate imports. However, due to its deep reliance on China—notably for rare earths and pharmaceuticals - Europe would likely lose any full-blown trade war.

On the geopolitical front, China could exploit perceived US weakness following the Iran conflict. Leveraging its massive military-industrial capacity, Beijing might remain focused on Xi Jinping’s goal of reunifying Taiwan and securing the Malacca Strait by 2035. While pushing Taiwan toward a "Hong Kong-style" integration remains a priority, executing this strategy remains highly challenging given Taiwan’s robust democracy.

Turning to the Old Continent, Europe finds itself caught between the trade war - with massive Chinese exports flooding its markets - and the war in Iran, bearing the full brunt of the energy shock. Fossil fuels still make up 70% of Europe’s energy mix, while it only produces 1% of its own supply.

Consequently, economists have slashed Europe's 2026 GDP growth forecast to just 0.5% (down from 1.3% pre-conflict). Purchasing power is sluggish, while investment remains fragile. On the upside, normalizing energy prices could provide a boost to growth.

Among major economies, Germany, France, and Italy are projected to grow by just 0.6% in 2026. Spain is the sole outlier, matching US-style growth at around 2%. Despite temporary boosts from the FIFA World Cup and major events like Céline Dion’s concerts, France is expected to grow by only 0.8% in 2027, facing a difficult autumn budget round and political uncertainty ahead of the May 2027 presidential election. On a positive note, manufacturing, defense, and tourism remain key growth engines.

As for monetary policy, the ECB hiked rates just before signs of a resolution in Iran emerged to cool oil prices. With inflation at 3.2% in May and expected at 2.8% on average in 2026 - well above the 2% target - the central bank had little choice. While further precautionary hikes are possible, notably to reach the neutral rate estimated by Philippe Lannes to be between 1.75% and 2.5%, the ECB may very well stand pat and hold rates at current levels.

Three hot topics took center focus as shaping the current global economic and investment landscape.

Firstly, the normalization of energy markets following the de-escalation of tensions in the Middle East, with short-term oversupply pressures in oil expected to give way to tighter market conditions later in the summer, while European gas markets remain supported by resilient storage levels and improving LNG supply prospects.

Secondly,  the implications of the upcoming U.S. midterm elections, where a likely split Congress could increase political friction but is not expected to materially alter the macroeconomic trajectory or the administration’s policy agenda.

And thirdly, the durability of the artificial intelligence investment theme, with current market dynamics viewed as reflecting a broadening of AI-driven opportunities across the technology ecosystem rather than the characteristics of a speculative bubble, despite ongoing valuation and regulatory considerations.

Stay tuned for the full article, coming next week!

With US-Iran tensions easing, investors are shifting their focus back to core macroeconomic drivers. Markets have largely reverted to pre-conflict dynamics, with earnings expectations continuing to support equities despite some near-term vulnerability due to a more hawkish Federal Reserve.

In credit, despite a manageable uptick in private credit redemptions, overall fundamentals remain stable. Given historically tight spreads, a selective approach is favored, focusing on higher-quality investment-grade and bank debt while remaining cautious on lower-quality credit segments.

The rates outlook remains biased toward a higher-for-longer environment, until disinflation trends become clearer. From an asset allocation perspective, diversification beyond crowded growth and AI-related exposures is warranted, with opportunities identified in European value equities, financials, commodities, and alternative strategies.

While reserve diversification continues to support a gradual de-dollarization trend, sustained capital flows into U.S. technology assets are expected to underpin demand for U.S. markets in the near term.

Stay tuned for the full article!