General Economic Overview – Quarter 3 2026
The quarter began with a sense of relief as the memorandum of understanding signed by the US and Iran in June had brought oil prices back to pre-conflict levels and investors were hopeful that the Strait of Hormuz would soon reopen. That hope proved short-lived as renewed strikes in early July reversed the fall in oil prices and, despite numerous rounds of talks, shipping through the Strait remained a fraction of its pre-war level for most of the quarter. A further flare-up in early September pushed Brent crude back above $100 a barrel, and by late September it was more than 17% higher than at the start of the month. As the quarter closed Iran offered to reopen the Strait within a week in return for sanctions relief and an end to the US naval blockade, however the White House rejected the proposal and the standoff continues.
The energy shock has also become more complicated than a simple loss of crude oil supply. Refining capacity has been lost in the Middle East, Russian output has been reduced by drone attacks on its refineries and China has suspended most of its exports of refined products, which has pushed the price of diesel and other fuels up much faster than crude itself. These costs feed directly into transport, food and manufacturing, and they explain why central banks have become so concerned that higher energy prices will spread into the wider economy. In September the ECB, the Federal Reserve and the Bank of Japan all raised interest rates, and the Bank of England came very close to doing so. This is a marked change from the start of the year, when markets were expecting a gentle easing cycle across most developed economies.
Bond markets have taken the brunt of this shift in interest rate expectations with government bond yields rising across the world. The US 10-year treasury yield rose above 5% to its highest level since 2007 before reaching its highest level since 2002 at the start of October. The Japanese 10-year yield appreciated to its highest level since 1996 with the UK 30-year gilt yields at their highest since 1998.
Focusing further on the US, the quarter saw the US celebrate 250 years since the declaration of independence with September also seeing the US national debt crossing the $40 trillion level. This level of debt equates to circa $117k of debt per US citizen (or circa $361k per US taxpayer). Putting this figure further into context, in order to incur $40 trillion of debt it would require the spending of circa $438m per day since the declaration signing on the 4th of July 1776 to the end of the third quarter of 2026. This increased debt burden raises questions on the ability of the US to service this debt (which is currently greater than defence spending), especially with the expected trajectory of interest rates at the Fed further putting pressure on yields.
Although inflation is one factor that has led to yield increases in the quarter, the reason does go beyond inflation as strong economic growth, record borrowing by technology companies to fund the AI build-out and concerns about government debt levels have all pushed yields higher, although the global economy has proved remarkably resilient. Energy now accounts for a much smaller share of household budgets and economic output than it did in the 1970s and 1980s, and this looks set to be the first major energy shock that has not led to a recession. Business surveys in the US are at their strongest for several years and corporate profits continue to grow strongly.
However, China remains the weak spot, as domestic demand continues to deteriorate and policymakers have so far resisted a large stimulus package. Elsewhere, growth forecasts for Europe have even been nudged higher. The question for the final quarter of the year is whether economies can continue to absorb higher energy costs and tighter monetary policy at the same time. In addition, the outcome in the Middle East will be the decisive factor, and a credible agreement to reopen the Strait of Hormuz would change the outlook for inflation, interest rates and markets very quickly.
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