Monthly economic update: October 2026

Every month, our Chief Economist, George Lagarias, and Chief Investment Officer, Ben Seager-Scott, examine the forces shaping the global economy and financial markets. Their analysis cuts through the headlines to explore where growth is proving resilient, where risks are building and what business leaders should be watching next.

Top insights this month

• Headline corporate earnings paint a robust economic picture, but another jobless recovery seems underway.
• The OECD and forecasters have reported a resilient global economy, but with rising risks.
• Financial markets, responding to higher inflation and worries over debt, have sharply escalated longer-term borrowing costs for countries and businesses.

Corporate earnings are strong, but possibly capped

U.S. corporate profits for Q2 surpassed projections (+27% year-on-year), and Q3 projections show similar numbers. When interviewed, C-suite executives revealed that the AI investment super-cycle is the dominant story. As estimated 70% of large companies have adopted AI. However, supply constraints are reportedly growing (labour, AI, geopolitics and infrastructure). Inflation pressures have risen but pricing power has not kept pace, so companies are very conservative about hiring, especially in junior positions, to improve or maintain their margins. Meanwhile, tariff refunds have helped lift margins and offset rising costs. Companies report that consumption remains steady but not expanding, at the pace this level of economic growth would usually suggest.

Our take: overall growth is concentrated. The economy is experiencing an AI- and defence-led capital expenditure expansion running into supply limits and delivered with minimal hiring. The weak links are consumer-facing margins and how much of Q2's earnings strength was flattered by refunds. While earnings have been good, the case for them continuing to do so is getting more difficult. As inflation rises, challenges to margins and profits will also increase.

Does economic resilience have limits?

The latest economic releases in September and updated forecasts from major economic institutions suggest that the global economy remains fairly resilient despite the double shocks of the Trade War and the Iran-U.S. war. Spearheaded by U.S. economic growth (est 2.2% for 2026 average forecast), the wider economic outlook has in fact improved. Economists surveyed by Bloomberg now also think that European economies will fare better than previously thought: UK GDP growth for 2026 has risen from 1% to 1.2% and European growth from 0.6% to 0.9%. Inflation expectations remain between 2.9% and 3.4% for this year across the board, but next year is seen as one of more subdued prices.

Our take: things are too event driven. The U.S. economy is performing well and European economies have managed to avoid recession. Taking into account growth, however, businesses should also be mindful of the non-linear risks that are attached to the forecasts. Presently, most economic projections come with a low level of confidence, as they are dependent largely on two factors: AI-related capital expenditure and developments in the Middle East. Employment conditions are looser and inflation pressures are building up. Trade policy uncertainties are putting more question marks on the economic outlook. A possible slowdown, due to a bottleneck in tech spending or protracted disturbance in the Persian Gulf, could significantly exacerbate the economic outlook. The problem comes from the lack of safety nets. Elevated inflation reduces the possible scope of monetary policy to help with a “growth accident” and higher borrowing costs restrict the governments’ ability to help with pro-cyclical fiscal policies.

Higher borrowing costs

September saw a sharp rise in borrowing costs (bond yields) across the board in developed economies, especially long-term borrowing costs. U.S. long-term borrowing costs are near 20-year highs (5.22%) and spilled over to the rest of developed markets. The United States-driven whiplash also spilled over to the UK and Europe, with markets pricing in two more hikes in the United States, four in the UK and three in the EU by mid-2027. Additionally, worries about the debt build up and rising servicing costs, as well as potentially runaway inflation, are also feeding into higher long-term rates. High costs are causing problems everywhere: from simple mortgage applications (house affordability has dropped significantly), to government budgets and, eventually, consumption. While there are two types of paradigms: one where borrowing costs are rising, but they are manageable, and one where they are rising faster and can have wider systemic implications.

Our take: it’s a problem, not a crisis. We feel we are in the first, rather than the second paradigm. While the problem is real, we are likely in the mature part of the debt cycle, we don’t see an entrance into the next stage, the default or debasement. Part of the reason why borrowing costs rose was a more hawkish (aggressive on interest rates) U.S. Federal Reserve than originally priced in. Rising costs can be attributed to specific events. One, financial markets considered Kevin Warsh, the new Fed Chair, to be close to the White House and to aggressively push for lower rates. When the opposite proved true, borrowing costs rose to account for higher rates. Two, higher inflation, mostly linked to the Hormuz closure. Three, rising Japanese interest rates, which reduce demand for U.S. Treasuries. Data suggest an 11% reduction of Treasury holdings by Japan since February, even as the American government increases the supply of its bonds. Four, increased corporate credit issuance, which could be reducing demand for government debt. Over time, markets tend to adapt to these sorts of events. High debt servicing cost burdens remain, however, and inflation could last, so we would not necessarily see the benchmark U.S. 10-year drop to below 4% any time soon, but we also don’t see the hallmarks of a crisis (credit stoppage, sell-offs, defaults, banking issues, etc).

[Original sources/references]