Approaching the final quarter of 2026, the global economy faces growing geoeconomic headwinds, according to a research note from Forvis Mazars. The Middle East energy crisis and US trade wars are challenging growth, while rising inflation is adding stress to debt markets. The US economy, propelled mainly by tech-related spending, continues to outperform most other developed markets, while Europe and the UK are lagging behind and risks are building in the background.
The firm notes that September economic releases and updated forecasts from major institutions suggest the global economy remains fairly resilient despite the double shocks of the trade war and the Iran-US war. US growth is estimated at 2.2% for 2026 on average forecast. Economists surveyed by Bloomberg now expect UK GDP growth for 2026 to be 1.2%, up from 1%, and European growth to be 0.9%, up from 0.6%.
Inflation expectations for this year remain between 2.9% and 3.4% across the board, although next year is expected to see more subdued prices. US corporate profits for the second quarter surpassed projections, rising 27% year-on-year, and third-quarter projections show similar numbers. According to the note, C-suite executives identified AI investment as the dominant story, with 70% of large companies reportedly having adopted AI.
Supply constraints are growing in labour, AI, geopolitics and infrastructure. Inflation pressures have risen, but pricing power has not kept pace, leading companies to be very conservative about hiring, especially for junior positions, in order to protect margins. Tariff refunds have helped lift margins and offset rising costs, while consumption remains steady but is not expanding at the pace that this level of growth would usually suggest.
Forvis Mazars expects inflation to persist for the time being, describing the backdrop as deteriorating in a non-linear way. As oil reserves are depleted and refineries are taken offline due to the geopolitical threats in Ukraine and Iran, gasoline and diesel prices have been climbing. The firm expects inflation to rise before it falls, possibly even beyond expectations by year-end.
Absent those threats, the world could face an oil supply glut that could lead to a rapid de-escalation in prices. The persistent disruption in oil supply, linked to the half-year closure of the Strait of Hormuz and attacks on Gulf infrastructure, has intensified problems in refining, which became more evident in August. Refining capacity was already constrained by refinery closures in 2020 and by Ukraine's attacks on Russia's refining facilities.
Refiners have been drawing on reserves for some time, but they are now operating at or beyond capacity, and reserves of products such as gasoline are running low, making it harder to deliver oil products such as gasoline, diesel, jet fuel and vessel bunkers at low prices. Against a backdrop of US-led global economic growth, debt markets are showing signs of significant stress. Accelerating global debt interest payments and a series of events have increased concerns over the ability of G7 governments to repay their debts in real, non-inflationary terms.
Rising inflation expectations, mostly due to fuel shortages, are forcing central banks to reverse course and raise interest rates instead of lowering them. Japan, which the note says is experiencing its highest interest rate since 1995, has seen some Japanese investors shift preferences away from US Treasuries toward Japanese government bonds, with their US Treasury demand reduced by 10% since February. Three events, according to the note, catalysed increased volatility.
First, US Treasury Secretary Scott Bessent's attempts to bring down long-term borrowing costs failed to hold, highlighting the vulnerability of the US government. After an initial rally, markets shrugged off the attempt to influence the bond market, with $6bn of buying on a $32tn market. Second, on 23 September the US Treasury sold $70bn of 5-year bonds at a high yield of 5.033%, against an original issuance level of 5.002%, a difference of 3.1 basis points.
This was five times the six-auction average of 0.6 basis points and was reported as the second-largest tail on record for this bond. The bid-to-cover ratio was 2.21x, against a 2.33x average and the weakest since December 2018. US longer-term yields rose sharply, spilling over to the rest of the world.
Third, French Prime Minister Lecornu's 2027 budget contained 43bn euros of new savings and revenue measures, or 54bn euros including earlier measures, aimed at cutting the deficit from 5.4% to 5.0% of GDP. Markets were unconvinced by the measures, which they viewed as optimistic, and by the ability of a fractured parliament to pass them before the 2027 presidential election. The French-German 10-year spread widened to roughly 152 basis points at the time of writing, its highest since 2011, and Moody's is reviewing its outlook this month.
Forvis Mazars considers a financial crisis unlikely to be the base case. In its view, US yields of 5.3% should be a natural consequence of high nominal growth, given real year-on-year growth of 2.2%, consumer inflation of 3.4% and about half a percentage point from the GDP deflator. The firm notes that the US is the largest debt market in the world, so developments in New York usually spill over globally.
When stress reaches Europe, it highlights the problem of high debt and the inability of eurozone countries to print their way out of trouble, given they lack monetary sovereignty. France, with debt at 117% of GDP and persistently high deficits, along with political reluctance to address them, is described as a natural target. The note adds that the first problem is high US yields driven by an inflationary boom, while the second is French borrowing, with the former highlighting the latter.
It does not, in the firm's view, signal the end of the debt cycle that began in 1971. Despite certain legal issues, Forvis Mazars considers it likely that the European Central Bank will intervene, and possibly the Fed as well, though not simply because governments complain about high borrowing costs. Intervention is more likely when market stresses are seen to threaten financial stability.
The firm warns, however, that executives should not mistake what is likely to be a respite for a reprieve. France is considered one of the riskier borrowers, and 2027 could see markets severely test its resilience. US debt interest payments, at 4.2% of GDP, are described as essentially two-thirds of annual nominal GDP growth.
Greece and Italy, even if they remain on a strict fiscal path, are also under market pressure, as is the UK, whose budget announcement later in the month is being closely watched. On the global economy, the note describes an AI- and defence-led capital expenditure expansion running into supply limits, delivered with minimal hiring. The weak links are consumer-facing margins and the extent to which refunds flattered second-quarter earnings.
Forvis Mazars notes that most economic projections carry a low level of confidence, as they depend largely on AI-related capital expenditure and developments in the Middle East. Employment conditions are looser, inflation pressures are building, and trade policy uncertainty adds question marks to the outlook. A slowdown caused by a bottleneck in tech spending or a protracted disturbance in the Persian Gulf could significantly worsen the outlook.
Elevated inflation limits the scope of monetary policy to respond to a growth shock, and higher borrowing costs restrict governments' ability to deploy pro-cyclical fiscal policy. On monetary policy, central banks are expected to tighten interest rates modestly until mid-2027, but not to undergo a full rate-hiking cycle. The note argues that the US Federal Reserve is moving away from a long-standing framework of market accommodation toward a regime in which it is genuinely committed to its anti-inflation mandate.
A more hawkish Fed means higher short-term interest rates than in the past, particularly if the government continues to favour short-term borrowing. However, the firm sees a positive side: global debt markets may see credibility restored to longer-dated government bonds, and an inflation-fighting Fed could restrain long-term debt costs from getting out of hand. For the financial sector, the firm sees the more hawkish central bank stance as a tailwind for most institutions.
European banks have beaten earnings expectations for 16 consecutive quarters, and consensus forecasts compiled by Bloomberg Intelligence point to earnings growth of 14% in 2026 and 13% in 2027, making financials the largest contributor to European earnings growth. Cash returns to shareholders are expected to reach a record 228bn euros this year. UK financials are expected to grow earnings by 8% in 2026, and Japanese banks by mid-teens.
The principal caveat is duration risk, which has grown since the last quarter. The jump in US long-term yields after the weak 5-year auction, along with the widening of French spreads, undermines the scenario in which falling rates would gradually erode unrealised losses on bank and insurer bond portfolios. According to ECB data, such unrealised losses peaked at 124bn euros in Europe.
European banks now trade at a premium to their long-term average price-to-earnings ratio, at around 10.8x forward earnings, which Forvis Mazars says means the sector is no longer cheap. The firm's bottom line is that the base case for the financial sector remains constructive, supported by margins in a higher-for-longer environment, benign asset quality, solid cost control and record shareholder returns. The risks largely mirror those of the wider economy, including geopolitics, trade policy, the rate path and a softening labour market.
The asymmetry lies in duration, and a sustained rise in yields is the single variable that could turn the sector's otherwise improving outlook.
Source: forvismazars.com