Iran war continues to cloud global economy's outlook

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The outlook for the global economy grew more uncertain this week as tensions flared between the US and Iran.

The International Monetary Fund underscored the lingering risks for growth and inflation from the conflict in the Middle East, and Bloomberg Economics warned elevated interest rates are here to stay.

Meanwhile, a rapid expansion in Japan’s bank lending suggests the central bank has room to keep raising rates. And in the US, high borrowing costs continue to weigh on the housing market, one of the sectors most sensitive to interest rates.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy, markets and geopolitics:

World

The IMF left its global growth forecast largely unchanged for this year, saying that the boom in artificial intelligence helped offset the fallout from the conflict in the Middle East. The fund expects growth of 3% in 2026, slightly down from the 3.1% predicted in April and a slowdown from the 3.5% average recorded over the previous two years. But the IMF cautioned that risks are “still tilted to the downside.”

New Zealand’s central bank raised interest rates. Alongside Peru, Egypt, Serbia, Malaysia, Poland and Romania kept rates unchanged. Israel’s central bank cut interest rates.

The repercussions for global monetary policy of Donald Trump’s war against Iran are here to stay. The path for central bank interest rates around the world has now shifted higher for years to come, according to Bloomberg Economics.

US

Sales of previously owned US homes slipped back in June, dragged down by stubbornly high mortgage rates that have kept the housing market stuck in a yearslong slump. Contract closings fell 2.4% to an annualized rate of 4.09 million last month, according to data from the National Association of Realtors.

Economists say the US is seeing a second wave in the business formation boom that started in the Covid-19 lockdowns, when worried and laid-off workers rushed to start their own businesses. Only this wave appears closely correlated with AI’s growth, economists say, with the strongest gains in sectors amenable to AI usage, such as professional services.

The US trade deficit widened in May as a broad-based increase in imports and a decline in exports propelled the gap to the most in more than a year. Imports rose 3.3% to the highest level since March 2025, in the lead up to President Donald Trump’s sweeping tariffs announced the following month.

Europe

The Bank of France raised its short-term growth estimate as activity improved in all sectors in June, indicating the economy will safely avoid a recession. The central bank said a combination of its monthly business survey and recent hard data show output rose 0.2% in the second quarter. It previously predicted stagnation.

German factory orders rebounded, encouraging news as the effect of the conflict in the Middle East on Europe’s biggest economy begins to fade. The rise was due to transport equipment including for the military, likely reflecting Germany’s upgrade of its armed forces.

Andy Burnham faces a £100 billion ($134 billion) challenge if he wants to put Britain’s public finances on a sustainable path, the government’s fiscal watchdog warned. In its annual assessment of the 50-year outlook, the Office for Budget Responsibility said that simply maintaining the national debt at its current level of 95% of GDP would require tax rises and spending cuts “equivalent to total onshore corporation tax receipts,” which it projects will be £101.4 billion this year.

Asia

Japan’s corporate goods prices picked up in June to the fastest pace since early 2023, adding to evidence of rising inflationary pressures that support the case for the Bank of Japan to keep raising interest rates. The figure adds to a streak of hefty readings after monthly prices rose in April by the most in 12 years and continued to climb in May shortly following the breakout of the war in Iran.

China’s reflationary momentum showed signs of stalling in June, a reminder that the outlook for domestic prices is fragile as the economy emerges from deflation after an easing of tensions over Iran led to a pullback in commodity costs. Consumer inflation and the core gauge of prices both slowed more than expected from a year earlier, according to data released by the National Bureau of Statistics.

Japan’s bank lending expanded at the fastest pace since the Covid pandemic, suggesting credit is still accessible and the Bank of Japan has room to keep raising interest rates. The figures reinforce the BOJ’s assessment that financial conditions remain accommodative even after Governor Kazuo Ueda’s board raised its benchmark interest rate last month to the highest since 1995.

Emerging Markets

Mexico’s inflation slowed much more than expected in June to the slowest pace since 2020, giving the central bank more flexibility as policymakers assess whether the decline in price pressures can be sustained. Consumer price increases eased to 3.37% compared with the same month last year, the national statics institute reported.

Higher prices for owner-occupied housing, potatoes and other tubers, and avocados drove headline inflation higher in June, while falling prices for tomatoes, eggs, and serrano and poblano peppers helped offset some of the increase.

Peru’s central bank held its key interest rate at 4.25% for a tenth straight month, betting that an uptick in inflation will prove temporary. The Andean nation has had one of the lowest inflation rates in emerging markets in recent years.

Chile’s monthly inflation was unchanged last month, surprising analysts who had expected a drop in fuel costs and subdued activity to help cause a decline in consumer prices. Annual inflation sped up to 4.3%, above the 3% target and the highest since September, the national statistics agency said.