Over the next six months, we expect growth to remain close to potential in the United States and slightly below potential in the Euro Area. The disinflationary trend is expected to continue, with inflation moving towards the targets set by the Fed and the ECB by year-end. In China, growth continues to be supported by exports, while domestic demand remains weak. We expect the PBoC to maintain an accommodative stance through the end of the year.
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IF IT COULD HAVE GONE WELL, THEN IT DID
Compared to our central scenario at the start of the year, the first six months of 2026 were full of confirmed expectations on the one hand, and heralds of some disruption on the other.
In terms of implications for the scenario in the second half of the year, confirmed expectations will be more relevant. The disruptive factors instead appear to be mere passing turbulence.
The production revolution befitting of Giuseppe Tomasi di Lampedusa’s The Leopard – aiming to meet consumption that remains strong, but with a different mix of production factors which sees investments in artificial intelligence (AI) dominate the employment component – maintains its momentum, mostly in the United States and to a much lesser extent in Europe.
As a matter of fact, in the first half of the year private consumption contributed 0.4 percentage points (pp) to American growth, against a backing of 1.3 pp deriving from investments in AI. In the previous two years, the average contribution from the two components was 1.9 and 0.5 pp, respectively. We expect the same script to play out again, and that growth will remain around potential in the USA and just under in the Eurozone.
Core inflation continued its slow decline: albeit annoyed by pressures on commodity prices stemming from the war in the Middle East, the prices of goods and services continued to converge towards the central bank targets. We remain convinced that the trend will stabilise.
Furthermore, it is difficult to imagine an inflationary acceleration similar to that of 2022, in the wake of the shock caused by the war in Ukraine. Indeed, the macro context is much different. Accumulated savings, fiscal policy and the growth rate of wages – the three forces that allowed consumption to continue supporting the transmission of the pandemic and military shock to consumer prices, albeit with rising rates – are today no longer a driving force capable of placing pressure on the output gap; at most, they will accompany it.
Against this macro backdrop, we confirm a central scenario that sees the central banks still focused on how to soften monetary policy conditions to preserve growth. The war in the Middle East and the change in leadership at the Federal Reserve will most likely have the effect of slowing the “disinflationary” drop in the rates. Nevertheless, we remain of the idea that the cycle of cuts will resume, if not as early as the end of this year, then in 2027.
With reference to the macro risks, one is unchanged, one is off the radar, and another has rightfully entered our framework. Our conviction is still that the greatest risk will be for American growth to prove too robust, stabilising above potential, thus triggering a wage-price spiral that the Fed would only be able to address through an aggressive cycle of rate increases. Meanwhile, the inflationary risk deriving from a late transfer of tariffs seems to have subsided; the Supreme Court ruling on IEEPA tariffs and the upcoming midterm elections, which will likely see the Republicans lose at least one chamber, suggest that this scenario is unlikely to reignite. Lastly, the new risk is that the Eurozone will experience a considerable slowdown in the economy, especially if the much-awaited German fiscal support for investments were to be postponed further or eliminated entirely.
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