Economic Bulletin Issue 5, 2026

Global economic activity remained robust in the first half of 2026, and soft indicators point to continued resilience in the near term. The global composite output Purchasing Managers’ Index (PMI), excluding the euro area, held broadly stable in June at 52.2, remaining firmly in expansionary territory. Strong manufacturing output has been a key support to activity, reflecting buoyant demand for high-tech products and the frontloading of purchases of energy and energy-related products to cushion disruptions from the conflict in the Middle East. While the boost to trade and activity from the latter two factors is not expected to persist over the medium term, the impact of the technology boom is expected to be longer-lasting, reflecting planned strong investment in AI infrastructure and AI adoption.

Global trade continues to be supported by high demand for high-tech products, although supply pressures persist. Growth in global real imports, excluding the euro area, was 1.8% quarter on quarter in the first quarter of 2026, up from 1.1% in the fourth quarter of 2025. Nominal trade data (available up to April) confirm that global imports, excluding the euro area, have strengthened since the start of the year, possibly also reflecting price increases. Global imports of AI-related goods and semiconductors have risen significantly since the start of the year and remain the key driver of the robust growth in trade observed so far (Chart 1). The contribution of energy goods imports has turned positive since the outbreak of the conflict in the Middle East, largely reflecting the sharp increase in energy prices. Global manufacturing PMI new orders, excluding the euro area, also remained in expansionary territory in June, reflecting strong demand for AI-related goods and the frontloading of consumer goods that could be subject to additional US tariffs once the temporary tariffs introduced in February 2026 expire on 24 July. Supply chain pressures have eased somewhat since the June 2026 Governing Council meeting, but they remain above normal levels and the recent re-escalation of the conflict between the United States and Iran might reverse some of these gains. Traffic through the Strait of Hormuz improved towards the end of June but has since fallen back owing to the conflict re-escalation, which has increased uncertainty about the near-term outlook for global economic activity and trade.

Inflationary pressures have risen further but, so far, largely remain limited to energy prices. Global headline inflation across the member countries of the Organisation for Economic Co-operation and Development (OECD) excluding Türkiye rose to 3.5% in May, from 3.3% in the previous month (Chart 2). The rise in headline inflation was predominantly due to higher energy inflation. While core inflation (excluding food and energy prices) also rose marginally (by 0.1 percentage points) in May, it still appears to be on a declining trend. Nevertheless, upside risks remain. Producer price inflation accelerated significantly following the energy price shock, with the strongest acceleration observed among AI hardware exporters in Asia, including Malaysia, South Korea, Taiwan and Thailand. Production in these countries is energy intensive and dependent on energy imports from the Gulf region, while strong global demand for AI goods is facilitating the pass-through of the energy price shock to AI hardware prices. Additional price pressures may also arise from the surge in global shipping costs, especially for routes to Asia, amid higher demand for cargo, reflecting robust trade dynamics. Overall, risks to global inflation in the near term remain tilted to the upside.

In the United States, economic activity has remained resilient, while inflation has remained elevated. US macroeconomic data have recently surprised on the upside, supported by the AI boom and improved resilience to oil supply shocks owing to increased domestic supply of shale oil. Rising retail energy prices have depressed annual real disposable income growth to around zero, despite elevated tax refunds earlier in the year. Consumption growth remains robust but is increasingly supported by lower savings, which pushed the savings rate down to a very low 3% in May, and higher consumer borrowing. The growing reliance on dissaving and borrowing, coupled with low real income growth, limits the potential for further robust consumption growth going forward. Investment growth continues to be driven by AI-related spending, which remains highly concentrated among a few large firms, leaving the economy exposed to idiosyncratic risk should the investment cycle turn. Given its high import intensity, the AI boom is also continuing to support US imports, which might record another stronger-than-expected rise in the second quarter. Inflation surprised on the upside in May but decelerated in June. Headline CPI inflation slowed to 3.5% year on year in June from 4.2% in May, mainly reflecting a decline in energy prices, while core CPI inflation retreated more modestly to 2.6%. This moderation may prove short-lived, however, as the re-escalation of the conflict in the Middle East has pushed energy prices up again. At its first meeting under its new Chair, Kevin Warsh, in June, the Federal Open Market Committee kept rates on hold but revised up its median projected policy path, with nine out of the 18 participants now expecting a rate hike this year, compared with none in March.

Economic activity in China weakened markedly in the second quarter of 2026, with softening domestic demand weighing on headline growth. Real GDP growth slowed sharply from 5.0% year on year in the first quarter to 4.3% in the second quarter, which was below market expectations. Monthly data point to a further deterioration in domestic demand, with year-on-year retail sales growth falling to near zero in the second quarter and investment contracting further – a weakness that is unprecedented in China outside the pandemic period. The decline in retail sales mainly reflects goods purchases, which were affected by a scaling-back of the Government’s consumer goods subsidy schemes, while the weakness in investment reflects in part a renewed deterioration in the real estate sector. In addition, the Government stepped up its “anti-involution” campaign in the second quarter to address overcapacity and excessive price competition, which is likely to be weighing further on investment. In June nominal goods exports (in US dollars) surged by 27% year on year, driven by AI-related demand, while imports rose even more strongly, by 36%, owing to higher energy prices and AI-related demand. Export prices, meanwhile, followed producer prices out of deflationary territory in the second quarter, driven mainly by sectors affected by AI demand and energy prices, ending a multi-year period of export price deflation.

In the United Kingdom, economic activity appears to be slowing following some rebound at the start of the year. Monthly GDP declined by 0.1% month on month in April, and the composite PMI fell further below the neutral threshold, to 49.3 in June (from 49.7 in May and 52.6 in April), as weakness in services activity more than offset stronger manufacturing output. Real GDP growth is therefore expected to slow in the second quarter of 2026 relative to the first quarter. Headline inflation stood at 2.8% in May, unchanged from April but below the 3.3% recorded in March. Headline inflation is continuing to surprise on the downside, mostly reflecting easing food and core goods inflation, while services inflation picked up slightly. Energy inflation increased further, supported by higher fuel prices. A higher energy price cap announced for the period from July to September is expected to add upward pressure over the summer. Evidence of indirect and second-round effects from higher oil prices remains limited at this stage. Measures of inflation expectations rose significantly in the immediate wake of the energy price shock but have since softened somewhat. Private sector wage growth has continued to moderate amid signs of a further loosening of the labour market, which should help to contain second-round effects. The Bank of England kept its policy rate unchanged at 3.75% at the June meeting of its Monetary Policy Committee.

Housing investment is expected to have resumed a recovery path in the second quarter of 2026, following the sharp decline in the first quarter. Housing investment fell by 1.7%, quarter on quarter, in the first quarter (Chart 7, panel b), partly owing to adverse weather conditions. At the same time, persistently high construction costs continued to weigh on residential building activity. Following the outbreak of the conflict in the Middle East, input prices and selling price expectations for energy-intensive construction inputs, such as cement and concrete, increased further from already high levels. After the signing of the US-Iran MoU, sentiment started to normalise in June. Consistent with this, the European Commission’s indicator of recent trends in building and specialised construction activity moved back to positive levels. In addition, the order books of construction firms improved in line with an increasing number of building permits in the first quarter of 2026, pointing to robust underlying demand. Taken together, these supportive demand conditions suggest that housing investment is continuing its gradual recovery following the dip in the first quarter, notwithstanding persistent cost pressures and still-muted activity indicators.

The recent improvement in extra-euro area exports appears to be fragile, with leading indicators signalling renewed weakness and rising import price pressures ahead. The volume of extra-euro area goods exports increased by 1.8% in the three months to April compared with the preceding three-month period, while import volumes rose by 0.3%. However, the rise in exports largely reflects a base effect following particularly weak exports at the end of 2025 and does not yet point to a broad-based strengthening in export momentum. Looking ahead, short-term indicators suggest renewed weakness. PMI indicators remained in contractionary territory in May and June, with a more pronounced weakness in services than in manufacturing. Exports continue to be supported by precautionary stock-building, amid concerns over supply availability and price pressures. The decline in euro area import prices, which started in April 2025 and was broad-based across trading partners, appears to have come to an end, largely on account of higher energy prices. Import price pressures are expected to broaden in the period ahead, partly driven by rising Chinese import prices, although those prices still remain below their levels at the end of 2024.

The euro area outlook remains highly uncertain owing to ongoing geopolitical tensions and heightened oil price volatility. A prolonged disruption to energy supplies could keep oil prices higher for longer, eroding real incomes further and raising production costs, weighing on consumption and investment. Intensified trade disruptions could further weaken growth. Russia’s war against Ukraine remains another major source of uncertainty. Conversely, growth could turn out stronger than expected if energy markets adjust more quickly than currently expected. Planned increases in defence and infrastructure spending, reforms to enhance productivity and complete the Single Market, as well as euro area firms adopting new technologies, could also provide additional support to economic activity.

Food inflation decreased to 1.5% in June from 1.9% in May. This encompasses a decline in both unprocessed food inflation and processed food inflation. Unprocessed food inflation dropped to 3.1% in June from 4.0% in May, while processed food inflation decreased to 0.9% from 1.1% over the same period. Overall, the indirect effects of the recent energy price shock on food inflation appear to be limited thus far. Instead, current adverse weather conditions – summer heatwaves and the developing El Niño (a recurring climate pattern that alters weather around the world, increasing the likelihood of floods, droughts and heatwaves) – may pose upside risks to the inflation outlook.

Almost all underlying inflation indicators declined in June compared with the previous month (Chart 9). These indicators ranged between 2.1% and 2.5% in June. Most exclusion-based measures decreased by between 0.1 and 0.2 percentage points, except for HICP excluding energy and food, travel-related items, clothing and footwear (HICPXX), which was unchanged at 2.4%, and the weighted median, which ticked up. Regarding model-based indicators, the Persistent and Common Component of Inflation decreased to 2.1% in June, from 2.3% in May, while the Supercore indicator, which comprises HICP items sensitive to the business cycle, edged down to 2.5% from 2.6%. Domestic inflation, which comprises items with a low import content, also eased in June, to 3.2% from 3.4% in May. Overall, the latest readings of underlying inflation measures point to broadly stabilising underlying price pressures.

Pipeline pressures increased further at the early stages of the pricing chain but are still contained at the later stages (Chart 10). At the early stages of the pricing chain, energy producer price inflation increased by 1.5 percentage points in May, reaching 14.0% year on year. Similarly, energy import price inflation rose by 8.5 percentage points to 41.6% year on year. Despite being substantial, these increases were smaller than those recorded in April, when energy producer and import price inflation rose by 8.5 and 25.8 percentage points respectively. Regarding intermediate goods, both domestic producer price inflation and import price inflation increased in May, to 5.5% and 7.4% respectively. At the later stages of the pricing chain, pipeline pressures for non-food consumer goods showed little change, with domestic producer price inflation edging up to 2.1% and import price inflation remaining negative at ‑1.2%. Manufactured food producer price inflation also remained in negative territory (‑1.0%), as did import price inflation for manufactured food, which stood at ‑2.6% in May. As the latest available data predate the June 2026 US-Iran Memorandum of Understanding and the subsequent reescalation of the conflict, developments in producer and import prices remain subject to high uncertainty.

Most shorter-term inflation expectations among professional forecasters, monetary analysts and consumers decreased in June 2026, while longer-term survey-based inflation expectations remained unchanged. Short-term inflation expectations for 2026 stood at 2.7% in both the July 2026 ECB Survey of Monetary Analysts (SMA), down from 2.9% in the June 2026 SMA, and the third quarter of 2026 ECB Survey of Professional Forecasters (SPF), unchanged from the second quarter of 2026. The SMA and the SPF point towards a further decline in 2027, to 2.2% (Chart 12, panel a). Regarding short-term consumer inflation perceptions and expectations, the median rate of perceived inflation over the previous 12 months eased to 3.6% in the June 2026 ECB Consumer Expectations Survey (Chart 12, panel b) from 4.0% in May. Median expectations for inflation one year ahead and three years ahead declined to 3.0% and 2.8% respectively, from 3.5% and 2.9% in May. Median expectations for inflation five years ahead remained unchanged at 2.4%. Moving to the longer-term inflation expectations, the median rates in the SMA and the SPF were unchanged at 2% (Chart 12, panel a).

In foreign exchange markets, the euro depreciated against the US dollar but was more stable in trade-weighted terms (Chart 14). The nominal effective exchange rate of the euro – as measured against the currencies of 40 of the euro area’s most important trading partners – was largely stable over the review period (‑0.4%) but remained below pre-war levels. This relative stability reflected broadly counterbalancing movements against several of these currencies. The euro weakened against both the US dollar (‑1.1%) and Chinese renminbi (‑1.2%). The strength of the US dollar was underpinned primarily by a shift in market expectations towards a tightening of monetary policy by the Federal Reserve System, combined with resilient macroeconomic data in the United States. The euro also lost ground against the pound sterling (‑1.1%), the South Korean won (‑4.3%) and the Brazilian real (‑2.7%). By contrast, the euro appreciated against the Polish zloty (+1.8%) and the Hungarian forint (+2.5%).

Bank funding costs remained stable in May. The composite cost of debt financing for euro area banks remained unchanged at 1.6% in May (Chart 15). Following the outbreak of the war in the Middle East on 28 February, bank bond yields increased by around 70 basis points, before levelling off by the end of April and continuing to fluctuate at just below 3.5%. The composite deposit rate, which measures the marginal cost of bank deposit funding, remained stable at 0.9% in May. Interest rates on time deposits increased slightly, while rates on overnight deposits, savings accounts and interbank rates were unchanged.

Banks’ access to funding deteriorated slightly further, while risks to credit quality had a tightening impact on credit standards and those related to climate considerations had an easing impact. According to the responses of banks to the ad hoc questions in the survey, in the second quarter of 2026 the ease with which banks were able to access debt securities, money markets and retail funding deteriorated further, although only slightly, while it remained broadly unchanged for securitisations. Over the next three months, banks expect access to debt securities, retail and money market funding to continue deteriorating, and to remain unchanged for securitisations. Banks reported a net tightening impact of non-performing loan ratios and other credit quality indicators on their credit standards for loans to firms and consumer credit, whereas this had little effect on credit standards for housing loans. Banks indicated that higher risk perceptions and lower risk tolerance and, to a much smaller extent, pressure stemming from supervisory or regulatory requirements and costs related to balance sheet clean-up operations had contributed to the net tightening. Credit standards tightened most in sectors like automotive and energy-intensive manufacturing. For the third quarter of 2026, euro area banks expect credit quality to have a further tightening impact on their credit standards for loans to firms and for consumer credit. Banks reported lower or broadly unchanged loan demand across most economic sectors. For loans to green firms and firms making progress in their green transition, euro area banks reported a net easing impact of climate change on credit standards and a positive impact on loan demand over the past twelve months, compared with a tightening impact on credit standards and a small net decrease in loan demand for high-emitting firms without credible climate transition plans. For buildings with current or targeted good or high energy performance, banks reported a climate-related net easing impact on credit standards and a positive impact on housing loan demand, while indicating tighter credit standards and a negative impact on loan demand for buildings with persistently low energy performance.

A deeper and more integrated venture capital (VC) market could help the EU finance innovative firms, support productivity growth and retain more value from its innovation ecosystem. This box shows that Europe’s VC challenges reflect gaps in later-stage financing, a relatively narrow institutional investor base and limited cross-border investment within the EU. It also highlights the productivity potential of VC-backed firms, underscoring the case for policy action, in line with the recommendations of the Kukies-Noyer report (2026).