Quarterly economics update for the financial services sector: Q2 2026

The fog of war on growth and inflation prospects 

The conflict in Iran has led to the closing of the Straits of Hormuz, an important global energy chokepoint, since the end of February, resulting in a daily oil deficit of about 2.5 million oil barrels. Brent oil prices rose as much as 94% since the beginning of the year, from $60 to $118 (+72% as of 1st April, at $103). Similarly, European gas prices rose 74% since January, from 28 Euros / megawatt hours to 50, the move has led to a wide financial market correction.  

Meanwhile, after a U.S. Supreme Court decision that cancelled two-thirds of “Liberation Day” tariffs, the White House imposed so-called “Section 122”, an emergency 6-month 10% tariffs (with a threat of 15%), until the 24 July, by which time Congressional approval would be necessary to continue. Moving towards a more permanent solution, on 11 March, the U.S. Treasury launched “Section 301” investigations into 16 economies, including China, the EU, Japan, South Korea, Vietnam and India, over structural excess capacity and production in manufacturing sectors. The following day, it initiated a separate set of probes into 60 economies, including virtually all major U.S. trade partners, over their alleged failure to ban imports produced with forced labour.  

Over recent months, and particularly recent weeks, private credit-related negative newsflow has been multiplying at an exponential rate. From the bankruptcies of Tricolor and First Brands last September, to Jamie Dimon’s “cockroaches” warning in October and through to the temporary suspension of redemptions by Blue Owl funds in November. A significant number of companies, particularly in software, are reliant upon private credit financing. Following the widespread adoption of artificial intelligence, fears have intensified that technology firms may face severe pressures. From February onwards, the newsflow has become more alarming. Blue Owl has permanently ceased redemptions and Market Financial Solutions, a Private Credit fund specialising in real estate lending, has collapsed into administration. In March, Blackstone, BlackRock, Morgan Stanley and Cliffwater all imposed redemption gates. JP Morgan has effectively blocked private lending to software companies and has marked down the valuations of private portfolios. The situation has been compounded by the conflict in Iran, which has heightened near-term inflation expectations and pushed borrowing rates higher. 

The global economic outlook has been pressured after a month during which the Straits of Hormuz have remained closed. Historic data, as recent as February, is now less important, as economists are looking for data from March and beyond, which would incorporate the Iran disruption. Inflation conditions are expected to deteriorate across the board, as higher energy prices begin to affect supply chains. Before the war, Europe had a more benign inflation outlook compared to the U.S., as America’s trade war had a deflationary effect on European economies, due to lower demand, while increasing the prices for goods sold in the United States. However, Europe is much more exposed to disruptions in energy prices than the U.S. projections suggest 2.2% inflation in Europe for 2026 and 3% in the U.S., up 0.4% and 0.2% from estimates 3 months ago. While inflation projections move in parallel, global gross domestic product (GDP) growth conditions are expected to diverge.  

For most of the world, economic growth is expected to modestly slow down. However, the U.S. despite a housing drag on growth, benefits the most from high investment rates, especially in the technology sector, as well as experiencing short-term gains from trade protectionism, allowing it to outperform many of its competitors at least in the next few months. Consensus now expects the U.S. GDP to grow by 2.3% for 2026, up from a 2% projection previously. Conversely, European growth is projected to slow down, with GDP rising by 1.1%, slightly below a previous 1.2% estimate. Unemployment pressures have been intensifying, mostly as a result of weak economic growth but also because AI productivity gains, this is more felt in the U.S. and the UK. As a result of rising inflationary pressures, central banks have not been discussing rate cuts but remain equally silent about potential rate hikes.   

Outlook 

On Iran 

We see the Iran War as a major disruption, but our base case is that it is mid-term a manageable one, well in line with our 3D themes (Debt, Disruption, Deregulation) and a world that is experiencing significant geopolitical and geoeconomic reorientation. After a month of hostilities, we have reached a point where we expect repercussions, by and large, to last until the end of the year before dissipating. Longer-term consequences will depend on how long the Straits will remain closed. A Hormuz closure beyond 2 to 3 months could worsen the consequences for 2026 and spill over into 2027. In our base case, we see higher U.S. inflation upside (3% to 5.5% versus a previous view of 2.5% to 4%) and higher upside and bigger trading range for oil prices, $75-$100 (versus a previous view of $60-$70) on average until the year’s end. We expect European and UK inflation to range between 2.5% to 4.5% at the end of the year. The investment market correction is, up to this point, within norms. The biggest risk is that short-term inflation pressures keep borrowing costs high and are becoming an obstacle for central banks to react quickly in case of serious financial stress.  

On tariffs

The U.S. Supreme Court’s decision ultimately reaffirms the rule of law in the U.S.. We expect policy to remain fluid, and uncertainty around existing trade treaties to persist for some time, but ultimately our view is that, regardless of the legal framework, average tariffs will remain high at least for the duration of this administration, and possibly beyond. Still, the Supreme Court of the United States ruling should remove some of the scepticism about flows into the dollar and U.S. assets, especially U.S. bonds, the bedrock of global portfolios. It is crucial to remember that the same Section 122 only allows the White House to impose tariffs for 150 days. Thus, mid-July, it will be up to Congress, just ahead of the Midterms and with no room left for primary challengers, to approve the continuation of the President’s tariffs, or approve Section 301 tariffs by then.  

On private credit

Private credit becoming a systemic risk capable of destabilising broader asset classes is not our central scenario; however, it warrants close monitoring. The market itself is not particularly large, $1.5 trillion (compared to $150 trillion for equities and roughly as much for fixed income), with approximately $100–$225 billion of assets considered at risk. As a proportion of total bank lending, exposure is estimated at roughly 7.5%–8.0% of aggregate loans. Nevertheless, given the opacity of interconnections with other markets, central banks must remain vigilant and be prepared to act swiftly should credit conditions begin to freeze or materially deteriorate. In context, we see this development as adding to the general risk and increasing the probability of conflating risks (trade war, rising debt, Iran and private credit).

On the global economy

The war in Iran has a clear inflationary effect on the global economy. This comes at a time of higher underlying inflationary pressures, especially in the U.S., due to the trade war. With U.S. tariffs presently running at 14.3% and pre-tariff inventories running out, companies were already incentivised to pass higher prices on to consumers. Against rising prices, the corporate backdrop was, by and large, healthy and AI’s effect on productivity, as well as sheer levels of capital investment, were already benefiting the U.S. and the world economy. Our scenario planning mostly depends on one un-forecastable factor: how long the Straits will remain closed for. Our base case suggests that the matter will likely be resolved fairly soon. However, we recognise both upside risks: a quick resolution, oil flowing freely and prices, which are also driven by trading activity, dropping quickly, as well as downside risks, where the closure drags on for months. In this, low but non-zero probability, the risks to the global economy would be exponentially worse. 

What this means for the financial sector  

Positive outlook 

European banks are experiencing a 5% revenue expansion driven by a net interest income recovery, stable fee and commission growth and mergers and acquisitions. Analysts expect strong growth in lending and net interest margins, driven by improved business lending trends and the ongoing advantage of a higher cash rate environment. The banking sector's outlook for 2026 is constructive, supported by a healthy financing pipeline and an improving Net Interest Margin recovery trajectory. An expected improvement in Net Interest Margins over the next six to nine months, led by a decline in the cost of deposits due to repricing, is contributing to bank performance. Loan growth momentum was set to strengthen from January 2026 onwards, driven by resilient economic conditions and robust domestic demand.  

Iran contingency 

If the war in Iran persists and expands, then the outlook for the sector would likely change. Presently, our base case is that incentives for the closure of the Straits are to be resolved quickly. We have a non-zero ~5% probability that the war persists and expands, causing global stagflation, as a scenario similar to 2022. In 2022, central banks were caught behind the curve and were forced to hike interest rates quickly to avoid runaway inflation. As a result, the bond market collapsed, which had a very negative effect on bank balance sheets and profitability. To be sure, European banks differed substantially from their global counterparts; their average liquidity coverage ratio exceeded 160% at end-2022, and around half of their high-quality liquid assets were held as cash and deposits with central banks. A relatively high share of deposits was covered by deposit guarantee schemes, reducing run risk. Still, unrealised losses on bonds constricted lending, further hurting profitability.  

The question remains, can this happen again. The U.S., unrealised losses are still about 50% from their peak, around the $300-400bn range. In Europe, unrealised losses peaked at 124bn Euros (ECB data), so we would expect them to sit on roughly half that number still. A 2022-rate hike race could have a significantly more adverse effect on bank balance sheets and profitability. Again, for us this is a tail-risk scenario. The base case is for healthy loan expansion, even in the face of a weaker economy.  

Private credit contingency  

Loans to nonbank financial institutions are a primary growth driver for the industry, with loans up 3% in early 2026 compared to a 1% increase in all other loans. Bank lending to private credit, which includes funds, business development companies, and collateralised loan obligations, has been a key growth driver, with balances rising a median 6% sequentially in the fourth quarter of 2025. 

We do not see huge risks from private credit in Europe. European banks have reported relatively low exposures to private credit, with even the largest players reporting figures in the double-digit billions, representing no more than 1% of total assets. 

A sharp increase of private credit defaults could harm loan growth, especially where banks have expanded too much into this high-margin sector, but only marginally. We would be more concerned about U.S. bank exposure and potential secondary effect spillovers to the wider global banking system, than we would be of direct European exposure. Still, this is an area that needs monitoring.  

While we feel that European banks are well enough capitalised to withstand one of two events (Iran or private credit blowout), we think that an ECB intervention may be considered if both scenarios materialise at the same time.