Al-Watani: Global economy maintains its resilience despite the repercussions of the war
A report issued by National Bank of Kuwait stated that global economic growth remained robust, despite headwinds associated with the war in the Middle East, including rising energy prices, supply chain disruptions, heightened uncertainty, and elevated inflation rates. This resilience was supported by stable labor markets and strong demand driven by artificial intelligence and technology.
The report noted that Federal Reserve Chair Jerome Powell appeared more transparent during the recent Jackson Hole symposium, marking a shift from his previous communication style, which was characterized by relative ambiguity. He emphasized the need for further efforts to bring down inflation.
Yields on long-term bonds have risen, reflecting concerns about the large fiscal deficit (approximately 6% of GDP), continued strong economic growth, and rising inflation. The Trump administration is facing pressure to take action ahead of the midterm elections scheduled for November, amid estimates suggesting that Republicans could lose, at the very least, their majority in the House of Representatives.
In an effort to lower yields, the Treasury Department is increasing its purchases of long-term government bonds, following a rare and coordinated intervention in the foreign exchange market to support the declining yen and curb further sales of U.S. Treasury bonds by Japan, the largest foreign holder of these securities. However, these measures do not address structural issues, and their impact is likely to be very limited in the medium to long term.
Meanwhile, underlying domestic demand remains strong. Final sales to domestic purchasers in the private sector rose at an annual rate of 4.2% in the second quarter, the highest rate in over three years, and are expected to remain above 4% in the third quarter, supported by robust household spending and investments linked to artificial intelligence. Nevertheless, inflation (3.4% year-on-year in July, and 2.5% for core inflation) remains significantly above the Federal Reserve’s target for the sixth consecutive year.
Despite fluctuations in monthly employment figures, the overall trend has improved compared to the previous year. The average number of jobs added over the six months ending in August was approximately 107,000 per month, the highest level in two years, while the unemployment rate remained stable at a moderate 4.1%.
The persistence of inflation above target, the stability of the labor market, and Powell’s recent hawkish remarks have raised the probability of a 25-basis-point interest rate hike on September 16 to around 60%.
However, the August inflation report will be the decisive factor in guiding the Federal Open Market Committee’s decision. If Powell votes in favor of raising interest rates, it would serve as the first strong signal of his readiness to confront growing political pressure from the Trump administration, thereby helping to preserve the Federal Reserve’s independence.
Eurozone Economy Maintains Some Flexibility
In Europe, the Eurozone economy has maintained a degree of flexibility, with GDP growing by 0.6% quarter-on-quarter in the second quarter, surpassing expectations, while the unemployment rate remained close to its historical low of 6.4%. Purchasing Managers’ Index (PMI) readings also improved in July and August, with the composite index reaching its highest level since November 2025, bolstering positive growth expectations for the third quarter.
Inflation remains the primary challenge for policymakers, as the consumer price index rose to 3.3% year-on-year in August (compared to around 1.9% before the war in February), driven mainly by a 14% increase in energy costs. In contrast, core inflation remained stable at 2.4%, a level similar to that recorded in February. It is worth noting that there is currently no evidence of secondary inflationary effects stemming from the energy shock, a view also held by European Central Bank President Christine Lagarde.
Although the ECB kept interest rates unchanged at its July meeting after raising them by 25 basis points in June, officials have stressed that uncertainty remains high. Despite its assessment of secondary inflationary pressures, it is highly likely that the ECB will raise interest rates again on September 10, based on its evaluation of upside risks to inflation, its core mandate of maintaining price stability, and possibly due to continued robust economic growth.
Furthermore, the recent surge in European oil and gas prices, which easily exceeded their August averages, will keep the ECB cautious about future inflation risks.
United Kingdom: Solid Growth in the First Half
Turning to the United Kingdom, where the new British Prime Minister, Keir Starmer, intends to address the cost-of-living crisis and implement initiatives aimed at improving economic fairness, achieving a sustainable economic recovery faces familiar challenges. The Chancellor is scheduled to present the autumn budget next month, but the government’s ability to launch growth-supportive policies remains constrained by ongoing fiscal challenges.
Additionally, yields on long-dated UK government bonds have risen sharply, with the 30-year bond yield approaching its highest level since 1998, posing an additional obstacle to public finance consolidation efforts.
Nevertheless, economic growth continued to show resilience during the second quarter, registering 0.4% quarter-on-quarter after 0.6% in the first quarter, supported by strength in the manufacturing sector and consumer spending.
Recent data have been mixed: retail sales fell in July and employment weakness persisted, while the August Purchasing Managers’ Index (PMI) reading was positive. Due primarily to the re-pricing of the regulated cap on household energy prices, inflation rose to 2.9% in July, up from around 2.6% in June, marking its lowest level in 15 months.
The Bank of England expects inflation to rise to 3.2% during the fourth quarter. Although futures markets currently price in an approximately 80% probability of at least a 25-basis-point rate hike before the end of 2026, this is not certain, particularly given the stance of Bank of England Governor Andrew Bailey, who believes that secondary inflationary effects remain limited.
Given rising inflation expectations, a weak labor market, limited fiscal support, and the possibility of tighter monetary policy, short-term growth prospects appear relatively weak.
