Trade War 3.0: a new, lasting tariff wall

With Section 122’s flat 10% tariff expiring on 24 July, the switch to Section 301 and Section 338 tariffs will send the US average import tariff back above 2025’s IEEPA-era level to 12.4%, up from a May low of 7.7%. And this time it should stick: Section 301 requires formal USTR investigations and is far harder to challenge in court. History shows these tariffs tend to outlive the administrations that impose them: China’s 2017 case is already in its second statutory review. On top of Section 301, the US will continue using Section 232 tariffs, concentrated on a few sectors – automotive, steel, aluminum, pharmaceuticals – while AI products remain largely shielded at below 5% thanks to a narrow scope of surtaxed electronic products and carve-outs for Taiwan and South Korea. So far, global trade flows have proven more resilient than feared: 2025 export losses came in at USD74bn, well below the USD134bn forecast, with USD 57bn expected in 2026 as frontloading, rerouting, shipment-timing shifts, and exemptions cushion the blow. But with the trade war 3.0 the real shift will be structural. Among the largest economies, China (+13pps to 35%), the UAE (+7pps to 22%), Brazil (+8pps to 20%) and Vietnam (+8pps to 15%) face the steepest tariff increases and now rank among the highest tariff levels overall. By contrast, the UK, South Africa, Taiwan, and the Philippines remain comparatively insulated, with tariffs holding stable at 4-7%, a divergence set to accelerate the supply-chain reallocation already underway. China’s US import share collapsed from 21% in 2016 to 13% in 2024 and 9% in 2025, while that of rerouting alternatives in ASEAN jumped from 7% to 14%.

The inflation punch of tariffs in the US is fading, but a second round is already warming up. With the H1 2025 tariff wave now largely passed through, the tariff drag on inflation should fade fast – reaching near zero in H2 2026 and bringing the full-year contribution down to +0.3pp. But the truce won’t last: Section 301 and Section 338 tariffs should push the effective rate to 12.4% by Q4 2026, reigniting tariff-related price pressure into 2027 (+0.4pp, peaking at +0.5pp annualized in Q2 2027), keeping core CPI sticky at +2.7% even as headline inflation cools to +2.2% on energy deflation. For corporates, the margin squeeze has largely passed: margins for tariffed-goods fell up to -5.5% versus a no-tariff counterfactual, peaking in Q3 2025 before recovering as pass-through advanced. But the recovery is uneven – manufacturers have rebounded, while retailers, wholesalers and transportation remain under pressure.

Section 301 is now the main event, but the trade war has plenty of extra time to play. Section 301 is becoming the administration’s tool of choice, driven by geopolitics, with Vietnam and Germany facing fresh investigations over Intellectual Property (IP) and pricing of pharmaceutical products, respectively. Section 338 will also become Trump’s new more reactive tool to use as a negotiations tool. Watch for NATO defense-spending disputes (e.g., Spain), Chinese rerouting through Asian supply chains and above all digital service taxes – a 100% DST-linked tariff on the EU would push its effective rate to 52% and cost-USD60bn in exports. Elsewhere, tariff relief to incentivize investment in constrained sectors (aluminum), bilateral deal-making resumes – India’s 18% interim rate still awaits finalization – while export controls, notably on AI models following the Anthropic Fable 5/Mythos 5 episode, could become a new lever mirroring weapons-export policy. Finally, USMCA’s shift to annual reviews through 2036 opens structural fault lines on automotive rules of origin, Chinese content via Mexican nearshoring and agricultural access.

View the complete research here.

The price of political fragility in Europe

With elections ahead in France, Spain, Greece, and Italy in 2027, political risk will be at the center of European government bond markets. Our high-frequency Political Fragility Index (PFI) shows that Europe is at a peak level of political fragility. Our PFI is built on polling data across four drivers – fragmentation, disaffection, polarization, and governability. The Netherlands and Belgium sit high on fragmentation (votes splintered across a rising number of smaller parties), while France tops the list on polarization (rising voting share for far-left, far-right, Eurosceptic, and populist parties). Germany and the UK show the sharpest increases in fragility since 2020, both suffering from weakening governability.

Sovereign risk premia (defined as asset swap spreads or ASW) have never been more sensitive to political fragility, and institutions matter more than the level of fragility. The effect of political fragility on risk premia is a one-way ratchet: once triggered, it stays in the equation even after the trigger fades. This link, latent under QE, is now structural, with sensitivity at a record high (+1 std. dev. in the PFI adds +53bps to Italy’s ASW). The risk premium is purely fiscal. Note that despite rising Eurosceptic votes, markets have priced out redenomination or euro breakup risk. Institutionally, majoritarian systems (UK and France) carry more political tail risk than their fundamentals imply for a given rating. This argues for a wider hedge around their electoral and budget calendar, while risk premia from consensus system issuers (e.g., Netherlands) tend to stay anchored through political noise.

To date, and since the end of QE in 2022, political fragility has resulted in an additional interest expense of around EUR98bn (partly paid and partly still to be paid), when we sum up Italy, France, Spain, Belgium, and the UK. On average, this represents an extra 3% of their annual debt-servicing costs, past, and future. This burden is concentrated in the UK (EUR41bn which represents roughly 2.8% of additional debt-service costs per annum over the maturity of the debt) and Italy (EUR41bn; 4.9%), followed by Spain (EUR14bn; 4.5%) and France (EUR11bn; 2.3%). In France’s case, most of this additional cost stems from the dissolution of parliament in 2024. Safe haven countries like Germany, the Netherlands and Austria show no structural fragility premium yet. Their shift from a negative to a positive ASW was mainly driven by a repricing of their fiscal fundamentals. However, given their underlying fragility this could change quickly. A structural fragility premium could add 1-2% to annual interest expenditure. Portugal and Greece were excluded, given their bailout-distorted financing conditions.

France’s presidential elections (18 April and 2 May 2027), followed by Italy’s general election due by 2027, are the next big rendezvous between political fragility and the bond market. Our PFI shows France’s sovereign premia are structurally sensitive to political fragility (+1 std. dev. adds +38bps to the ASW). This channel may keep pushing the OAT-Bund spread toward 90bps by year-end, with normalization contingent on a parliamentary majority in June 2027. In Italy, fragility is the single most sensitive channel in our sample (see supra) but it is currently dormant. Our baseline holds the BTP-Bund spread near 80bps, though a Eurosceptic turn on either flank, amplified by the proposed majoritarian electoral reform, is a fatter tail that could reawaken the redenomination premium France’s spread no longer carries.

Explore the complete findings here.

Super El Niño risk: more inflation in Asia, oversupply in Latin America yet little disruption in financial markets

• Take a deeper dive for the full anaysis here

The emerging 2026-27 El Niño has the potential to become the strongest climate event in more than a decade. While weather events are often viewed as operational risks, this one is more appropriately understood as a macroeconomic event with implications for inflation, trade flows, supply chains and corporate earnings. The IMF estimates that a typical El Niño raises global food prices by around 5% within a year, and the 1982-83 and 1997-98 events led to USD4.1trn and USD5.7trn in cumulative global income losses over the following five years.

El Niño creates an uneven commodity shock, with the greatest disruption concentrated in commodities produced in Asia while grains in Latin America – mainly Brazil and Argentina – could see oversupply from improved growing conditions. Southeast Asia, India and parts of West Africa face heightened risks of drought and agricultural disruption. At the same time, large parts of South America are likely to benefit from improved growing conditions, supporting grain and oilseed production. The result is a divergence across commodity markets, countries and sectors rather than a broad-based inflationary surge. The highest risks are in sugar, palm oil and rice, where drought, low inventories and potential export restrictions could drive price volatility. Cocoa and robusta coffee also face supply pressures, while soybeans, corn and arabica coffee are likely to face price declines on the back of favourable conditions.

For corporates, the implications extend well beyond agriculture. Food manufacturers may face renewed input-cost pressure from sugar, palm oil, rice and cocoa but could pass on higher prices. Consumer-goods companies operating in emerging markets may encounter renewed inflation sensitivity among lower-income consumers. For corporates involved in the trade of crops that will see a supply surge, especially in Latin America, higher production is not necessarily positive news as selling prices fall, storage capacity could overflow, and demand is inelastic (i.e. lower prices do not drive more volume). Governments in food-importing economies could respond with export restrictions, price controls or strategic stockpiling measures that amplify supply-chain disruption.

A super El Niño would transmit inflationary pressure in Asia primarily through food prices, with Indonesia the most affected (+2.3pp) and Malaysia and the Philippines the most insulated (+0.7pp). In Latin America, this picture is mixed, with Colombia, Peru and Brazil facing potential pressures. Central banks in the Philippines, Indonesia and India could be forced to hike further or delay easing into 2027, while Malaysia and Thailand would remain on hold. Export bans by major agricultural producers (India, Thailand, Vietnam) would ease domestic pressures but amplify inflation risks for importers, notably the Philippines and Indonesia. In Latin America, drought conditions in Northern Brazil and Colombia could push up inflation while Peru could face disruptions from coastal El Niño.

Super El Niño events normally do not matter much for broader financial markets. The S&P 500 has rallied strongly in every such episode, driven by the concurrent macro backdrop rather than the weather event itself. For emerging markets, food-importing economies like the Philippines and Indonesia show a tendency to underperform global benchmarks in the 12-18 months following an ONI peak (with the exception of 2015-2016). However, each event occurred in a radically different macro backdrop (i.e. Asian crisis, China slowdown, post-Covid inflation) so the signal is too weak and too confounded to be attributed to El Niño alone.

Take a deeper dive for the full analysis here

Cash at risk: Inventories are driving a new cycle of working capital strain

Go beyond the summary for the full analysis here.

The global cash conversion cycle (CCC) rose again in 2025 – and it is stuck at a high plateau. The global CCC – how long it takes for a unit of cash spent on operations to be converted into cash collected from sales – lengthened by a moderate half a day to above 67 days of turnover, some +3 days above its 10-year average and close to its 2023 high of 68. The past four years now run about +4 days longer than before 2020 (63): not a spike, but a structurally higher plateau that shows no sign of easing.

Asia stands out with the longest cash conversion cycle. The cash conversion cycle lengthened in Western Europe (+1.8 day), the Middle East & Africa (+1.6 days), Asia (+1.2 days) and South America (+1 days), but shortened in North America (-2.2 days) and Eastern Europe (-1.7 days). Asia carries the longest cycle at 70 days, driven by a persistent commercial gap: long customer terms (59 days of Days Sales Outstanding) that a low Days Payable Outstanding (44 days) cannot fully offset. It is followed by a tightly clustered Western Europe, North America and South America (all 63 days), while Eastern Europe and the Middle East & Africa run the leanest.

The real driver is inventories in a world shaped by geoeconomics. Days Inventory Outstanding (DIO) now explains almost 80% of the CCC level and more than 80% of its change over 2014-2025 – up from 68% of the variation before 2021 to 90% since. This reflects a fundamental change in corporate behaviour: Companies are moving away from “just-in-time“ efficiency toward “just-in-case“ resilience, with larger inventories now a strategic hedge against geopolitical uncertainty, supply-chain disruptions and trade fragmentation. In other words, supply chains are no longer optimized only for cost; they are increasingly designed for security, resilience and optionality.

Sector global dispersion is extreme: 25% of firms sit below 43 days and 25% above 107, suggesting an emerging bifurcation between strategic sectors and the rest of the economy. Twelve of 20 sectors extended their cash conversion cycle – automotive suppliers (+4 days) and paper, metals and textiles (+3 days each) leading – while eight compressed, notably transport equipment (-6 days), computers & telecom (-4 days) and energy (-3 days). The sectoral divergence in working-capital dynamics reflects the uneven impact of securonomics. Industries most exposed to supply-chain fragmentation – particularly upstream manufacturing and industrial inputs – have increased inventory buffers, resulting in structurally higher working-capital requirements. By contrast, several strategically important sectors, including energy, transport equipment and digital infrastructure, have shortened their cash conversion cycles despite heightened geopolitical uncertainty. This likely reflects a combination of stronger pricing power, robust cash generation, supportive industrial policies and sustained structural demand. Strategic relevance, therefore, does not necessarily translate into higher inventory intensity; it increasingly provides the financial flexibility and operational leverage needed to strengthen resilience while preserving working-capital efficiency.

For 2026 we expect a contained rise in CCC. First, the US-Iran conflict is expected to follow a “lighter” version of the 2022 supply-chain shock template: faint in listed firms‘ financials in H1 2026, as flows take time to normalize, and more tangible in H2 as the disruption feeds through supply chains with a lag. As a result, we do not expect a full replication of the 2022 surge (+5 days of CCC, of which 81% came from inventories). The shock will not land evenly across sectors. Electronics, pharmaceuticals, textiles, automotive suppliers, metals and paper face the most direct pressure: already inventory heavy and running elevated cycles, they have the least room to absorb a further DIO rise without tipping their financing needs into distress territory. Construction and machinery & equipment carry the largest absolute cycles (~103 days) and are unlikely to escape a broad inventory rebuild. Second, the shock should be partly offset by continued private-sector spending on AI infrastructure and data centers, which supports computers & telecoms and software & IT, keeping a meaningful share of the economy on a compressing or at worst flat trajectory. On these assumptions, measures to reassess energy security, strategic inventories and supply-chain resilience, together with the direct fallout of the conflict, should push global DIO up by around +2 days. Given our estimated elasticity, each additional day of DIO translates into +1.16 days of CCC globally.

Take a deeper dive for the full analysis here.

Half-Time Outlook 2026-27: AI Holds the Score, Growth Slows to +2.5%

Link to the publication & the slides

Yellow card only: As the Middle East conflict de-escalates – despite temporary flare-ups – we expect only a mild slowdown in global growth in 2026 to +2.5%, followed by a rebound to +2.9% in 2027, broadly in line with our previous baseline outlook. AI is strongly propping up the global economy, offsetting the drag from the energy shock and the trade war. The energy shock is still working through balance sheets, with consumer purchasing power recovering only in Q4 2026 and firms’ profitability still exposed. The US is set to grow at +2.1% in 2026 supported by energy exports, a savings rate at its lowest since 2008, AI investment (a third of growth) and fiscal support (7.3% deficit). The Eurozone (ex-Ireland) will grow by just +0.9% in 2026 but rebound to +1.2% in 2027, held back by higher energy dependence, minimal AI offset and subdued growth in Germany as bold reforms are needed on top of the fiscal stimulus. China will stay resilient at +4.7%, led by exports and high-tech manufacturing, but faces headwinds from weak domestic demand and US tariffs. Global trade of goods will avoid a recession, growing by +2.9% in volume terms in 2026 and +2.4% in 2027 as the US trade war reloads with Section 301 following the expiry of Section 122 from 24 July, raising the US effective tariff rate from 8% to 13%.

Has inflation been knocked out? The peak should already be behind us. With oil flows normalizing and crude prices even falling back below pre-war levels, the energy shock should prove short-lived, limiting second-round effects on broader inflation and avoiding a repeat of the 2022 inflation surge. We still expect some volatility during US-Iran negotiations triggering temporary oil price spikes but overall, we see them dropping to USD75/bbl and USD67/bbl by the end of 2026 and 2027. Gas prices are still higher compared to pre-war levels, but with EUR41/MWh expected at the end of 2026 and EUR32/MWh in 2027 they remain in the trading range of the past three years. This suggests a far more muted inflationary impact than in 2022, when prices surged by over 500% to above EUR300/MWh. Headline inflation should therefore reach central bank targets in 2027 in major economies. We expect the ECB to stay on hold at 2.25% (around neutral) after having already delivered one insurance hike in June, while the Fed will raise policy rates at least once this year to 4.0% amid persistent inflation, driven by strong AI-related investment demand, before a normalization back to 3.5% in H2 2027.

The goalposts are shifting for corporates: Earnings held up in Q1 2026 but the delayed impact will hurt down the line. Most European sectors posted positive EPS growth in Q1, while US earnings were buoyed by AI-driven tech. But a profitability squeeze might be building: Turnover growth was revised down for 12 out of 16 sectors, led by pharma (-2.0pps to 0%), utilities (−1.6pps), and motor vehicles (−1.3pps). Only electronics (+1.7pps to 11%), information & communication services (+0.7pps) and food & beverages (+0.4pp) bucked the trend. The auto sector remains most exposed via elevated net leverage meeting higher rates. Against this backdrop, we expect global insolvencies to increase by +4% in 2026 before plateauing in 2027.

Capital markets are playing the advantage, largely looking through near-term risks. US rates should gradually decline to 4.35% by the end of 2026 and 4.1% in 2027 as inflation pressures and monetary tightening fade next year. German Bunds will hover around 3% amid ongoing supply pressures from quantitative tightening and a high fiscal deficit around 4% of GDP – above Italy and Spain. Equities remain supported by nominal growth and AI upside, although valuations leave little room for disappointment and relative value becomes more relevant. After strong year-to-date gains, further upside in 2026 looks limited with our full-year forecast of 13% total return for the S&P500 and 14% for the Eurostoxx, but in 2027 we see ongoing solid performance of 11% on both sides of the Atlantic. EM stocks are leading the charts (29% total return expected for 2026) driven by the strong weight of top South Korean and Taiwanese semiconductor companies in the index. Credit markets should continue to deliver attractive carry, even as ultra-tight spreads leave valuations stretched and skew risk to the downside. Rising issuance and falling interest coverage ratios are likely to drive a mild widening in spreads over the next two years – but elevated carry should still be enough to offset those valuation losses. Private markets remain a story of rising dispersion, with AI-related infrastructure and high-quality private credit outperforming more challenged segments.

More shocks ahead? The number of risks has certainly not decreased. AI is doing the heavy lifting that geopolitics and fiscal policy cannot. But it is also concentrated, unevenly distributed and itself a source of downside risk if delivery disappoints as it would hit trade, investment, and consumption. In addition, global policy uncertainty remains well above trend, with many risks ahead including a reloaded escalation of the trade war, US midterm elections, a subdued German fiscal push, and polarization ahead of upcoming elections in key European countries. Climate risks remain omnipresent – the latest heatwave in Europe has passed, but risks of a severe El Nino year are still looming. Labor markets are still tight, but the medium-term outlook is more fragile. In several European economies, AI-driven layoffs could outweigh productivity gains, ultimately weighing on growth.

Link to the publication & the slides

Europe under water: The macroeconomic cost of flooding and the economic case for adaptation

View the full findings here.

Floods are local events in their physical origin, but their economic consequences ripple through the entire economy. To quantify these economic effects, we simulate a one-off flood in 2027, calibrated to each country’s average historical maximum flood depth over 2015–2024, and compare the economic trajectory with a no-flood baseline through 2030. The analysis links observed flood depth to real gross fixed capital formation and real household net disposable income, tracing how flood damage spreads through investment, consumption and public finances. Investment is hit hardest: cumulative gross fixed capital formation losses between 2027 and 2030 range from 10.5% in Norway to 14.6% in the Netherlands, with Germany at 12% recording the largest absolute loss at around EUR84bn. Real household net disposable income meanwhile falls by 3.9–5.4% in 2027-2030 as reconstruction costs and labour-market effects accumulate, in turn reducing households’ capacity to absorb uninsured losses and rising insurance costs.

Floods create a stagflationary shock, raising prices, slowing growth and eroding fiscal space. Consumer prices rise as damaged infrastructure, disrupted logistics and lower local availability of goods and services create supply bottlenecks. The cumulative price-level impact remains contained, from +0.2% in the United Kingdom to +1.0% in Greece, but it still adds pressure on households already facing an income shock. Private consumption declines in all countries, with cumulative losses ranging from -0.3% in Norway to -0.9% in Czechia; in absolute terms, the United Kingdom records the largest loss at about EUR61bn, ahead of Germany and France. GDP losses then range from around -0.4% in Norway to -1.0% in Spain, with Germany and France losing approximately EUR108bn and EUR79bn, respectively. The impact on public finances is also visible, with cumulative 2027-2030 government deficits widening by 1.3pp of GDP on average, from -0.3pp in Norway to -2.4pp in Spain.

The economic case for flood prevention is overwhelming: well-targeted adaptation pays for itself many times over. Adapting to flooding requires more public capital than any other climate hazard, accounting for around 65% of all predominantly public measures in our adaptation taxonomy. Yet target adaptation investments in natural flood retention, resilient infrastructure and risk-sensitive land-use planning can largely offset future losses. Concretely, flood adaptation means keeping people and assets away from high-risk floodplains where possible, restoring natural retention areas, upgrading dikes, drainage, sewers and stormwater systems, and flood-proofing buildings and critical infrastructure. These measures should be combined according to the type of risk: basin-level retention and land-use planning for fluvial floods, local drainage and blue-green urban infrastructure for pluvial floods, supported by early-warning systems, emergency planning and insurance incentives. Flood resilience investments yield roughly four times their cost in avoided damages. Land-use planning offers similarly high returns: prohibiting development in floodplains and integrating green, water-retaining infrastructure into cities offer similarly high returns. This shows that more than climate policy, adaptation is preventive fiscal policy.

Europe’s challenge is to deliver effective flood adaptation solutions at the speed and scale required. The measures with the highest returns, keeping development out of floodplains and restoring natural flood retention, are also the most politically difficult to implement, while major flood protection infrastructure requires lengthy planning and construction. Germany illustrates this implementation gap: despite the EUR38bn flood disaster in 2021, only around EUR500m of the EUR6–7bn planned under the National Flood Protection Programme launched in 2013 has been spent. The main barriers are institutional fragmentation and lengthy approval procedures rather than limited fiscal capacity.

Long-term flood resilience requires integrating prevention, adaptation and insurance coverage into a single risk-management strategy. Structural flood defences, resilient building standards, property-level adaptation and greater public awareness must be complemented by sustainable public-private insurance partnerships. Experience from Spain’s Consorcio, France’s CCR and reforms under discussion in Germany and Ireland shows that risk transfer remains sustainable only when accompanied by meaningful risk reduction. Accelerating proven adaptation measures would strengthen public finances, reduce uninsured losses and safeguard the long-term insurability of flood risk.

View the full findings here.

In that spirit, we looked at AI’s environmental footprint once you take a full system view, at low Earth orbit satellites as part of the emerging digital backbone, and at how credit risk has been moving across investment grade, high yield, and private credit.

Code, carbon, kilowatts: AI’s hidden toll and the race to green the grid

The unabridged science is here, the key take-aways below:

AI is already reshaping the economy at remarkable speed, but its toll on the environmental systems our prosperity depends on remains poorly understood. In this week’s publication, we tackle that blind spot by assessing two of the largest environmental footprints of AI and data centers: carbon emissions and water consumption. Using a country-level analysis of the 26 biggest global data-center hubs (over 93% of worldwide capacity) we estimate both footprints along the full value chain, going well beyond operational electricity use to quantify the hidden environmental costs embedded in infrastructure, energy systems, and supply chains.

Data-center investment reached USD580bn in 2025, putting AI on track to become one of the world’s fastest-growing sources of electricity demand. Installed capacity is expected to double by 2030, with AI workloads already accounting for 15–20% of data-center electricity use and potentially approaching 40% by the end of the decade. Yet the sector’s environmental footprint remains underestimated as most analyses focus only on operational electricity use. This analysis takes a broader systems view across 26 countries (+93% of global capacity), adding lifecycle emissions, water use, and AI’s growing resource demand.

Identical workloads can generate up to 24 times more emissions depending on the emission intensity of the grid, making location as decisive as demand growth. Fossil-dependent grids in Indonesia, India and Malaysia exceed 600 gCO₂/kWh, compared with under 30 gCO₂/kWh in Norway and Sweden. The US and China, which host the largest data-center clusters, sit in between at 384 gCO₂/kWh and 526 gCO₂/kWh, respectively, giving Europe’s cleaner power mix a structural advantage for low-carbon AI growth. These disparities are amplified by transmission and distribution losses of 10–15% in some markets, while less reliable grids raise electricity needs and dependence on backup generation.

At 286 MtCO₂ in 2025, the true carbon footprint of data centers is 57% larger than IEA estimates suggest. Electricity consumption (Scope 2) accounted for 76% of this footprint, at 218 MtCO₂, with hardware manufacturing and construction (Scope 3) contributing a further 66 MtCO₂, or 23%, and direct Scope 1 emissions remaining negligible (<1%). Emissions are also heavily concentrated geographically, with the US and China alone accounting for roughly 70% of the global total. AI accounts for an estimated 43-60 MtCO₂ of today’s emissions, and this is set to climb steeply as deployment widens and computing demand grows.

Without grid decarbonization, global data-center emissions would more than double to 643 MtCO₂ by 2030, leading to an estimated USD154bn in annual climate damages (up from USD68bn today). AI workloads already account for an estimated USD13bn in climate damages annually and could exceed USD50bn by 2030. By contrast, an ambitious decarbonization pathway would hold emissions to around 329 MtCO₂ despite continued growth in computing demand and keep climate damages at USD79bn. This makes the pace of power-sector decarbonization the primary determinant of whether AI growth can be decoupled from emissions in the near term. Even under ambitious decarbonization, however, the footprint does not vanish but moves up the supply chain: as Scope 2 falls from more than 70% of the footprint today to around half by 2030, embodied emissions from servers, semiconductors and infrastructure become the binding constraint, approaching 50% of the total. Achieving genuinely low-carbon AI will therefore require not only cleaner power, but also closer attention to emissions embedded in digital infrastructure supply chains.

Deployed across the economy, AI could cut global CO₂ emissions by around 1.4 Gt a year by 2035, more than offsetting the emissions generated by its own infrastructure and creating net savings of roughly 750 MtCO₂. According to the IEA, these reductions would result from efficiency gains, optimization, and improved resource management across sectors such as energy, industry, buildings, and transport, and are equivalent to around 2.6% of current global emissions. However, this outcome is not guaranteed. With most AI applications still at an early stage of deployment, its ultimate climate impact will depend on whether these economy-wide benefits can scale faster than the infrastructure required to support them.

Data centers consumed 814bn liters of water in 2025 and could require 1.3-1.8trn liters by 2030, comparable to Switzerland’s annual consumption, making water the overlooked resource constraint of AI. Most of this footprint is indirect, with roughly three-quarters originating from electricity generation and the remainder from on-site cooling and semiconductor manufacturing. This ties water use closely to the energy transition, since fossil and nuclear plants require substantial cooling water while wind and solar use little or none in operation, lowering both the carbon and water footprints of a cleaner grid. Although power-sector decarbonization can help moderate future water demand, water-related risks are becoming increasingly concentrated in water-stressed regions such as South Korea, India, Mexico, and parts of China, where rapid data-center growth is colliding with existing pressure on local water resources, raising the risk of access constraints and community or regulatory opposition to new capacity.

Realizing “green AI” will depend less on making data centers marginally more efficient than on transforming the energy systems that power them. Unlocking AI’s environmental potential will require a broader policy framework, combining clean-power expansion, greater transparency on resource use, stronger incentives to price environmental costs, and faster deployment of AI applications that reduce emissions across the wider economy.

The unabridged science is here.

Low earth, high stakes: The LEO satellite race between AI demand and geopolitical fragmentation

See the complete research here.

Amid the recent frenzy surrounding SpaceX’s record IPO and massive debt issuance, our research team this week focuses on the outlook for the space economy, particularly the growth drivers behind low Earth orbit satellites, which are emerging as a critical factor in the development and deployment of AI infrastructure amid increasing global fragmentation.

SpaceX’s record-breaking IPO puts a public price on a conviction private investors already hold: space is a durable investment vertical, not a passing cycle. Private investment in space tech hit a record USD12.4bn in 2025, up 48% year-on-year, even as venture funding cooled elsewhere, with the US capturing 60% (about USD7.3bn). Late -deals reached 41.3% of space-tech VC transactions, signaling capital concentrating on proven, revenue-generating businesses rather than speculative bets.

The next wave of the AI economy requires real-time connectivity that terrestrial networks cannot deliver . LEO satellites are the only viable solution. Autonomous vehicles, industrial robotics, drone logistics and AI-driven grid management all depend on continuous, low-latency connectivity , which 5G cannot meet since 40% of global land surface sits outside reliable coverage.

The LEO services market is on track for a 7-8x expansion this decade, within a broader space economy set to triple. Valued at about USD16bn in 2025, LEO services are projected to reach USD120bn by 2030, driven primarily by enterprise and industrial demand. The broader space economy, currently accounting for about USD600bn, is projected to exceed USD1.8trn by 2035.

The US holds a commanding lead through SpaceX’s vertical integration and Amazon’s hyperscaler logic, but China is closing the gap with state capital and sovereign ambition. SpaceX’s 7,000 satellites in orbit and its successful IPO position it as the default connectivity backbone of the AI economy; Amazon has invested over USD10bn in Project Kuiper targeting the same enterprise segment. Meanwhile, China’s credible near-term pipeline stands at about 27,000 satellites across state-backed operators – expected to represent close to 40% of effective LEO satellites by 2030 – replicating the model used in EVs, with state funding eliminating the capital constraints that limit commercial rivals.

Emerging markets are the strategic battleground where the long-term balance of digital infrastructure power will be decided. Fixed broadband penetration remains below 40% in Africa and 80% in Asia-Pacific and Latin America (vs. over 90% in Europe and North America). China has moved earlier and more deliberately than Western competitors, positioning LEO as the connectivity layer of Belt and Road’s digital extension and replicating the Huawei playbook – below-market pricing, technical lock-in and conversion of infrastructure dependency into geopolitical leverage. India, Brazil, and Gulf sovereigns have enough scale or strategic assets to negotiate terms; the remaining 150 plus economies face straightforward dependence.

Europe’s best strategy is to own a chokepoint in the value chain rather than compete on constellation scale – the ASML model applied to launch. With Eutelsat OneWeb’s about 650 satellites financially constrained and IRIS’s 280-satellite sovereign constellation limited by design, Europe cannot match the US-China pipeline of over 100,000 satellites. The credible path is deepening Arianespace’s position as an indispensable launch provider – already validated by Amazon’s Kuiper contract on Ariane 6 – while closing the reusability gap, building toward Ariane Next in the 2030s.

See the complete research here.

Credit risk relocation as a Newton’s cradle: how stress transmits across BBB, high yield, and private credit markets

Explore the full paper here, the executive summary below:

US credit looks calm, but calm isn’t the same as safe. Like a Newton’s cradle, the risk hasn’t disappeared; it’s simply been transmitted down the chain from investment grade to high yield to private credit. Our latest note traces where it went — and in which cases, it could swing back and strike the chain again. An illustration of Newton’s cradle for your amusement here.

US credit looks calm on the surface – spreads tight, headline growth cheerful – but the risk has simply migrated. Investment grade (IG), high yield (HY) and private credit are one continuous risk-transfer chain and at every link price has decoupled from fundamentals through a different mechanism: spread compression in IG, weakest links bypassing public HY and net asset value (NAV) smoothing in private credit.

Softened IG fundamentals and fallen-angel risk expose up to 1/3 of spread. US IG spreads sit at ~75bps – tighter than their pre-Iran-war level – even as credit quality has softened (interest coverage ~6.3x, net leverage ~2.7x), held tight by price-insensitive all-in-yield demand rather than by fundamentals. The specific danger sits at the bottom of IG: a fallen-angel downgrade forces index-constrained holders to sell into a smaller, less liquid HY market, producing spread moves that far exceed the change in credit quality. In stress case like 2020, downgrades eroded 25bps of excess return, which would be equivalent to ~1/3 of current spread. The net upgrade rate has run below zero for roughly three years and actual fallen angels are ticking up, with historically tight spreads leaving no cushion to absorb the loss.

HY offers a more defensive risk/reward profile than BBB – but largely due to a composition effect, as the weakest names have migrated out to private credit. HY leverage (~3.8x) and coverage (~2.8x) have held firmer than a deteriorating BBB, helped by shorter duration (3yr vs 7yr for IG) and a cleaner index (BB now >50%, CCC near a 20-year low). But much of that strength is a composition effect: the weakest borrowers have migrated out to leveraged loans and private credit. The risk was not removed – it was relocated.

The same decoupling runs quietly underneath private credit, via NAV smoothing. The migrated borrowers are structurally weaker (leverage 5–7x, coverage 1–2x), and because positions are appraisal-valued, NAVs stay smooth while coverage erodes. Stress therefore surfaces not in price but in the plumbing: Payment-In-Kind has roughly doubled to 8.9% of interest income from a 4.3% trough in early 2023, and lender takeovers reached USD39.4bn across 2025–26 – about three times the prior three years combined, though still low single digits against a ~USD1.75trn book. The fallen-angel analog here is a gate or restructuring, not a downgrade – lumpy and deferred – concentrated in software/AI-exposed names (~25% of portfolios) and the 2021–23 vintage.

For investors, carry rewards holding but requires selectivity as vulnerabilities concentrate in the lower-rated buckets – BBB in IG, CCC in HY, and the 2021–23 private-credit vintage. All-in USD IG yields near 5.2% can largely offset a 30–50bps spread widening, while the pure excess return offers only a thin cushion for 10bps widening – basically at the mercy of normal volatility.

Above all, in a stress event the risk that left public HY can return to it. Crowded private-credit positions are hard to exit quickly, so when investors need to de-risk, they sell the most liquid instrument first – public HY – regardless of its own fundamentals. Public HY therefore becomes the involuntary shock absorber, and its spreads widen as a liquidity and basis effect rather than a credit-quality one.

Explore the full paper here.

Ten Years After Brexit: Resilience Without Revival

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Brexit 10 years on: Neither collapse, nor renaissance. As the UK looks for its 7th Prime Minister in 10 years, this week also marks a decade since Brexit roiled markets and divided forecasters. Predictions ranged from economic collapse to a renaissance. A decade later, we take a hard look at which projections came through and which failed to pass. The outcome has been more nuanced that many expected, with indicators pointing to both economic strengths and weaknesses — not all of them Brexit related.

Britain’s Economic Backbone: The knowledge economy, tech, and clean energy. UK ICT exports to the EU have almost doubled since Brexit, demonstrating the continued competitiveness of Britain’s knowledge economy. The UK remains the world’s second-largest exporter of financial services, accounting for 21% of global exports, while deepening its provision of financial services to EU markets. In private markets, the UK continues to attract more venture-capital funding than any European competitor. Between 2020 and 2026, it raised roughly USD164bn. Since then, London has retained much of its global financial importance. The UK still accounts for nearly 50% of global OTC interest-rate derivatives trading and almost 38% of global foreign-exchange turnover. In clean energy, the UK has emerged a leader within Europe. Wind generation has increased by 130% since 2016, reducing the UK’s fossil dependence while enabling a successfully phased out coal in 2024.

Burned by Brexit: Dragging growth, trade frictions and lagging Leavers. Independent studies estimate that GDP would have been 2 to 4% larger without the political instability and trade friction triggered by Brexit. Since 2016, “Leave” regions have generally underperformed compared to the UK as a whole: 59% of the population of the ‘’Leave’’ areas have seen their regions fall further behind national income per capita average. Since the vote and the formal exit from the bloc’s economic structures on 1 January 2021, growth has relied increasingly on foreign-born workers, which has fueled more than half of GDP expansion. Brexit has increased frictions and reduced trade flows. While the EU remains the UK’s largest trading partner, structural estimates suggest UK-EU trade is around 21% lower for goods than it would have been without Brexit. New trade agreements and diversified supply chains with the US, China and Commonwealth countries have failed to match the scale of the economic ties previously enjoyed within the EU. UK assets continue to trade at a discount relative to international peers.

A lasting lesson of the 2022 mini-budget crisis is that fiscal credibility matters. Investors now demand a structurally higher risk premium on UK assets against a backdrop of rising fiscal imbalances. Equity markets, where UK stocks have underperformed both US and European peers in the past decade, reflect this premium. In private markets, the magic has faded into a priced-in discount. A decade on, Brexit’s imprint reads through the UK’s two largest private-capital engines, private equity, and venture. UK investments were 12–18% below a no-Brexit path as of 2025, a one-off level shift now cleared into a structurally higher cost of capital. Private equity has proved resilient, but increasingly as a US funded value trade rather than home grown momentum with compressed valuations turning UK companies into take-private targets for US capital.

Beyond Brexit: Identifying and implementing solutions for the future. The UK scores high on business creation, labor-market flexibility, higher education and research, compared with many other advanced economies. This indicates that domestic bottlenecks — exposed by Brexit but not caused by it — are the root of the country’s disappointing growth performance. The government has identified many of these issues but needs to push further. Priority actions should include: accelerating planning reform, increasing investment in housing and energy, infrastructure, strengthening support for innovation and strategic industries, treating NHS reform as an economic priority, and addressing the slow diffusion of new technologies from frontier firms to the broader economy.

A revamp of fiscal rules, combined with reforms to pensions spending and property taxation as well as broadening the VAT base, would help redirect scarce public resources toward deficit reduction and investment, with an eye to defense. Unlike the EU-27, Britain has staged no distinct post-2022 rearmament inflection. The UK government has committed to increase defense spending to 2.5% of GDP by April 2027, and 3.0% target by 2030, but they are not set in stone. The cooperation map looks busy – AUKUS with the US and Australia, GCAP with Japan and Italy, a privileged-partner track toward the EU’s SAFE instrument – yet it reads as a catalog of commitments rather than tangible delivery. Government investment would help attract investors and domestic defense companies to commit capital to UK capacity. Reintegrating more closely with European energy markets would generate meaningful economic benefits. High energy prices caused by the UK leaving the EU Internal Electricity Market, successive energy supply crises and grid bottlenecks linked to the rapid expansion of renewable energy have continued to undermine industrial competitiveness. Divergence between UK and EU carbon markets also risks creating new trade barriers for energy-intensive industries. Reintegrating energy and carbon markets could help reduce friction costs, stabilize power prices, and improve supply security.

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Pension Reform Survey 2026: Everyone knows reform is needed, few expect it to happen

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With baby boomers starting to retire and population aging set to accelerate, the need to reform social security systems – and pension systems in particular – is becoming increasingly important. Our survey of more than 8,000 respondents across Austria, France, Germany, Italy, Poland, Spain, the UK, and the US explores how willing citizens are to accept reforms, what measures they would be willing to accept, and how well prepared they are to take on greater responsibility. These findings are of particular relevance in Germany right now, where the government received the report of the Pension Reform Commission just two days ago.

Citizens recognize the need for social security reforms but have far less confidence that reforms will actually be delivered. Recognition of the need for reform is overwhelming, exceeding 80% in most countries. Yet confidence in governments’ ability to implement the reforms needed to ensure long-term sustainability is much weaker. The latter ranges from just 36% in Italy and 42% in Germany to 63% in Poland and 66% in the US. Views diverge more sharply when it comes to how the adjustment burden should be shared. Taking greater personal responsibility through additional saving is the most widely accepted option, while higher taxes and social contributions receive little support. Importantly, while respondents differ on how adjustment should be achieved, only a minority rejects all proposed measures outright. The challenge for policymakers is therefore no longer convincing citizens that reform is needed but demonstrating that reforms can be delivered and designing politically viable reform packages.

Older generations are not blocking reform. Recognition of the need for reform increases with age, but trust that governments will successfully implement the necessary reforms declines. While 61% of respondents aged 18 to 34 express confidence that the necessary reforms will be implemented, this falls to 54% among those aged 35 to 49 and to just 44% and 43% among respondents aged 50 to 64 and 65 to 79, respectively. The result is a striking paradox: the older cohorts are most convinced that reform is necessary, while younger respondents attach less urgency to the issue, suggesting that pensions suffer from a salience gap despite their long-term importance. Contrary to common stereotypes, respondents aged 50 to 64 are also among the most willing to accept measures such as working longer, postponing retirement, or receiving lower public benefits.

Responsibility for retirement is increasingly shifting onto individuals, yet many lack the knowledge to prepare for it. Only half of respondents expect the public pension system to provide the majority of their retirement income. As occupational and private pension provisions gain importance, pension and financial literacy are becoming essential pillars of retirement income adequacy and pension system sustainability. Yet only one in six respondents shows a high level of financial literacy (18%),while one in four scores low (26%). The knowledge gaps have concrete implications: only one third of respondents correctly identified how long they are likely to spend in retirement, and only half state that they have a clear picture of their expected financial situation in retirement. These findings suggest that the financial literacy gap is also a pension literacy gap.

Furthermore, more funded pension provision – as envisaged in Germany – would be a win-win for households and the wider economy. Stronger occupational and private pension pillars would improve retirement security through greater private wealth accumulation while simultaneously providing long-term capital to financial markets. This could support investment in innovation, infrastructure, and the green transition. Asset-backed pension arrangements amount to more than 200% of GDP in Denmark, 145% in the US and 78% in the UK, compared with just 6% in Germany and 13% in France. If Austria, France, Germany, Italy, Poland, and Spain had reached the UK’s level of pension assets relative to GDP in 2025, an additional EUR8.8trn of long-term investment capital would have been available.

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The semiconductor premium: EM equity and the concentration risk within

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Semiconductors are the backbone of the 2026 AI rally. Capital investment is overwhelmingly directed at AI infrastructure, and the data centers doing the heavy lifting run entirely on chips. The numbers speak for themselves: the Philadelphia semiconductor index is up +90% YTD – twelve times the S&P 500’s +7.5% - despite a couple of recent sell-off episodes in June. In emerging markets, which concentrate most of the supply chain, markets like South Korea and Taiwan are up +110% and +60% this year.

Concentration is the flip side of the boom but fundamentals are strong. Concentration is most acute in EMs, where dependence on a single industry is now extreme. If the chips sector disappoints, the re-rating could be brutal. But the earnings are real and lopsidedly so: chips deliver 13% of S&P 500 profits on just 5% of sales, half of South Korea’s profits on a fifth of its sales and over 70% of Taiwan’s earnings and revenue alike. Ferocious demand colliding with supply bottlenecks from Middle East tensions are keeping prices sky-high.

The bull case still stands on five pillars. First, hyperscalers show no sign of easing off: Upward capex guidance in Q1 points to a still-aggressive stance that should lift Asian chipmakers’ profits by a remarkable +70% CAGR through 2026-2029. Second, the demand pipeline looks structurally solid: Broader AI diffusion, the corporate shift to agentic platforms and the memory-hungry new chip generation all reinforce one another. Third, the moat is real: capital and expertise are needed to build a modern foundry, keep competition at bay and pricing power intact. Fourth, valuations are compelling as based on solid earnings trajectory, and recent sell-offs offer new entry point on top picks. And fifth, in the over-concentrated EM space, semiconductors ensure geography and supply-chain position diversification, with an attractive trade-off compared to developed markets.

But strong convictions do not mean complacency: Four risks could unsettle the rally over the next 12-24 months. First, a Middle East re-escalation could disrupt energy routed to Asia, forcing production halts – temporary or not. Second, bottlenecks in the Asian supply chain for inputs critical to data-center fleets could lift costs and lengthen lead times, throttling AI capex momentum. Third, a timing mismatch looms: New supply could come online just as capital allocation decelerates, should a fresh rate cycle take hold in the US or Europe. Fourth, competition is sharpening fast – Beijing is piling on funds and pressure to drive chip self-sufficiency (70% target in AI chips in 2026) and a bigger global footprint for its champions. Contrary to what market volatility suggest, we do not see lower inference cost to be a negative driver for memory chip business, but rather a guarantee of a sustainable book order if it comes with stronger AI diffusion and usage

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US-Iran Deal: Markets price peace, economies still pay for war

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Markets have celebrated the end of the Strait of Hormuz conflict. The economy has not yet earned that relief – and for most households, corporates, and governments, things may get worse before they get better. The physical reopening is a multi-month process, not a switch. The US-Iran MoU and 60-day ceasefire mark a meaningful turning point, but they are a de-escalation framework, not a final settlement. Normalization will be slow, frictional, and reversible, and markets have frontloaded the good news before the transmission lags have even peaked. Mine-clearing alone takes 30 to 50 days. After that, commercial traffic returns only as fast as shipowner confidence allows — the 1988 Iran-Iraq precedent shows normal conditions took more than three months to restore even with US naval escorts. Our base case restores 65% of the disrupted 4-5 mb/d within three months and 80% within four, with full normalization by year-end. The corridor reopens under managed, not free, navigation. Any stumble in nuclear negotiations or ceasefire adherence on Lebanon restarts the clock.

Energy prices ease, but inflation peaks later than markets think. Brent stabilizes around USD 80/bbl. in Q3 before easing to USD 75/bbl. in Q4 and USD 67/bbl. by end-2027. Past energy increases are still passing through supply chains, utility bills, and rents. US headline CPI averages 3.3% in 2026 and core CPI peaks at 3.1% in Q4; Eurozone inflation peaks around 3.4% in Q4 before averaging 3.1% in 2026. Real wages turn positive only in Q1 2027. Markets pricing disinflation from today are running at least two quarters ahead of the data.

The shock hits every balance sheet - but Europe bears the deepest scar. The US absorbs the blow with structural advantages: a net energy exporter, it captures a terms-of-trade windfall through higher mining revenues and fiscal receipts, while tax rebates cushion households and AI-driven investment sustains corporate capex. Europe has no such offset. Governments across the Eurozone have deployed just EUR 12bn YTD - 0.1% of GDP - with Germany’s defense and infrastructure stimulus the sole demand anchor. Households face a sharper and more persistent squeeze: energy bills represent a larger share of disposable income than in the US, floating-rate mortgage exposure is higher across the UK and Netherlands, consumer confidence has not recovered to pre-war levels, and real purchasing power will remain compressed through most of 2026. For corporates, the energy cost relief, most visible in transport and petrochemicals where fuel runs 25-40% of operating costs, runs directly into this demand void. Pricing power is the dividing line: airlines and branded pharma can defend margins through surcharges; automotive OEMs and generic drugmakers cannot. Input costs are easing but wage bills remain elevated into 2027 and listed-company cash has already fallen 3% to EUR 36.7trn. Any ceasefire relapse would recouple all three pressures simultaneously - reigniting input costs while households are still digesting the first wave and fiscal space is exhausted - with Europe more exposed throughout given higher energy intensity, greater trade openness, and no room left for transfers.

For central banks, the risk of a policy mistake is the highest since 2022. Both the Fed and ECB are expected to deliver one further hike in H2 - the Fed likely in September as core CPI ticks above 3%, the ECB before year-end - before disinflation opens the door to cuts in H2 2027. Both face a time consistency problem as inflation pressure will fade quickly while their data-dependency on backward-looking measures continues to justify tightening well into Q4. Overtightening into an already-fragile household and corporate backdrop remains a plausible – and underpriced – scenario for both banks. But the US retains more growth momentum to digest further tightening, while the Eurozone’s growth is already fragile.

For capital markets, the signal is rotation and carry, not re-rating. Equities never priced the conflict as a systemic shock - MSCI US up ~8%, MSCI Europe +5% YTD - so there is little upside to unlock on good news but significant room to gap lower on bad. Valuations sit in the 85th percentile with earnings in the 92nd percentile (MSCI World, 20-year history); a 5-10% pullback through summer is plausible. A tilt toward Europe, cyclicals, and energy-sensitive sectors is warranted over a broad melt-up. On credit, EUR IG at ~77bps and US IG at ~72bps are near all-time tights; the deal protects the carry trade rather than opening new compression. In rates, the short end and belly of European curves offer the most compelling outperformance (~35bps front, ~20bps belly), while long ends remain vulnerable to fiscal supply - bull steepening, not a parallel rally. In private markets, gains show up in activity - firmer exits, smoother refinancings - not in marks.

Relief is the call. It is not the all-clear. Markets have frontloaded the peace dividend; the economic data has not confirmed it. Inflation will get worse before it gets better. Household and fiscal stress will persist well into 2026. And the deal remains conditional on nuclear negotiations and a multi-front ceasefire with a poor track record. The asymmetry is uncomfortable: upside on good news is modest; downside on bad is fast, disorderly, and correlated. The cost of being slow to react would far exceed the cost of staying cautious.

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Southern Europe won the last decade, the next one is less obvious

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Southern Europe has delivered an impressive turnaround this past decade, broader and more durable than many expected. Spain, Portugal, and Greece are running ~11% above pre-pandemic output, while Germany has stagnated for four consecutive years. Sovereign spreads that peaked above 250bps during the debt crisis have compressed to around 70. Southern banking systems, once the epicenter of Eurozone fragmentation risk, have largely completed their NPL clean-up (it is German and French banks that are now carrying rising asset quality pressures). This is not a cyclical blip but reflects an earned shift through labor market reforms, fiscal consolidation, and the NGEU investment impulse – the largest coordinated public investment program the Eurozone has ever deployed. Spain’s renewable buildout – now supplying more than half of its electricity – has added a further dimension: an industrial energy cost advantage that did not exist before 2021 and that has no equivalent in the North. The reversal is real but increasingly reflected in market pricing.

The growth model has delivered output convergence, but productivity – the engine of durable income catch-up – remains the unfinished business. Employment-led recovery has run its course as the primary driver; Greece remains below its 2008 per capita income level. Sustaining the narrative through the next phase requires a more difficult set of structural changes: judicial efficiency, capital market deepening, R&D intensity, and a completed Banking Union. The NGEU disbursements ending in 2026 sharpen that test: what phases out is not just a fiscal impulse but a reform discipline mechanism, and where implementation has been compliance-driven rather than institutionally embedded, the risk of slippage rises. The fiscal impulse is fading, with no clear replacement, and private cross-border capital flows remain too limited and episodic to fill that gap organically – the handover from public investment anchor to market finance is assumed but not yet visible in the data. These are not reasons to dismiss the story – they are the conditions that would extend it.

The political calendar and spread geometry call for selectivity. France, Italy, Spain, and Greece all face national elections in 2027, creating fiscal pressure points at the precise moment external conditionality fades and the ECB continues quantitative tightening. At around 70bps, BTP and Bonos spreads leave limited room for positive surprises and some room for temporary widening if credibility wavers. This is not a crisis configuration – sovereign balance sheets are in materially better shape than in 2011 and the ECB’s Transmission Protection Instrument (TPI) provides a credible backstop – but it is a configuration in which episodic volatility is more likely than further compression. The region’s reform record since 2012 is real and the underlying story has not exhausted itself. What comes next is more differentiated: returns will accrue to investors who discriminate by country, sector, and reform trajectory rather than treating Southern Europe as a monolithic allocation.

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Public vs. private equity: The widest equity return gap in two decades

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Public equities have repriced the future while private equity is still monetizing the past. Since the October 2022 trough, the S&P 500 has compounded at more than 20% a year for three straight years, while Private Equity buyout portfolios assembled at the 2020-2021 peak, and now carrying more expensive debt into a thin exit market, have lagged on every benchmark and horizon. At this point in time, the gap between liquid and illiquid equity returns seems to be the widest in two decades.

The rally that opened the gap is narrow and earnings-led, not a liquidity melt-up. The Magnificent Seven alone delivered more than half the S&P 500’s three-year total return, strip them out and the index is an ordinary performer, and the equal weighted version has compounded at about half the pace, a gap unseen since the late 1990s. But the move rests on delivered earnings and a real AI capex super cycle rather than multiple expansion, so the premium looks more durable than the dot-com peak.

Yet private equity’s long-run premium is real, this cycle has just interrupted it. On a like for like basis, matched to public indices for geography, size, sector and leverage and net of fees and carry, buyout has beaten public markets over three decades, with MSCI estimating pooled direct alpha of roughly 400bps a year since 1994. The exception is the 2021-2023 vintages, which currently show a negative direct alpha of about ~800bps against the MSCI ACWI, the first consecutive run to trail public markets in the series. Consequently, the data points to rough PE performance ahead even allowing for the fact that these vintages are still young, and J-curve distorted.

Private equity can no longer count on rising valuations and must now drive returns by growing the underlying business. For over a decade, buyout returns came mostly from rising valuations, selling companies for a higher multiple than was paid. That is mostly gone as borrowing costs have roughly doubled and exit valuations have stopped climbing, so returns now come from growing the business. The contrast on the financing side is also large, with the largest listed companies still holding more cash than debt, so benefiting from higher rates, while buyout owned companies sit on floating rate debt due to be refinanced in 2026-2028, where higher rates only add to their interest bill.

As capital drains from private equity, private debt is catching the outflows. The same jump in interest rates that made buyout deals more expensive made lending the more attractive trade. Big long-term investors continue to like senior private credit because it pays a steady, contractual cash yield, its value barely moves and losses have been low, none of which buyout has delivered lately. So new money is rotating out of private equity and into private debt.

2026 will decide whether the public-private gap was a passing extreme or a lasting regime change. The central case assumes an economic mix that keeps returns positive but well below the post-Covid peaks with public equity settling in the low teens, while buyout follows in the mid-teens through 2027-2028. All in all, the way forward for private equity seems to be less about how much to own and more about how to own it. This means favoring managers and vintages with a demonstrable edge over generic exposure, treating liquidity and valuation discipline as features to be tested rather than assumed and resisting the temptation to buy the label without the underlying skill.

Dive deeper into the analysis here.

From kickoff to cash flow – Taking the 2026 Football World Championship on tour

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The Football World Cup 2026 will be the largest tournament in football (soccer) history and a structural departure from previous editions, expanding from 32 to 48 teams and from 64 to 104 matches across 16 host cities in the US, Canada, and Mexico. It will test whether a World Cup can successfully evolve from a single-country event into a distributed continental experience without sacrificing atmosphere, attendance, or commercial performance. Over a six-week period, it is expected to mobilize approximately 6.5mn attendees, including 2.6mn international visitors, generating an estimated USD9bn in GDP across North America during June – July 2026. For comparison, Taylor Swift’s Eras Tour, and Beyoncé’s Renaissance World Tour, with 149 and 56 shows respectively, generated approximately USD2.1bn and USD579mn in revenue. FIFA projects record commercial revenues of USD13bn for the 2023–2026 cycle but the macroeconomic impact remains more concentrated than transformative, with tourism-related spending accounting for the dominant transmission channel.

From a demand perspective, total tourism-related expenditure is expected to reach around USD8bn, split between USD6.8bn in foreign tourism exports and USD1.2 bn in domestic consumption, after accounting for crowding-out effects. Despite the stricter US visa barrier (refusal rate of 33% on average for non-European qualified nations, 74% for Senegal, 61% for Iran), the US captures the largest share, with an estimated USD5.4bn boost, followed by Mexico (USD1.4bn) and Canada (USD1.2bn). This reflects around 40% international visitors and 60% domestic attendees, each staying an average of 6–10 days and spending between USD180 and USD350 per day depending on the host country. Air travel adds a further USD1.0bn in incremental airline revenues, reinforcing the importance of mobility-linked sectors in overall value creation. Security operations spending will add USD1bn to the economic boost. Most of this spending is government consumption.

The distribution of gains will be highly uneven across sectors and geographies. Lodging and airlines emerge as the clearest winners, supported by peak hotel occupancy rates of 90–95%, with room prices rising by up to +15–20% in selected host cities following the draw phases. Airlines benefit from structurally constrained capacity growth ranging between +0.4% and +2.1% in Q2 2026, supporting strong pricing power on key domestic and international routes. Meanwhile, food & beverage, retail and entertainment industries also stand to gain meaningfully from elevated match-day consumption, particularly in Mexico where football-related social spending is deeply embedded in consumer behavior.

However, the macroeconomic impact remains modest relative to the size of host economies, translating into a GDP uplift of approximately USD6.1bn in the US (+0.1pp quarterly growth), USD1.7bn in Mexico (+0.3pp) and USD1.3bn in Canada (+0.2pp). The event is therefore best characterized as a high-intensity, short-duration demand shock rather than a structural growth driver, with benefits concentrated in tourism-sensitive sectors and constrained by substitution effects, capacity bottlenecks, and regulatory frictions. Ultimately, the 2026 World Cup will deliver clear sectoral winners – hotels, airlines, and urban tourism ecosystems – while reinforcing the importance of execution, mobility infrastructure, and cross-border coordination in shaping the final economic outcome.

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The recent report on how AI is rewiring global trade explores how technology and interconnected supply chains increasingly shape global economic activity—key themes that also underpin the tournament’s economic footprint: here.

Emerging markets in a fragmented world: From geography to resilience – the 4Rs framework

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The traditional distinction between emerging markets and developed markets is increasingly blurring. The Iran war has underlined that markets are repricing countries based on fundamentals rather than conventional EM–DM classifications. The paper captures this shift through the 4Rs framework: Resource Position, Reserve Strength, Rate Credibility, and Refinancing Structure. The compression of EM risk premia thus increasingly reflects structural convergence rather than cyclical overvaluation.

• The Iran war marked the first major oil shock not triggering a broad emerging markets’ sell-off. Markets repriced countries based on strengths and weaknesses rather than the traditional EM–DM divide. This supports a resilience-based investment framework built around the “4Rs” — Resource Position, Reserve Strength, Rate Credibility and Refinancing Structure, which increasingly explains cross-country differentiation more effectively. Although institutional mandates, benchmarks and trading-desk structures will continue to rely on the EM–DM distinction for the foreseeable future, portfolio construction frameworks that lean primarily on this historical classification risk becoming progressively less relevant.

• Resource Position, not the EM–DM label, defines the fault line of the Iran shock. Economies with large import dependencies such as Egypt, Romania, South Korea, Greece, the UK, have faced the strongest repricing pressures, while commodity exporters have benefited from improved terms of trade. Even in a downside scenario with oil prices above USD180/bbl., the pain would be concentrated within the energy-importing cohort.

• Reserve Strength increasingly separates resilient sovereigns from vulnerable “triple-deficit” economies, irrespective of EM or DM classification. Since the 2013 taper tantrum, many EMs have rebuilt fiscal discipline, strengthened current-account positions and stabilized debt trajectories, entering the Iran shock with roughly 1pp of GDP more fiscal headroom than at the onset of Covid-19. EM economies now account for roughly 60% of global GDP in PPP terms, up from around 40% in 2000. FX reserve buffers have continued to strengthen across the Middle East, Central Asia and Emerging Europe, while several advanced economies remain mired in persistent fiscal deficits and deteriorating external balances.

• Rate Credibility has structurally improved across EMs and increasingly resembles DM-style monetary frameworks. Inflation targeting is now the norm across most major EMs, and EM central banks tightened by an average of 780bps during the post-pandemic cycle versus around 400bps in the DM, front-loading hikes despite weaker growth. The Iran war has confirmed this convergence: no major EM central bank has been forced into emergency hikes, capital controls, or disorderly stabilization. EM FX volatility has fallen materially, with several G10 currencies experiencing higher volatility during 2024–25. Outliers, notably Türkiye, Argentina and Nigeria, remain, but the broader convergence trend is intact.

• Refinancing Structure has fundamentally changed the transmission of external shocks. Foreign-currency debt shares have fallen by roughly 20–40pps across major countries including Brazil, Mexico, India, Indonesia, and several CEE. Deeper domestic institutional investor bases and larger local-currency bond markets have reduced vulnerability to USD and Fed, turning FX depreciation into a macroeconomic adjustment mechanism rather than a solvency trigger. Currently, EM currencies adjusted in an orderly manner with no widespread defaults or emergency IMF interventions; even in a downside scenario of further Fed and ECB tightening, the likely outcome is slower convergence rather than a return to a crisis like the 1990s or early 2010s.

• The compression of EM risk premia increasingly reflects structural convergence rather than cyclical overvaluation. The excess spread of EM hard-currency debt over comparable DM credit has largely disappeared on a rating-adjusted basis. Even in a downside Iran escalation scenario, EM hard-currency spreads would likely widen from around 178bps to approximately 235bps and peak near 280bps, materially below the roughly 700bps reached during the Covid-19 shock. A compelling long-term case increasingly lies in EM local-currency debt, where structurally higher real yields continue to generate superior long-term risk-adjusted returns relative to DM fixed income.

Dive deeper into the analysis here.
A natural precursor to the 4Rs framework, our recent analysis dissects EMs, demonstrating how energy dependence, fiscal vulnerabilities and external financing structures increasingly drive market differentiation: here.

And just how sustainable is sustainable corporate governance? Do ESG principles merely ease one’s green conscience, or do they create real added value for investors? Our second paper this week takes a closer look at this question.

Matryoshka market: Nested convictions in equities

Unpack the full analysis Matryoshka market: Nested convictions in equities | Allianz

Geopolitical resolution is the master assumption. Equity markets are pricing a framework agreement by September, consistent with the prediction market consensus and the pronounced kink in VIX term structure at Q3. That bet has logic: the global (political) cost of ongoing conflict and mid-term elections make a deal valuable to the US administration by autumn. But a genuine agreement requires Iran to provide credible security guarantees for the Strait of Hormuz. Tail and downside risks are visible in options but not in equity valuations. In our downside scenario, equities could correct by 25% and 20%, respectively, in Europe and the US. Indeed, if resolution fails and oil remains structurally elevated, every subsequent layer inherits a more adverse starting point: margins compress, central banks are constrained and the stagflation risk premium returns not as a tail scenario but as a working assumption.

The earnings story is concentrated exposure to some sector tailwinds, not broad-based resilience. The S&P 500 has delivered double-digit EPS growth for six consecutive quarters, and European corporates surprised with Q1 growth of +11.5% y/y. Record margins should be read as limited remaining buffer. Beyond the headline figure, approximately 17pps of S&P 500 EPS growth in Q2 2026 originate from the IT sector alone – growing at an estimated +66% y/y and representing roughly 31% of total index earnings. Excluding technology, the rest of the S&P 500 expands at around +12%, in line with a 6% nominal GDP world. Europe tells a parallel story: exclude energy, the direct beneficiary of elevated crude, and STOXX 600 EPS growth falls from +11.5% to approximately +7%. Furthermore, a 20% equity correction would additionally impair US consumption by an estimated 1-1.5pp of GDP through the wealth-effect channel – a feedback loop markets are pricing as exogenous.

Non-cyclical index composition concentrates rate sensitivity rather than reducing it and the pending mega-IPO wave deepens the crowding. The shift in major equity indices away from cyclicals toward technology, healthcare, utilities, and high-dividend defensives is read as structural insulation. Non-cyclical sectors divide into bond-proxy profiles (utilities, healthcare) and long-duration growth profiles (large-cap technology): both are materially sensitive to real interest rates, through yield competition and discount rate mechanics, respectively. The index has not removed rate risk, it has hidden it in less visible form. The pending mega-IPO wave deepens this structural vulnerability. SpaceX (USD1.75trn), OpenAI (USD850bn) and Anthropic (USD850bn) – combined USD3.45trn – would represent approximately 4-5% of S&P 500 market capitalization at index inclusion, making their combined entry the largest supply event in US equity market history. All three would land in or adjacent to technology, further crowding the most rate-sensitive index segment.

The real equity risk premium is a breakeven, not a buffer. The negative nominal equity risk premium (ERP) is rationalized two ways: equities offer inflation protection that nominal bonds do not, and dominant technology constituents carry a structural growth premium that justifies a negative nominal spread, by analogy with long-duration bonds whose value sits in distant cash flows. On the real ERP measure (i.e., earnings yield minus real risk-free rate) the picture is thinner still, sitting at approximately 2.5%. That is not a buffer, it is breakeven. A rise in real rates of 50–75bps eliminates it entirely. At that level, the reallocation from equities into investment-grade credit becomes a mechanical trade for liability-matched institutional investors. The multiple stays compressed until either real rates fall, or earnings growth widens the premium. In a scenario where geopolitics and growth have simultaneously deteriorated, neither condition arrives quickly.

Technical positioning amplifies fundamental moves non-linearly while the mega-IPO pipeline adds further risk. The 2025–2026 rally has been amplified by structural technical tailwinds: CTA trend-following models near maximum long, option dealers suppressing intraday volatility and FINRA margin debt near cycle highs. Each is mechanically reversible, and the reversal is self-reinforcing rather than gradual. A 5-7% fundamental-driven decline can cascade into a 15–20% technical drawdown before positional overhang clears. The mega-IPO pipeline introduces another amplifier poorly captured by conventional risk models. Passive vehicles must rebalance to new index weights on a defined schedule, selling existing holdings irrespective of valuation or momentum. These rebalancing flow would represent some of the largest single-session institutional selling pressure seen outside of crisis conditions, enough to breach the technical thresholds that convert a managed correction into a self-sustaining cascade without any prior fundamental deterioration. A lockup expiry cliff at approximately 180 days post-listing adds a second, later-dated supply wave.

In the adverse scenario, all three policy levers are simultaneously constrained. Since 2010, equity pricing has reflected not only fundamental value but policy optionality – the assumption that a geopolitical deal, fiscal stimulus, or central bank rate cuts are available in any deterioration. The underpriced risk is not the absence of any single lever but the correlation of constraints across all three. The geopolitical channel has been partially activated - ceasefire negotiations are themselves a policy response. The fiscal channel has structural limits: Europe‘s substantial post-2022 commitments to energy security and industrial policy did not fully offset structural competitiveness damage from sustained energy repricing. The central bank channel requires either sovereign market dysfunction or a banking stress event to activate – high-bar triggers in an inflationary environment.

Unpack the full analysis Matryoshka market: Nested convictions in equities | Allianz

Weed out the laggards: Sustainability as a credit filter

Unpack the full analysis Weed out the laggards: Sustainability as a credit filter | Allianz

Financial fundamentals remain the primary drivers of credit risk. Across more than 7,400 companies and 280,000 firm-year observations, profitability (ROA), leverage and size collectively explain the vast majority of variation in credit risk. Sustainability is statistically significant but smaller in magnitude: financial fundamentals carry coefficients 3-7 times larger than the sustainability variable in our global sample. A firm’s balance sheet, earnings power and scale determine whether it can service its debt - sustainability adds an incremental but real signal on top of that financial bedrock.

Sustainability acts as a credit-risk filter, but its signal concentrates at the bottom of the distribution. Weaker sustainability is consistently associated with higher default risk. A one-decile improvement in sustainability (roughly +7.5 points on a 0-100 scale) corresponds to an approximately 0.25pp reduction in default probability - a 12-25% relative reduction for firms in the worst default-risk decile. The relationship is non-linear: moving from poor to average sustainability materially improves credit outcomes; moving from average to best-in-class delivers little additional benefit.

Environmental performance is the clearest predictor of default risk. A 10-point improvement in the environmental score is associated with a 0.9-point gain in the Altman Z-score - enough to move borderline firms out of the distress zone. Governance, by contrast, is the key driver of broader credit quality, consistent with financial discipline and transparency underpinning financial strength.

European companies lead on sustainability scores and show the greatest sensitivity to ESG factors. Regional baselines differ sharply: Europe leads (average combined score in the 50s), the US trails (40s, with environmental scores near 30) and Japan scores well on environment (near the high-40s) but weaker on social metrics. Environmental leadership carries the strongest credit premium in emerging markets, where best-in-class issuers benefit from a scarcity premium as standards tighten. In the US, holistic ESG profiles matter more than any single pillar; in Europe, the combined score links to both credit risk and credit quality.

The clearest ESG–credit links cluster in sectors exposed to energy transition, operational and reputational risk - notably communication services, consumer staples and energy. Our sector analysis finds meaningful sustainability–credit relationships in seven of eleven sectors, with the largest effects in these three. Communication/software tends to concentrate financially strong firms that can fund sustainability investment and are rewarded for risk management that encompasses ESG. Consumer staples and energy include carbon-intensive sub-sectors - textiles to oil & gas - where pollution, labor issues, carbon pricing and stranded-asset dynamics can directly hit cash flows, asset values and funding access. The relationship is weaker in materials and IT, reinforcing that sustainability integration in credit requires a sector materiality lens, not a blanket score overlay.

These findings are robust across data providers and confirmed by our internal credit assessments. Replicating the analysis with alternative sustainability scores yields virtually identical results. Using our proprietary internal credit grades, we find that sustainability is already implicitly embedded in analysts’ assessments - the sustainability score and environmental and social pillars are all statistically significant predictors of internal grades. Analysts are capturing sustainability-related risks in practice, a more systematic approach could sharpen that signal further.

Banks should embed sustainability as a negative screen in credit pricing and due diligence. Credit investors should use it primarily as a downside protection tool. Corporate issuers face a real credit penalty for sitting below the sustainability threshold - and no proportionate reward for exceeding it. The imperative for all market participants is the same: clear the floor. Chasing the ceiling is a marginal bonus.

Unpack the full analysis Weed out the laggards: Sustainability as a credit filter | Allianz

At the same time, our latest global insurance analysis explores a broader strategic shift: in a fragmenting world, resilience is steadily replacing efficiency as the industry’s organizing principle. We look at how global premium growth remains resilient despite cycle normalization, why health is emerging as the most dynamic growth segment, and how fragmentation is reshaping risk diversification, capital allocation, and cross-border business models. The real question is no longer whether the industry grows — but how it adapts when volatility becomes the baseline rather than the exception.

Too hot to grow: The economic costs of extreme heat

For the complete publication and detailed analysis, see here.

Extreme heat is emerging as a structural economic risk, with Europe particularly exposed. Heat stress events have multiplied sevenfold since the 1980s, while the average death toll per event has risen fivefold. Part of this reflects better measurement, as excess-mortality surveillance is far more developed in Europe than in much of Africa and South Asia. But structural vulnerability is also central: ageing populations, dense urban building stock designed to retain heat and underdeveloped cooling infrastructure, with air-conditioning penetration averaging just 19% across Europe compared with roughly 90% in the US.

The economic effects of heat stress are highly non-linear, with a critical threshold around 30°C beyond which productivity losses accelerate sharply. Below this level, warming can reduce heating costs and modestly support productivity. Above it, the relationship reverses. The dominant transmission channel is labor: output per hour declines by approximately USD1.3 (constant PPP, around 3% of mean hourly output in our 2014–2024 sample) for every degree across the 30–35°C range. Wage adjustments lag productivity, meaning the short-run burden falls primarily on corporate profitability before feeding through to household income and consumption. A second channel runs through energy demand, which rises by around 1.2% per degree, increasing firms’ costs precisely when labor productivity is weakening. To assess the macroeconomic implications, we model a stress scenario in which the five hottest years observed between 2014 and 2024 are replayed over 2026–2030, culminating in each country’s hottest year on record in 2030. Under this trajectory, cumulative GDP losses could reach 5–7% for the most exposed economies: USD240bn for France, USD354bn for Japan, USD147bn for Italy, USD131bn for Germany and USD120bn for Spain. More importantly for long-run growth, declines in fixed capital formation systematically exceed consumption losses, reaching 8% on average across affected countries. As heat compresses expected returns on capital, investment falls, reducing future productive capacity in a self-reinforcing drag on growth. Stagflationary dynamics are also likely, with rising prices alongside higher unemployment, creating difficult trade-offs for monetary authorities – particularly in the Eurozone, where one policy rate must serve economies with sharply different climate exposures.

The fiscal consequences fall most heavily on economies least able to absorb them. Heat-related output losses reduce tax revenues by an estimated 1.8% in France, 1.3% in Italy and Spain, and 0.7% in Germany, while healthcare costs, inflation-indexed transfers and emergency infrastructure spending increase public expenditure. Fiscal balances deteriorate by around 0.5% of GDP annually on average. Italy and Spain risk breaching the Maastricht deficit ceiling once heat-related pressures are included, while France faces additional fiscal pressure of 2.2% of GDP on top of its projected deficit of -4.9%.

Insured losses remain only a small share of total damages, reflecting a mismatch between what heat destroys and what conventional insurance was designed to cover. In 2022, climatological losses in Europe reached EUR46bn, while the insured share rose only marginally. Most heat-related losses stem from excess mortality, lost working hours, healthcare-system strain, and infrastructure stress – areas traditional indemnity insurance does not address effectively. Extreme heat is therefore harder to insure than many other climate risks because losses are widespread, systemic, and often indirect. Closing the protection gap is as much a product-design challenge as a capacity issue, prompting the development of parametric solutions, public-private risk-sharing arrangements, and public backstops for systemic exposures.

Heat-adaptation policy in Europe still focuses more on compensating losses than preventing them. Following the IPCC’s multi-actor framework, closing the adaptation gap requires coordinated action across four areas: labor regulation, buildings, public finance, and households. Occupational protection regimes need binding temperature thresholds, automatic work restrictions, paid compensation for lost hours and broader coverage for fixed-term, seasonal and platform workers. Yet no major European economy currently has all four. Building policy also remains incomplete. Effective adaptation requires overheating standards for new construction, mandatory passive cooling in renovations, cooling access for vulnerable households and electricity-grid planning that accounts for rising summer cooling demand. The revised EU Energy Performance of Buildings Directive addresses only part of this agenda.

On fiscal policy, most European economies have national adaptation strategies, but few have embedded them in multi-year budget frameworks. As a result, responses rely on ad hoc emergency measures that consume fiscal space without reducing future vulnerability. The missing layer is households. EU households hold almost EUR40trn in financial assets, while much of Europe’s housing stock remains poorly adapted to hotter summers. Mobilizing even a small share of these savings through incentives for retrofits, passive cooling and affordable parametric cover could help close the adaptation gap. But this cannot rely on private finance alone: the households most exposed are often not those with the largest liquid savings. Public guarantees, subsidies, and distributional safeguards are therefore essential to ensure resilience does not become another source of inequality.

For the complete publication and detailed analysis, see here.
Missed our related report on how an investment taxonomy for climate adaptation could look like? Check it out here.

Allianz Global Insurance Report 2026
The Future of Insurance in a Fragmenting World

Unpack the full analysis here.

What does the future of insurance look like in a world increasingly shaped by fragmentation, geopolitical tensions, and structurally higher uncertainty? In our deep-dive, we examine how these shifts, alongside demographic change and rising protection needs, are reshaping the global insurance industry. At a time when resilience is replacing efficiency as the dominant organizing principle of the global economy, insurers are facing more complex risk environments, changing growth dynamics and growing pressure to balance protection and affordability. The report analyzes where the industry’s next growth engines are emerging and what the transition from efficiency to resilience means for the future role of insurance in supporting economic stability and long-term growth.

• World: Cooling from exceptional growth, but far from slowing into weakness. According to the report, the global insurance industry is estimated to have grown by +7.1% to EUR6.9trn in 2025, adding EUR456bn to the global premium pool. Although growth moderated from the exceptional +9.4% recorded in 2024, it remained comfortably above the ten-year compound average growth rate (CAGR) of +5.6%, confirming that the industry’s growth drivers remain firmly intact. Life insurance remained the largest segment (EUR2,861bn), followed by P&C (EUR2,320bn) and health (EUR1,688bn).

• The P&C market is moving from pricing boom towards normalization. Global premiums increased by +3.8% in 2025, well below both last year’s +8.5% expansion and the segment’s ten-year CAGR of +5.6%, as pricing cycles matured, and claims inflation began to stabilize. North America remained the industry’s dominant market, accounting for 52% of global P&C premiums, although growth slowed sharply to +2.2% from +9.7% in the previous year. Western Europe remained comparatively resilient with growth of +5.3%, while the Asian market was less dynamic expanding by only +4.0%.

• The life insurance market remained robust in 2025, although the exceptional post-rate-hike boom in North America has clearly lost momentum. Global life premiums grew by +6.9% in 2025, down from the exceptionally strong +11.3% recorded in 2024 but still comfortably above historical norms. The moderation was driven primarily by North America, where the annuity boom fueled by households locking in higher interest rates has started to lose momentum. Asia has meanwhile re-emerged as the industry’s principal growth engine, with life premiums rising by +9.9% in 2025 and China alone expanding by +11.4%. Asia remains the world’s largest life insurance market, supported by demographic ageing, high savings rates, and less comprehensive public pension systems.

• Health insurance is becoming the industry’s clearest structural growth story. Global health premiums increased by +12.3% in 2025, the strongest expansion since 2014, as ageing populations, rising medical costs, and pressure on public healthcare systems continued to drive demand for private protection. North America alone grew by +14.9% as medical inflation accelerated further, with the US now accounting for more than 70% of global health premiums. Despite some normalization following the post-Covid surge, long-term growth potential remains particularly strong in Asia, where health insurance penetration is still below 1% in almost all markets.

• Geopolitics and fragmentation are becoming central forces shaping the insurance industry. A more fragmented global economy is making risk environments more complex, challenging cross-border business models and weakening traditional diversification benefits. At the same time, fragmentation is also creating new growth opportunities by increasing demand for protection, resilience, and specialized risk transfer across areas such as infrastructure, energy security, and political risk insurance. Insurers will need to adapt by building more regionally resilient operating models, integrating geopolitical analysis more directly into underwriting and capital allocation, and developing products tailored to emerging risks.

• Overall, the global insurance market is expected to grow at an annual rate of +5.3% over the next ten years, slightly above economic output. For P&C, we expect global annual growth of +4.7% up to 2036. The segment will show solid growth rates in almost all markets, as the increasing need for protection is a global phenomenon. Allianz Research also remains confident about life insurance, which can expect annual growth of +4.9% thanks to higher interest rates. Wider Asia remains the growth engine, driven by the need for private provision in the face of accelerating demographic change. The smallest segment, health insurance, should remain the most dynamic, with annual growth of +6.7%.

• In absolute terms, the global premium pool will grow by EUR5,260bn over the next ten years. Most of this growth will come from life insurance (EUR1,991bn). More than half of this additional premium pool will be generated in Wider Asia (EUR1,004bn), exceeding North America (EUR416bn) and Western Europe (EUR402bn) combined. In P&C insurance, 44% of the additional premiums of EUR1,505bn will come from North America. In health insurance, we expect additional premiums of EUR1,764bn, most of which will come from the US market.

• The global insurance map will continue shifting eastward, albeit gradually. North America is expected to retain a global market share of roughly 46% through 2036, surrendering only marginal ground over the next decade (-0.5pp). India and China, by contrast, are expected to continue gaining relevance, together adding almost 4pp of global market share. Western Europe will continue to lose relative weight. A glimmer of hope for the Old Continent: while it lost 5.3pps of market share in the last decade, it may lose “only” 4pps in the next decade.

• Geopolitical fragmentation is reversing many of the assumptions that shaped the global economy for decades. As trade, capital flows and regulation become increasingly fragmented, resilience is replacing efficiency as the dominant organizing principle. This shift is making the operating environment more complex and costly, making the push for affordability even more urgent. Nothing less than insurance’s strategic importance is at stake: not only as a mechanism for risk transfer, but also as a critical enabler of investment, innovation, and economic confidence.

Unpack the full analysis here.
Looking for country specific numbers? Explore our updated Global Insurance Map here.

How AI is rewiring global trade
Concentrating Power, Dependencies, and Supply Chains

AI and trade are no longer separate policy domains. AI growth depends on globalized supply chains for semiconductors, computing infrastructure, and digital services, while trade is increasingly shaped by who controls AI infrastructure, data flows, and cloud capacity.

For the complete publication and detailed analysis, see here.

Trade openness is a structural precondition for AI-driven productivity gains. Open economies benefit disproportionately from cheaper inputs, faster innovation diffusion, and AI adoption spillovers. Trade openness accounts for 23% of the variation in AI adoption across countries, with highly open economies such as Singapore, the UAE and Ireland leading in diffusion. However, while AI can significantly boost growth, its benefits are unlikely to be distributed evenly.

Exports of AI-enabling goods have surged from USD1trn in 2014 to USD3.8trn in 2025 (+280%), now accounting for 15% of global trade and far outpacing the 40% growth in overall goods trade. Asia dominates the supply side, accounting for 65% of global AI-related exports and seven of the top ten exporters, led by China (18% of AI-related exports), Taiwan (12%) and Hong Kong (11%). The composition remains concentrated in intermediate inputs (76%) and equipment (23%), reflecting deep dependence on semiconductors and data-center infrastructure. On the demand side, the US has tripled its AI-related imports since 2023, supported by 5,427 operational data centers, representing 45% of the global total. Europe’s import growth of just +40% underscores a widening infrastructure gap.

Services imbalances could scale further with AI. ICT services trade reached USD900bn in 2024 (11% of global services trade), with Ireland alone exporting USD173bn, exceeding both the rest of the EU (USD142bn) and the US (USD108bn), reflecting its role as a billing hub for US multinationals. However, this masks structural dependence, with the EU excluding Ireland running a USD45bn ICT services deficit, largely with Ireland, highlighting its reliance on US digital ecosystems. And the imbalance could deepen further. Hypothetically, if the AI-services subscription penetration rate of US providers such as ChatGPT Plus and Claude Pro were to increase from 3% to 50% in a high-adoption scenario in the Eurozone, annual payments to US providers could reach EUR34bn (up from EUR2.7bn currently), equivalent to 20% of the current EU–US goods and services deficit. AI thus acts as a scalable, recurring channel that exacerbates structural EU–US digital imbalances and could reduce the overall US trade deficit.

Beyond the headline data, three structural dynamics are reshaping the global AI trade order:

Supply-chain concentration as a single point of failure
The AI supply chain is concentrating rapidly at the technological frontier. Taiwan, South Korea, the US, and the Netherlands dominate the production of advanced chips, high-bandwidth memory, and semiconductor equipment, creating critical single points of failure with no near-term redundancy. Unlike broader goods trade, which has partially reoriented along geopolitical lines, AI-related goods remain largely unfragmented across geopolitical blocs. Semiconductors and key components continue to flow globally — except at the technological frontier, notably under advanced US export controls — due to deep interdependencies, challenging the narrative of technological decoupling.

Infrastructure as geopolitical power
Control over data centers, cloud infrastructure and computing capacity is emerging as a primary source of geopolitical leverage, distinct from traditional goods-trade dynamics. Europe’s strategic exposure is particularly acute. With less than 10GW of operational data-center capacity — four times below the US (60GW) — and a development pipeline six times smaller, the gap is unlikely to narrow. US hyperscalers already control 35% of European computing capacity and account for nearly half of the upcoming pipeline, consolidating a 70% cloud market share. Structural constraints, fragmented regulation, complex permitting processes, grid-connection delays, the absence of a domestic hyperscaler and limited VC or state-backed funding reinforce this dependency. At the same time, reliance on Asian hardware inputs further compounds Europe’s dependence on the US and is likely to increase without sufficient EU investment. Under this backdrop, Europe faces the persistent risk of a US “kill switch” on cloud infrastructure. Meanwhile, the expansion of this critical infrastructure remains dependent on inputs sourced in Asia, notably from China (which accounts for a 14% import share of AI data-center components) and Taiwan for semiconductors, exposing supply chains to disruption risks amid rising geopolitical tensions in the Middle East and Asia. Regaining control and strengthening sovereignty over both AI goods production and service delivery will be critical if Europe is to avoid a twin external dependency.

Industrial policy: from subsidies to protectionism
Global tariffs on AI-enabling goods have fallen from 5.6% in 2015 to 2.8% in 2025, well below the 7.8% average for manufacturing overall. However, non-tariff measures have surged, driven primarily by the US and China, reflecting a strategic shift from financial support toward technology protectionism. More than 3,600 AI subsidy measures targeting critical materials, semiconductors, GPUs, computing equipment, and optical fibers are now in force globally. China has nearly doubled its trade coverage over the past five years, followed by South Korea, Malaysia, the US, and Japan. The overlap between national and multilateral governance regimes is concentrating production, infrastructure, and modelling capabilities in the hands of a small number of economies. Regulatory fragmentation is also becoming a binding constraint on AI-services trade, with ICT trade restrictiveness already explaining 5% of the cross-country variation in AI-services flows. Meanwhile, the EU and US are advancing increasingly incompatible regulatory frameworks, creating compliance friction that reinforces existing structural imbalances.

For the complete publication and detailed analysis, see here.

Related publication: Bottlenecks created by the AI-driven data-center boom are now materializing in the power grid itself. A while ago, Allianz Research had already warned that the rapid expansion of data centers could run into hard infrastructure constraints: here.

Allianz Commercial: Political violence & civil unrest trends 2026

Allianz Commercial published its 2026 edition of trends on political violence and civil unrest earlier in the week, Allianz Research co-authored the report:

• War in the Middle East redraws global risk landscape for companies and insurers.

• Sabotage and civil unrest are also major business concerns with hundreds of incidents globally over the past five years, according to Allianz Research.

• Middle East conflict has a significant impact on risk mitigation, accelerating demand for Political violence and terrorism (PVT) insurance and changes in supply chain risk management strategies.

Transatlantic Spread - From monetary signal to fiscal mirror

Explore the full analysis here.

The transatlantic spread - the yield differential between US Treasuries and German Bunds - is one of the most closely watched pricing signals in global capital markets, and it is now testing the lower bound of the trading range it has held for over a decade. Rather than breaking through into a new tighter regime, we anticipate a reversal toward wider spreads (~200bps) in a medium-term horizon, driven by diverging rate expectations and a repricing of term premia. What makes this shift analytically distinctive is its structural character: the transatlantic spread is evolving from a pure monetary policy signal into a fiscal mirror, reflecting the divergent sovereign risk profiles of the US and the Eurozone.

Since 2015, the 10-year spread between US Treasury yields and Eurozone German Bunds has ranged between 100bps and 270bps. Since early 2025, pushed first by Germany’s fiscal pivot and then by converging rate expectations (hawkish ECB vs Fed easing bias), the 10y US–Bund spread has narrowed by roughly 90bps. If this continues, the transatlantic spread could finally break through the lower trading range that has held for more than a decade.

The latest bond sell-off suggests that the convergence trade has run its course: We expect a gradual reversal rather than a new tighter-for-longer regime. Over the last few weeks, the spread has stopped narrowing and rewidened to around 140bps. In the short run (next 6–12 months), the move should remain modest (+20bps) and still driven by rate expectations as markets reprice a less hawkish ECB against a Fed that stays on hold longer than consensus expects or even proceeds to hike.

In the medium term (3–5 years), the transatlantic drivers will shift decisively from rate expectations to risk premia. We see the US neutral rate rising by 10–20bps on stronger AI-driven productivity gains while the Eurozone neutral rate drifts 10bps lower, consistent with a historical 20–50bps widening of the real-rate spread. On top of that, the US Treasury term premium looks underpriced relative to Bunds: the US convenience yield has flipped from -30bps to +20bps as Treasury supply erodes the safety premium, while the Bund retains a -40bps convenience yield anchored in collateral scarcity. The ECB’s faster QT has already cheapened Bund duration by 35bps versus 10bps for Treasuries and we expect that gap to close. Adding a structural +10bps from the OIS/swap-spread channel, we see the spread widening by ~75bps to around 200bps.

Ultimately, the transatlantic spread is evolving from a pure monetary-cycle gauge to a barometer of fiscal credibility and sovereign liquidity. For investors, this means the transatlantic spread should be monitored not only through the lens of rate differentials, but equally as a mirror of fiscal sustainability and sovereign market liquidity. For duration positioning, this means active positioning in Bunds versus US Treasuries not only in terms of rate expectations but also where the term premium repricing will be most pronounced (longer maturities). In addition, the marginal buyer of Treasuries will increasingly demand a higher term premium, supporting a steeper US curve and a structurally weaker dollar against the euro. For corporate issuers, the EUR–USD funding-cost differential is expected to widen, favoring euro issuance (reverse Yankee issuance) that may support EUR investment-grade bonds over their US counterparts.

Explore the full analysis here.

Thinking fast, building slow: The energy cost of the US AI boom

For the complete publication and detailed analysis, see here.

Data-center power demand is expanding faster than US grid infrastructure can accommodate, creating bottlenecks across interconnection, supply chains and generation capacity that are beginning to translate into measurable price effects at the utility level. In our latest report we examine the scale of these pressures, estimate who is bearing the cost and outline the policy priorities needed to address them.

• Artificial intelligence is about to impose the largest sustained demand shock on US electricity infrastructure in decades. By 2030, data-center power consumption is expected to nearly double, lifting the sector’s share of total US electricity demand from roughly 5% to around 9%. Although planned generation additions look sufficient on paper, data centers may absorb nearly half of projected new capacity, leaving thin margins if electric-vehicle adoption or industrial electrification accelerate faster than expected. Yet demand itself is evolving faster than forecasts can capture: generative AI reached 53% population-level adoption in just three years, agentic systems consume far more energy per interaction than conventional workloads and a 280-fold decline in inference costs since 2022 is driving a rebound effect that efficiency gains alone cannot offset.

• The critical bottleneck, however, is not generation capacity but the grid itself. Data centers can be built in under two years, but grid connections can take up to seven years in congested markets such as Northern Virginia. Nationwide interconnection requests now total 1.84 terawatts, exceeding total installed US generating capacity. Supply-chain shortages have pushed lead times for critical grid equipment to several years, while projected demand would require building roughly 8,000 km of high-voltage transmission lines annually – around ten times the current pace. The strain is already showing: In early 2026, the Department of Energy invoked emergency powers to shift data centers onto backup generation during peak demand periods. Rising public opposition and legislative scrutiny add a further layer of uncertainty that conventional supply forecasts have yet to fully capture. The strain is already visible in project pipelines, with half of the 12 GW of US data-center capacity planned for 2026 being delayed or cancelled.

• Aggregate electricity prices have not yet fully reflected these pressures, but a growing “data-center premium” is emerging. States hosting the highest concentration of data-center activity have so far seen price inflation below the national average, reflecting favorable grid conditions, economies of scale and the lagged structure of utility rate-setting. Beneath the surface, however, the impact has become increasingly visible since 2023. US residential customers are already paying USD1.4bn more per year on their electricity bills as a direct result of data-center demand, with just five utilities serving 4.4mn households in Northern Virginia, the Pacific Northwest and Arizona accounting for more than 40% of that total. The sales-weighted average price effect across all utilities sits at just 0.6%, but for the most exposed utilities roughly 7.8pps of a 24.5% cumulative price increase between 2020 and 2024 are directly attributable to data-center demand, adding 0.19pp to headline inflation over four years through the direct electricity channel alone. These markets historically benefited from below-average electricity costs, a gap that has already narrowed from 5% to 3.7% since 2020 and is set to close further. Data-center investment grew 32% in 2025 and is set to rise a further 75% in 2026 alone, pointing to an additional electricity price effect of close to 14pps for the most exposed utilities over 2025–2026, nearly doubling the cumulative four-year effect in just two years. Meanwhile investor-owned utilities filed USD18bn in rate-increase requests in 2025, the highest since the mid-1980s, with costs largely falling on existing rate-payers rather than the facilities driving them.

• Preparing energy infrastructure for AI and addressing community concerns is as urgent as building the AI infrastructure itself. The immediate priority is interconnection reform: binding timelines, penalties for speculative queue filings and priority treatment for shovel-ready projects with firm power commitments would help relieve the most acute bottlenecks. Cost allocation is equally important. Unless data centers bear a proportionate share of the infrastructure costs they create, public opposition and permitting delays will intensify further. Mandatory energy-use disclosure, incentives to redirect investment away from saturated regions, stronger efficiency standards, demand-flexibility mechanisms, and stricter additionality requirements for power-purchase agreements would fill the most critical gaps in a policy framework that remains largely inadequate to the scale of the challenge – and lay the foundation for AI ambitions that the grid can actually support.

For the complete publication and detailed analysis, see here.

Related publications:

Bottlenecks created by the AI-driven data-center boom are now materializing in the power grid itself. Back in October, Allianz Research had already warned that the rapid expansion of data centers could run into hard infrastructure constraints: here.

Our latest report explores the infrastructure reality underpinning the AI spending boom. In March, Allianz Research examined whether the AI capex super cycle could persist despite market volatility: here.

Behind the gate: The promises and perils of private markets democratization

Explore the full analysis here.

“Democratization” is one of the most significant structural trends reshaping private markets. After decades of institutional dominance, private markets are now opening up to retail investors. This week, we examine what private-markets democratization actually means, why it is happening now, what lies beneath the promises, and what to expect going forward.

• Private markets are opening up to retail, and the product has to be rebuilt to fit. Global private markets have grown more than twentyfold since 2000 to over USD17trn, propelled by institutional adoption of the Yale endowment model that tilted long-duration capital aggressively into illiquid assets. The next leg of growth runs through wealth channels and mass markets, where investors lack the governance, illiquidity tolerance, and manager-selection capability. Semi-liquid evergreens have become the workhorse for wealth, while the mass market is reached primarily via DC plans, regulated retail funds, public-private hybrids, and insurance wrappers, structures in which a fiduciary, insurer, regulatory template, or the product design itself makes the call rather than the end investor.

• Three forces have converged to push democratization: savers need enhanced returns and diversification; governments need to mobilize private savings for public priorities and asset managers need new pools. Diversified private-market exposure can improve portfolio efficiency, lifting expected returns from 6.2% to 7.9% while keeping stressed downside risk (CVaR) around -3% versus -5% for traditional liquid portfolios. Governments see a policy lever to address a USD400trn retirement gap by 2050, growing inequality as value creation stays private and infrastructure needs that public budgets cannot fund. For asset managers, the move is increasingly necessary: institutional fundraising is slowing as the traditional capital pool matures, and large LPs reach their target allocations.

• The pitch is real, but a closer look reveals a more nuanced picture. First, the return story is compelling at face value: buyout funds have delivered 12-14% annually against 7-9% for public equities. But strip out leverage and most of the private-equity advantage disappears, leaving manager selection as the real driver of outperformance. Second, retail investors face a compounding triple disadvantage compared to institutional products: additional fee layers that erode the illiquidity premium, potentially weaker underlying assets, and no ability to select managers in an asset class where dispersion runs wide. Third, the semi-liquid promise is not illusory, but it comes with conditions; it works in normal market conditions but exposes investors to gates precisely when they want their capital back. Finally, retail money brings reactive behavior into an asset class increasingly tied to banks and life insurers, reintroducing the maturity transformation that closed-end structures had engineered away.

• The early-2026 slowdown is a stress test, but structural drivers remain intact. Expect product recalibration toward larger liquid buffers and tighter gating, consolidation toward mega-GPs with the scale and distribution to run retail wrappers and a new round of regulatory scrutiny on disclosure, leverage, and liquidity buffers, adding cost but reinforcing product quality.

• For investors, the dispersion between well- and poorly-built retail vehicles will widen. Four markers separate institutional-grade retail product from repackaged versions: liquidity sized to the underlying asset, clean separation of retail and institutional pools, independent valuation governance, and real manager-selection capability.

Explore the full analysis here.

Related publication: While this weeks’ publication examines the dynamics of private markets expand into retail channels, our February report explored the structural liquidity challenges facing private equity here.

Automotive: Will the Middle East crisis supercharge EV momentum?

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• An electric tilt boosted by energy volatility. After a bruising 2025, Q1 2026 data reveal a striking reversal. BEV market share hit 19% EU-wide (+4pps vs; Q1 2025) and surged to 28% in France and 23% in Germany. The 30% oil spike fueled by Middle East tensions has sent pump prices back above EUR 2.0/L, reviving the cost-of-ownership debate and accelerating a shift that was already structurally underway. This is notably thanks to price compression over other powertrain models on primary markets and rising supply on second-hand markets.

• Consumers are more sensitive than ever before to energy costs. Fuel expenditures are hitting European households already squeezed by a post-Covid cost spiral across all car-related services with repair, maintenance, and parts costs up between 20-30% since 2021, 10% higher than the increase in average disposable income in the EU-27. Car-usage costs absorb 7–8% of disposable income on average in France and Germany but rise to 11% for lowest-income quintiles during periods of volatility (e.g., 2022 energy crisis), making fuel-consumption costs a critical issue for low-income households. At current market conditions, switching to BEVs would offer material energy consumption savings – equivalent to a 4–5% purchasing-power gain per capita on average in Western Europe – with an average energy-cost differential range estimated at 5-7x regardless of price volatility.

• But turning current momentum into a durable energy shift will require firing on all four policy cylinders in parallel: increasing local battery production, building sufficient grid infrastructure implementing effective carbon pricing and consistent subsidies. While there have been positive signs of structural progress (e.g., average battery range crossing 500km psychological barrier, faster charging times), Europe remains exposed to China’s technological dominance on batteries and powertrains. Its infrastructure deficit remains the most underestimated structural brake, with only 1.1mn charging points in Q1 2026 (mostly concentrated in four countries) – far from the European Commission’s 3.5mn target by 2030. Moreover, AI-driven data-center expansion will compete directly with EV electrification for constrained grid capacity: EU consumption is projected to grow from 70 TWh in 2024 to 115 TWh by 2030. To reach its electrification targets by 2030, Europe needs carbon pricing that makes the fossil-fuel cost signal permanent, purchase subsidies that bridge the affordability gap for mass-market buyers, technological acceleration that makes BEVs the cheaper option without government support and grid decarbonization that ensures electrification actually delivers on its climate promise.

• We find that even the most generous subsidy scenario (at least EUR5,000) reaches only 70% BEV share by 2030. Carbon pricing under NDC commitments lifts the EU BEV share from roughly 29% to 42% by 2030 – meaningful, but still not enough to be on the Net Zero target which estimates 79% of BEV share in the EU by 2030. On the technology side, battery costs have fallen -93% since 2010 and are heading toward USD 60–70/kWh by 2030, the level at which EVs become cheaper than combustion vehicles in most segments without any grant. But ultimately an EV is only as clean as the electricity it runs on: even full fleet electrification falls short of its environmental potential without a cleaner grid. Moving Europe’s low-carbon electricity share from 70% to 80% by 2035 would cut per-vehicle EV emissions by over 40%.

• What if energy volatility continues beyond Q2? EV resiliency profile to be tested. EV resilience could be tested in a more volatile environment, as the progressive phase-out of subsidies reduces public support buffers against energy and macro shocks. However, relatively strong purchasing power among EV buyers, ongoing technology improvements and intensified competition from Chinese OEMs should continue to underpin demand. The main downside risk lies upstream: renewed semiconductor supply disruptions could disproportionately impact EV production and pricing, given their higher chip intensity.

The complete analysis at your fingertips here.

US large banks: The peak of the cycle is not the time to be complacent

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US large-cap banks posted record Q1 2026 earnings, and both earnings growth and asset quality sits well above trend. Yet, bank equities have underperformed the S&P 500 by more than 5 percentage points since the earnings season began. Our new report explains why the market’s caution is well-founded, for at least four reasons.

• First, buybacks offer short-term support but have limits. The Big Six returned over USD110bn in 2025 and ~USD32bn in Q1 2026 alone via share repurchases, mechanically inflating EPS levels. But buybacks support EPS growth only as long as they continue: once excess capital is exhausted, the growth tailwind disappears with a cliff effect, leaving valuations resting entirely on business growth. Elevated trading income and the M&A cycle are both volatile and unlikely to persist at current levels.

• Second, regulatory softening reduces buffers. The March 2026 Basel III/GSIB/stress-test proposals will cut CET1 requirements for the largest banks by ~5–6% cumulatively. Banks have already positioned for this: CET1 ratios for the Big Six fell ~100bps y/y, and this direction will persist as big banks still have rich buffer of around 2pps against the minimum required CET1 ratio.

• Third, SRTs artificially lift reported CET1. Synthetic risk transfers (SRT) have grown five-fold since 2016 (~EUR800bn outstanding), allowing banks to shed risk-weighted assets and boost CET1 ratios without reducing actual exposure. “Organic” solvency, which is not at the mercy of high-risk-buyers, is lower than headline ratios suggest – an estimated gap of 43bps from the CET1 ratio, plus the procyclical and liquidity risk that have not been tested yet.

• Last, long financial cycles analysis points to weaker fundamentals for the banking industry in the years ahead. Based on BIS methodologies, potential financial strains can be detected by examining credit-to-GDP, real credit growth, and residential property prices over 8–30 year periods. This framework, which successfully identified the two last U.S. financial or banking crises (the S&L crisis and the GFC), helps spot out cycle reversals that typically precede stress, though timing remains uncertain. Current signals indicate the U.S. long financial cycle has passed its peak and entered a downturn phase between 2021 and 2023. Emerging strains may extend beyond banks to non-bank financial institutions, given their larger role in the economy. Although real corporate credit growth has been picking up recently, and credit standards have loosened, most other segments (such as mortgages) have been subdued for several years now, suggesting that the US economy is indeed entrenched in the downward phase of the long financial cycle.

• What could it mean for equity and credit investors? The conclusion is asymmetric. Equity prices may capture the upside created by continuous share buybacks in the short term. But the valuations, which already embed rate-driven net interest income (NII), buyback-fueled EPS growth, and M&A super cycle tailwinds, are fragile and leave no room for disappointment. Credit spreads have widened modestly but do not compensate for structurally thinner capital buffers. The largest banks may be well-positioned to weather a downturn; the question is whether their investors are being paid enough for the risk that one arrives.

The publication is available at this link.

Happy labor day!

How geopolitics, immigration and AI will reshape work

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• US and European labor markets appear to be in good shape, with headline unemployment rates near historic lows. But three strong undercurrents (immigration policy, energy-price shock and AI) are churning beneath the calm surface. Demand for workers had already begun to soften before the shock of the Middle East crisis: vacancy rates were easing and hiring rates cooling from uncertainty and the trade war. The shift in immigration policy in the US, the UK and Germany is adding to the mix: Fading immigration inflows have quickly translated into lower employment numbers. In the US, immigration has gone from contributing over half of job creation in 2024 to near-absent in 2025 – weighing on potential growth and risking sectoral labor shortages, while offering a short-term offset against rising unemployment.

• The Iran shock will land unevenly on labor markets depending on countries’ energy exposure and the duration of the conflict. Still, we see only a limited increase in unemployment rates in the range of 0.1-0.3pp. If the crisis is resolved by end-May, unemployment rates would rise only in the most exposed European economies, and by +0.1pp at most, with 102,000 jobs lost in the Eurozone and half that in the US. Unlike in 2022, when labor hoarding led to falling unemployment, leaner buffers today could see any shock frontloaded into unemployment. In case of a prolonged closure of the Strait of Hormuz, the energy shock would hit Europe harder than the US, though higher labor protection standards provide some cushion: an estimated 225,000 jobs would be lost (0.13% of employment) in the Eurozone versus 126,000 (0.08%) in the US, with higher losses in Germany, Poland, Italy, France and Spain due to high energy exposure.

• AI’s labor-market effects are emerging, pointing to a K-shaped pattern, with youth and mid-level white-collar workers most at risk. Early evidence shows pressure on younger and less experienced white-collar workers in routine cognitive tasks, while gains accrue to higher-skilled, AI-complementary roles. Since late 2022, higher AI adoption has been associated with larger increases in youth unemployment, with AI exposure explaining about 40% of cross-country variation (excluding high-unemployment economies). AI may therefore appear first not as job loss but as fewer entry points, weaker wage growth, and sharper polarization, with reallocation driven mainly by shifts in job composition rather than wage pressures in labor-intensive activities predicted by Baumol.

• In the medium term, the AI labor-market impact will be substantial, uneven across countries and unprecedented in the scale of workforce reorganization required. Over the next 1-3 years, AI is expected to affect 23.3% of jobs across major economies, with reorganization (10.4% of jobs) dominating augmentation (5.3%) and outright displacement (7.6%). The share of jobs affected ranges from 9.2% in Italy to 28.7% in the US, with the UK (17.7%), Germany (16.2%), France (14.7%) and Spain (12.4%) in between. That is equivalent to 52.5mn jobs in the US and 21.8mn across the major European economies. Our analysis does not account for potential AI-related job growth, which we expect to offset adverse employment effects at least partially. However, job displacement is likely to outpace job creation in the medium term, as firms adjust faster than workers, creating a temporary gap. Ultimately, whether – and how quickly – AI leads to job losses, reorganization, or new job creation will depend less on technology than on policy choices. AI-proofing policy frameworks will be critical: labor-market policies, including re- and upskilling, active labor-market programs, and social protection, will shape worker transitions. Taxation (including the relative treatment of labor and AI capital), firm incentives, and competition policy will determine whether AI is deployed to augment or replace labor and how broadly productivity gains are shared.

The publication is available at this link.

Staycation summer? Jet-fuel crunch reshapes the peak holiday season

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• The Middle East crisis is squeezing airlines’ jet-fuel supplies. Unlike previous oil crises, the main bottleneck lies in refining capacity and product logistics. The Strait of Hormuz accounts for roughly 25% of global seaborne jet-fuel trade, making it a critical artery for aviation markets. As regional refinery operations have been disrupted, jet-fuel prices have doubled since the start of the conflict, while refining crack spreads have moved above USD 100/bbl. Fuel is the largest cost line (30–35%), meaning price shocks translate almost immediately into higher fares, capacity cuts, or margin erosion.

• Europe is among the most structurally exposed regions. Europe produces only around 50% of its kerosene needs domestically, with the remainder met through imports. Gulf producers account for approximately 70% of imported volumes, affecting markets such as the UK, Germany, France, and Italy, all of which run persistent deficits. Middle East kerosene flows to Northwest Europe fell -90% m/m in March, while April flows were effectively nil. Although US shipments surged +782% m/m, total combined inflows from the US and Middle East were still down -82% m/m in April, suggesting tightening physical availability into late spring and summer. More worryingly, even if Hormuz reopens soon, a full refinery ramp-up would likely take 3–6 months.

• Airlines are reacting through fare increases (+5-15% for international routes) and tighter capacity management (2-5% cuts in Europe). Across markets, carriers are attempting to preserve margins via pricing power. Beyond the fare hikes, specific fuel surcharges now range from USD20-60 on short/medium-haul routes and USD80–150 on long-haul tickets. If conditions worsen, further fare increases of 10–15% are likely. In Europe, announced capacity reductions remain selective, concentrated on lower-yield short-haul routes and secondary airports. Low-cost carriers are especially vulnerable because of thin margins, short-haul concentration, and strong competition from high-speed rail alternatives.

• Will it be the summer of staycations? Some substitution benefits are emerging in Southern Europe, but the upside is limited. Equity markets have repriced airlines sharply while rewarding Western Mediterranean hospitality firms, with listed hotel stocks up +36% since the onset of the conflict. Booking trackers point to demand gains of +32% y/y for Spain and around +20% for Italy, Greece, and Portugal. However, weakening sentiment in the US and Eurozone means many households may reduce total leisure spending rather than fully replace international trips with long domestic holidays.

• Meanwhile, tourism in the Middle East faces a sharp reversal after strong post-pandemic growth. Before the conflict, international arrivals were expected to increase by +13% y/y in 2026, after +51% in 2025 versus 2019, thanks to visa reforms and heavy tourism investment. If hostilities persist for another month, arrivals could instead decline by -35-40% y/y, implying approximately USD70-75bn in lost tourism receipts. Smaller tourism-dependent economies – i.e., Lebanon (where tourism accounts for 9.1% of GDP), Bahrain (6.2%), the UAE (6.2%) and Jordan (5.9%) – are most exposed to sudden declines in arrivals, foreign-exchange receipts, and hospitality demand. Countries with weaker external balances may face stronger pressure on reserves and exchange rates. Beyond the Middle East, island tourism destinations where aviation is the primary gateway (Seychelles, Maldives, and Mauritius) will also feel the pinch from disrupted connectivity through Middle Eastern air hubs.

The complete analysis at your fingertips here.

Global Insolvency Outlook: Brace for Middle East spillovers

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How has the impact of the Middle East conflict led to a reassessment of business insolvencies for 2026, which downside risks to the insolvency outlook we’ve identified, and a detailed regional perspective, including our analysis of the 28th regime – the EU initiative aiming at harmonizing insolvency laws across member states:

• Spillovers from the Middle East crisis will make 2026 the fifth consecutive year of rising global business insolvencies. The ripple effects of lower growth and higher inflation from the Middle East will account for one-third of this increase. The immediate implications for energy markets, shipping costs and supply chains, as well as second-round effects via inflation, financial conditions and the hit to confidence, have pushed up our forecasts to +6% in 2026 for our Global Insolvency Index (+2pps compared to what was expected before the conflict), with the expected plateau delayed to 2027. This comes after a +6% increase in 2025 (+10% in Germany, +4% in France,+7% in the US, +7% in China, +3% in Japan) and hinges on a progressive normalization of traffic through the Strait of Hormuz by June. At a global level, the direct toll from the Middle East represents +7,000 additional cases for 2026 and +7,900 for 2027, including +700 and +200 cases respectively for the US, and +3,750 and +3,600 respectively for Western Europe, while they were already expected to rise by +1,400 cases in 2026 and to fall by -11,000 in 2027. Asia will remain the largest contributor, with China’s insolvencies projected to rise by +9% in 2026 and +5% in 2027 due to ongoing structural challenges. North America will see contrasting trends, with the US extending its rebound (+9% in 2026) while Canada continues its decline (-4%). Western Europe is expected to see a prolonged rise in 2026 (+3%, +4pps compared to pre-war expectations) followed by a moderate decline (-3%) in 2027, with most countries (10 out of 17) within the -4%/+4% range and thus indicating a quasi-stable number of insolvencies. This is the case for Germany (+2% to 24,650), France (+2% to 69,900), Belgium (+1% to 11,750) and the UK (-1% to 26,550). This prolonged risk of non-payment (insolvencies of buyers) and supply-chain disruptions (insolvencies of suppliers) requires close monitoring of critical buyers and suppliers.

• The extended rise in business insolvencies will put 2.2mn jobs directly at risk globally in 2026 (+94k compared to 2025), followed by a marginal decrease in 2027 (-34K). Globally, the main sectors at risk are construction, retail and services. In 2026, Europe (1.3mn) would lead this global count, notably Western Europe (~960k), ahead of North America (~460k), both recording a 12-year high, and followed by Central and Eastern Europe (~325k) and Asia (~346k) This is equivalent to 6% of the number of unemployed people in the US and Europe, but with significant differences across countries (1% in Spain, 4% in Italy, 7% in Germany, 9% in the UK and 11% in France).

• Things could get worse before they get better: Several geopolitical and economic shocks could significantly amplify insolvency risks. First, the longer the conflict lasts, the stronger the impact on the insolvency outlook given the region’s central role in supplying essential inputs such as LNG, fertilizers, aluminum, helium and sulphur. This disruption is driving up costs across global value chains, from agrifood to manufacturing, healthcare and technology, exacerbating pressures on energy intensive sectors such as transportation (shipping, aviation, road transport), chemicals and metals. The combination of weaker demand, rising input costs and tighter financial conditions is straining companies with weak pricing power, thin margins, high debt levels or structurally higher working capital requirements (e.g. machinery, transport equipment, electronics, pharmaceuticals and construction). Countries and sectors are unevenly exposed to the direct and indirect impacts of the conflict in the Middle East. Asia is most vulnerable to the oil price and supply shock, but most developed markets’ economies are highly dependent on oil and gas imports. Beyond transportation, energy-intensive sectors such as basic metals and chemicals are immediately more vulnerable in particular in Europe where the risk of non-payment already increased noticeably prior to the war in Iran. Second-round effects are likely to materialize in particular in consumer sectors in Europe, and cyclical sectors in both the US and APAC. Zooming in Europe, real estate and technology could suffer the most from a margin squeeze based on 2022-2023 episode. A prolonged conflict could push up global insolvencies by closer to +10% in 2026 and +3% in 2027, i.e. roughly +3pps compared to the current baseline scenario. Overall, this would mean +4,100 additional cases in the US and +10,500 in Western Europe over 2026-2027. The AI boom is another risk to monitor. A collapse in the current AI-driven economic boom could mirror the dot-com bubble burst, leading to an additional +15,600 insolvencies in the US and Western Europe over 2026-2027, boosting the baseline count by +6,100 and +9,500 cases, respectively. Fiscal concerns, such as confidence shocks related to high debt levels, could further exacerbate insolvency risks, particularly in the Eurozone, boosting business insolvencies by +22,500 firms in Western Europe over 2026 and 2017.

The complete analysis at your fingertips here.

Energy shock and policy response: Once bitten, twice shy?

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• The current energy shock is fundamentally a supply disruption, not just a price event, with Asia most at risk. The blockage of the Strait of Hormuz has disrupted around 20mb/d of oil flows (roughly 1/5th of global supply), leaving a net shortfall of ~10mb/d despite rerouting, additional supply and strategic reserve releases. The resulting supply-demand gap has been closed through higher oil prices (Brent +30% since the war began), which have lowered consumption. Physical scarcity is already visible: jet fuel is tightening; diesel is being rationed and industrial users in price-controlled markets face outright shortages. Asia is most exposed (85% of Hormuz oil flows vs. less than 6% to Europe and 4% to the US), driving a persistent 6–7% price premium above Brent. A first policy response, mainly by Asian countries, has been demand rationing (shortened working weeks, energy usage and fuel restrictions) cutting global demand by ~1mb/d.

• Fiscal support followed swiftly, primarily through fuel-tax relief and subsidies (~0.15% of GDP in developed markets and ~0.20% in emerging markets on average). On price support Asia leads again, with large EMs (South Korea, India, Indonesia) deploying fiscal packages >1% of GDP vs. a global average of ~0.2%. Similarly, in developed markets, large EU energy importers average ~0.4% of GDP vs. ~0.15% overall. However, deeper pockets buy more: Germany’s small 0.04% of GDP package translates into USD22 per capita while India’s package of 1.5% of GDP, despite being 37 times larger in relative terms, only translates to a mere USD40 per capita. Should the conflict prove more prolonged (beyond May), a “second salvo” of fiscal support would raise spending to 0.6-0.8% of GDP, as governments would respond to higher energy price pass through with a 2–6-month lag. Nonetheless, no fiscal transfer can resolve the supply-demand mismatch, which will need to be cleared via demand destruction.

• Compared to 2022, the shock differs in two fundamental ways: fiscal support is materially smaller, but proportionally similar (around 50% in Europe as the size of the energy price shock is also lower) and price transmission has weakened due to structural shifts in the energy mix. This reflects policy learning , the perception of a temporary shock and fiscal limits, with governments allowing greater pass-through rather than repeating large-scale shielding (e.g. France announcing later and more targeted measures, Belgium taking no measures). Meanwhile, in the European power market, higher wind and solar penetration has reduced the gas-to-electricity pass-through seen in 2022, but gas remains indispensable for grid balancing Spain stands out with electricity prices around 70% lower than in Italy, reflecting higher renewables share and better storage capabilities.

• For now, fiscal costs for most countries are negligible but EMs with high energy import dependence and a deteriorating current account are vulnerable (Türkiye, Egypt, Morocco, and Hungary). Debt servicing costs will rise by around 0.05% of GDP annually in advanced and emerging economies on average. entirely from a higher debt stock. Interest rates have risen only modestly (US/DE: +30bps, EM hard currency: +20bps, local currency: +30bps), with an even lower change in real rates. A gradual pass-through given slow debt rollover raises debt-servicing costs only marginally through this channel. On the flip side, higher inflation could even dampen the debt burden (inflation tax) and thus debt-service costs but the currently expected increase in inflation is far below 2022, thereby limiting this effect. Some EMs nevertheless stand out: fiscal fragility and elevated debt service are most acute in Egypt, Hungary and Poland. Currency depreciation amplifies the damage in nations with a high share of hard currency debt: Türkiye, Argentina and Egypt. Nevertheless, not all emerging markets are on the losing side of the energy shock: Higher prices are a windfall for energy producers such as Nigeria, Brazil and Colombia.

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A wind of change in Hungary: Last weekend’s election delivered a landslide victory for the opposition Tisza party – after 16 years, Viktor Orbán’s Fidesz was ousted. We explore how this decisive political realignment could translate into greater institutional credibility, EU re-engagement, and a durable macro repricing. A credible path to reform and growth has been opened, but delivery will determine whether the opportunity is fully realized.

In last week’s Allianz Trade Global Survey, we examined how more than 6,000 companies across 13 countries assess their 2026 outlook, in an environment where the Middle East conflict has added a further layer of shocks to an already fragile backdrop shaped by tariffs, weakening demand, and declining consumer confidence. We’re very pleased to kick-off another season of our acclaimed Ask-me-anything explainer video series on LinkedIn & YouTube here. The complete publication for you here (in case you missed it during the Easter holiday period).

Nota bene: ‘Wind of change’ – for those around when the Berlin wall came down in 1989/1990, we cannot guarantee you won’t have the famous Scorpions’ tune in your head for the rest of the day.

Nowhere to hide? Rethinking safe havens and safe assets in a fragmented world

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The US dollar emerged as the last remaining safe haven standing amid the war in Iran. However, this situation is increasingly conditional and regime-dependent. Since the outbreak of hostilities in Iran, only the US dollar provided genuine safe haven protection for global equities. Interestingly, gold, the Swiss franc, the Japanese yen, and government bonds all failed to deliver. This dollar safety is not an anomaly but a pattern: the same dynamic played out during the Ukraine war in 2022, when inflation concerns overrode traditional flight-to-safety mechanics toward safe government bonds. Geopolitical shocks that carry inflationary consequences now systematically undermine the hedging properties of assets that once defined crisis protection. Yet, while the greenback still appreciates during acute liquidity crises, its correlation with broader risk-off behavior has weakened materially over the past decade. The resilience of the dollar is tied less to investor flight-to-quality and more to its structural role in global funding markets. When dollar liquidity dries up, the currency strengthens mechanically. This distinction matters: the dollar protects against funding stress, not against all forms of market turmoil.

Against this backdrop, the era of a single global safe asset may be coming to an end. Firstly, true safe assets have become regional. Secondly, central banks across the world have accelerated their diversification away from a single reserve asset class and currency. Currently, no single asset offers simultaneous protection against both equity drawdowns and funding dislocations. US Treasuries come closest, but their safety derives from Federal Reserve backstops, not intrinsic properties. German Bunds and Japanese government bonds hedge domestic risks effectively but offer little protection against dollar funding stress. Safety has become a function of base currency: each bond market protects primarily against shocks within its own central bank’s perimeter. In the meantime, the diversification away from the US has accelerated, if we consider the allocations of central banks to be a precursor to wider rebalancing. For a third consecutive year, central banks purchased over 1,000 tons of gold in 2024. By mid-2025, the market value of the gold they held surpassed their US Treasury holdings for the first time since 1996. The euro is emerging as the preferred currency alternative: 16% of central banks are planning to increase allocations; since 2021, the percentage of non-traditional reserve currencies in global reserves has doubled to 20%.

Post-war, beware of strong(er) currency and government bonds volatility as the unipolar monetary order fractures without a clear successor. Twin deficits and policy radicality have eroded the role of the US as supplier of global reserve assets. In the meantime, China continues to fears financial liberalization risks, keeping Chinese bond markets secluded. As for Europe, without the fiscal integration required for credible safe asset provision, its relative attractiveness remains limited. The geopolitical fractures in the currency world assumes a weakening of the US dollar viz. surplus economies such as the Eurozone, Japan, South Korean, Singapore, the offshore Chinese renminbi market and commodity exporters including Australia, Brazil, Canada, and South Africa. As for safe assets, structurally higher and more volatile interest rates are to be expected as the convenience yield erodes in countries running unsustainable deficits. This will pressure equity markets and increase the likelihood and severity of sharp, liquidity-driven market squeezes. Gold could continue to serve as a transitional hedge during this shift.

The complete analysis at your fingertips here.

A Wind of change for Hungary

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Hungary’s 12 April election delivered the country’s most consequential result since 2010 and a decisive mandate for change. Péter Magyar’s Tisza secured a landslide victory, winning 53.5% of the vote and an estimated 138 of 199 parliamentary seats, comfortably above the 133 required for a two-thirds constitutional majority. Viktor Orbán’s Fidesz fell to 38.0%. The result gives the incoming government the legislative room to pursue institutional reform, rebuild relations with Brussels and unlock around EUR18–19bn in frozen EU funds (~11% of GDP), while also improving the chances that Hungary’s EUR16bn SAFE plan can move forward. With the end-2026 RRF deadline leaving little room for delay, the election removes the main political obstacle to EU re-engagement, though the key risk now shifts to implementation speed amid potential resistance from institutions still shaped by the Orbán era.

The proposed policy changes point to near-term fiscal expansion, with growth increasingly supported by announced tax cuts, social measures, and renewed EU financing prospects. Tisza’s announced measures - lower labor taxes for low-income earners, VAT cuts, continued pension and household support - are clearly expansionary and should support household incomes and domestic demand. This comes on top of existing pressures from the Iran-driven energy shock, which is already increasing the fiscal cost of subsidies and could add up to 0.7pp of GDP to the deficit. At the same time, improved prospects for unlocking frozen EU funds would ease financing constraints, revive investment, and support a more durable recovery, with GDP growth likely to recover to around +1.6% in 2026 from 0.4% in 2025, as the investment cycle begins to turn in H2. Inflation has fallen sharply, but the disinflation looks temporary, and energy prices and rising geopolitical risks should keep the NBH on hold in the next months at 6.25% as price pressures are likely to re-emerge.

The forint is where the election trades first and where the upside is largest. The forint is the primary transmission channel for political repricing, appreciating more than 2% against the euro on Monday morning to its strongest level in around four years. Pre-election FX gains appear to have been driven by regional rather than Hungary-specific factors, suggesting limited election premium was priced in – leaving room for further appreciation if the political signal reasserts itself. The Poland 2023 precedent, where PLN gained 14.5% against CZK over the 12-month election window, illustrates the scale of upside. In local bonds, repricing is likely to be more muted: the Iran-driven sell-off pushed 10Y HGB yields from 6.47% to 7.55% ,erasing any prior election premium, and any future constructive repricing would start from a higher-yield base.

Beyond Hungary, a political restart could ease EU decision-making and strengthen the EU’s capacity to act collectively on strategic priorities. Hungary accounts for 21 of the 48 publicly reported EU vetoes since 2011, with the pace of obstruction accelerating markedly since late 2023. In response, the EU has already shown greater ability to preserve policy continuity and act under pressure, including by using Article 122 TFEU in December 2025 to indefinitely freeze around EUR210bn in Russian central bank assets without unanimity. A more cooperative government in Budapest would likely reduce tactical veto use on Ukraine, sanctions and enlargement, lowering headline political risk and improving policy cohesion. More broadly, it would reinforce a recent trend toward stronger coordination and more effective collective action at EU level, particularly in areas such as Ukraine support, defense, and common financing.

The publication can be found here.

Allianz Trade Global Survey 2026
Business as ‘Unusual’: Exporters adapt to geopolitical shocks

Beyond the conflict, global trade has changed for good. We have identified seven lessons from this year’s survey – the complete deep-dive here.

The Middle East conflict has added a new layer of shocks to an already fragile environment shaped by tariffs, weakening demand and declining consumer confidence. We expect lower global GDP growth (+2.6% in 2026), higher global inflation (4.3% in 2026) and stronger fiscal pressure, with higher energy and input costs and weak demand adding to the pressure of 10.5% effective US tariffs on companies’ margins. Even in the best-case scenario, a post-ceasefire recovery in the Strait of Hormuz would take time (reaching 15-30% of normal levels). Against this backdrop, for the 5th edition of the Allianz Trade Global Survey, we asked 6,000 companies in Brazil, China, France, Germany, India, Italy, Poland, Singapore, Spain, the UAE, the UK, the US, and Vietnam about their outlook for 2026, before and after the outbreak of war.

• Export confidence has held up better than during the 2025 tariff shock - dropping only 6pps to 75% of exporters still expecting positive growth - compared to the 40pps collapse after “Liberation Day.” However, the impact is uneven: Vietnamese, American and Spanish firms lost more than 10pps of confidence, while Chinese firms, already weakened by the trade war, lost 9pps to 51%.

• Logistics and energy are the most immediate concerns. 60% of firms are worried about supply-chain disruption and rising energy and commodity prices. In the wake of the war Iran, countries are faced with different challenges. Some are highly exposed and with low buffers (e.g., Vietnam, Thailand etc.), others are exposed but have buffers through reserves, alternative suppliers etc. (e.g. European countries, China etc.). Against this backdrop, Vietnamese (79%), Polish (76%), British (72%) and American (71%) firms show high levels of concern. In contrast, Indian and Chinese firms appear relatively less worried.

• Operational adjustments have accelerated. Over half of companies are now seeking alternative shipping routes or carriers – especially in Vietnam (60%), the US and India (55% each). Many are also working with customs brokers to expedite clearance (Vietnam 64%, India 56%) or adjusting delivery schedules. These operational responses are moving faster than contractual changes.

• Trade finance conditions are tightening. The share of firms expecting payment terms to deteriorate has rebounded to 43% (+5pps since the conflict began), with the sharpest rises in Brazil (+18pps), the UAE (+10pps), India, and Vietnam (+9pps each). Non-payment risk fears have risen to 40% of firms (+6pps vs. pre-conflict), with the most exposed sectors being pharmaceuticals, construction, and computers/telecoms.

• Reshoring dynamics have shifted. The conflict has accelerated reshoring intent, particularly in Europe – Poland, the UK and France lead this shift – while US and Vietnamese firms moved in the opposite direction. The UAE shows a bifurcated response, reflecting its dual role as both a logistics hub and a geography directly exposed to the crisis.

• AI optimism has taken a hit. The share of firms expecting AI to drive export growth of +10% fell 8pps post-conflict, from ~30% before the war.

Beyond the conflict, global trade has changed for good. We have identified seven lessons from this year’s survey – the complete deep-dive here.

Pixels of crisis: A granular look at the risks of non-payment due to the conflict in the Middle East

The complete analysis at your fingertips here.

• The Middle East conflict and the disruption of the Strait of Hormuz have led to a broad-based reassessment of non-payment risks, with country downgrades outweighing upgrades. We downgraded the non-payment risk backdrop for five economies (Kuwait, Qatar, Serbia, the UK, and the UAE) and upgraded only three (Azerbaijan, Costa Rica, and Kazakhstan). Downgrades are due to either first-round effects such as higher input prices and rising supply shortages jeopardizing profitability or simply to growing domestic fragilities such as the UK’s fiscal situation. Triple-deficit economies – energy, current account and fiscal – are set to bear the brunt of second-round effects, notably Ukraine, Jordan, Pakistan, Kenya, and Ethiopia, followed by Ghana, Egypt, Sri Lanka, Türkiye, and Morocco. In Asia, we are closely monitoring Indonesia, Thailand, Philippines, and Taiwan. Third-round effects are also becoming more visible as FX reserve accumulation has decreased and tighter external financing conditions begin to feed into higher sovereign risk premia and rising debt-service costs, particularly in countries geographically close to the conflict and those where weaker external buffers and policy constraints amplify vulnerability (e.g., Türkiye’s gross reserves are down -25%).

• Sector risk ratings, measuring non-payment risks by sector, have also deteriorated markedly, reversing the improving trend seen since mid-2025. The global transport sector and the energy sector in GCC countries in particular are caught in the crossfire. Europe’s energy-intensive companies, already affected since the 2022 energy crisis, are set for even tighter margins. With 21 sector rating downgrades versus just six upgrades – one of the sharpest negative balances since end-2022 – the impact is already visible. Gulf countries sit at the epicenter, accounting for more than half of our proprietary rating downgrades, particularly in energy and transport-related sectors. Bunker oil prices have surged by around +70%, pushing total operating costs up by +25% for sea carriers, while freight rates have increased only modestly (+16%), squeezing margins amid weak demand. Airlines face a different dynamic: although jet fuel prices have hit record highs, stronger pricing power has allowed fares to rise significantly (up to +70% on some long-haul routes). However, the sector is also grappling with major disruptions, including over 70,000 flight cancellations and the closure of key Middle Eastern hubs, with tourism losses for the region potentially reaching USD55bn and international arrivals dropping by around -30% y/y in 2026. Fragilities are also resurfacing in already weakened sectors, notably chemicals and metals in Europe, highlighting the broadening reach of the shock. In Europe, natural gas accounts for 40% of final energy consumption across industries, leaving the already downsizing chemicals, steel, and cement sectors in the dark in 2026.

• Beyond these first-round effects, the risk of broader and more persistent second-round impacts is rising. The Middle East’s central role in supplying critical inputs such as LNG, fertilizers, aluminum, helium, and sulfur is also pushing up costs across global value chains, from agrifood to manufacturing, healthcare, and technology. Emerging markets remain particularly vulnerable, followed by Europe, where energy-intensive sectors now face further capacity reductions, while consumer confidence and pricing power show early signs of strain. If the shock persists, tighter financial conditions, weaker demand and rising input costs could trigger a more systemic downturn, echoing – or potentially accelerating – the dynamics seen during the 2022 energy crisis.

The complete analysis at your fingertips here.

From invisible to investible: An investment taxonomy for climate adaptation

The publication can be found here.

• Exposure to climate risk is rising sharply but unevenly across hazards and regions. Global warming continues to accelerate, with 2025 the third-warmest year on record, reinforcing warnings that the +1.5°C threshold could be reached as early as 2030. As a consequence, global natural catastrophe losses have risen roughly fourteen-fold since 1970, reflecting intensifying hazards and rising exposure as urbanization, asset concentration and populations expand in risk-prone areas. Risk is increasing unevenly across hazards and regions: flood exposure is rising fastest in Southeast Asia, the Middle East, and North Africa; wildfire exposure has grown markedly in North America; heat stress is expanding across Africa and Asia, and drought risk remains concentrated in already water-stressed regions.

• The sharp increase in uninsured losses poses a growing risk to public finances and adaptation spending should triple to be commensurate with the needs. While the share of uninsured losses has remained broadly stable, their absolute scale has increased sharply as climate damages rise, leaving a growing volume of losses unprotected and hundreds of millions without effective financial coverage. Protection gaps exceed 80% in several major economies, including Mexico, South Africa, Italy, India, and China. Governments often absorb part of these losses through ad hoc support, but reliance on such measures risks shifting rising climate liabilities onto public balance sheets and increasing fiscal pressures. Large extreme-weather events have been found to worsen fiscal balances by between 0.2% and 1.1% of GDP, though average impacts on EU and OECD economies have been more limited due to stronger institutions and broader insurance coverage. At the same time, insurers are transferring climate risk to capital markets through catastrophe bonds, with issuance reaching record levels in 2025 and supported by strong investor demand, raising questions about the financialization of climate risk in the absence of scaled adaptation and public risk-sharing. Adaptation expenditure represents a form of preventive fiscal policy. However, current combined public and private sector spending in Europe stands at approximately 0.3% of GDP, well below the estimated requirement. Projections indicate that investment would need to triple to 0.9% of GDP to adequately address adaptation needs across the EU-27 and the UK, corresponding to an additional EUR67.5bn in annual expenditure.

• Mobilizing capital for climate adaptation at the required scale remains constrained by a set of deep structural barriers. Fiscal space in many European economies is limited, restricting the public co-investment needed to crowd in private finance. Policy frameworks remain fragmented across jurisdictions, creating regulatory uncertainty that discourages long-term private commitments. Investment cases for adaptation are underdeveloped: projects often lack bankable structures, established track records and the financial modelling that institutional investors require. Compounding this, physical climate-risk disclosure remains inconsistent, data on adaptation outcomes is scarce and, unlike mitigation, the benefits of adaptation are context-specific and difficult to measure and verify. Together, these frictions make adaptation an opaque and commercially challenging asset class for private investors. Addressing these barriers requires action across multiple fronts: agile and coordinated policy frameworks, stronger project pipelines, improved risk-sharing mechanisms, better data infrastructure, and more robust investment cases. Within this broader agenda, classification and transparency are foundational – investors and governments cannot coordinate effectively around an asset class they cannot clearly define or track.

• A shared taxonomy of climate adaptation would provide a critical first step by establishing a common language, reducing ambiguity, and making adaptation spending more visible in financial markets. This would help the private sector identify investment opportunities, support the development of new financial instruments and limit greenwashing and “adaptation-washing”. We develop a taxonomy of 61 adaptation measures, drawing on and consolidating existing frameworks, and classify them according to their underlying economic and financial characteristics – particularly the extent to which benefits can be monetized and captured by private actors. This yields a differentiated mapping of financing modalities: 38% of measures are primarily public, notably large-scale infrastructure and system-level resilience; 23% are primarily private, concentrated in scalable, innovation-driven segments such as cooling technologies and climate analytics and 39% fall into public–private territory, highlighting the central role of risk-sharing mechanisms. Importantly, these shares reflect the distribution of adaptation measures, not the allocation of investment volumes, which vary significantly across activities and remain difficult to quantify consistently. Rather than providing a capital split, the taxonomy offers a structural framework to understand investability and guide the respective roles of public, private and blended finance.

The publication can be found here.

Global Economic Outlook 2026/2027: The ‘Fog of War’

The full report and the detailed slide deck at your fingertips here & here.

• The war in the Middle East sets the stage. For the US and Europe, we expect lower growth, higher inflation, stronger fiscal pressure, and a challenging situation for central banks. Global GDP is expected at +2.6% in 2026 (revised down by –0.5pp), inflation at 3.2% in the US and 3.0% in the Eurozone this year (revised up by +0.7pp and +1.1pp, respectively) and trade growth at +1.5% in 2026 (revised down –0.5pp). Growth is expected to stay at +2.1% in the US and +0.8% in the Eurozone and deficits will remain elevated: -7% of GDP in the US and -3.0% in Europe, while higher debt-servicing costs limit room for support. Oil prices are expected to hover around 80 USD/bbl at end-2026 after reaching a record high in Q1 2026 on the back of geopolitical volatility. The Fed is expected to look through the inflation spike and remain on hold, with only one cut in early 2027. The ECB is likely to deliver a +25bps hike to anchor expectations, then pause as growth weakens. Both central banks will treat the shock as temporary in the baseline scenario, but prolonged energy pressures would trigger a more hawkish response.

• The Gulf countries (GCC) and Asia remain most directly exposed while China should still grow by +4.6% in 2026. Watch for triple-deficit economies facing recession risks while some commodity exporters benefit from diversification. Triple-deficit economies, combining fiscal, current account and energy deficits, are particularly vulnerable to capital outflows, higher inflation, and recession. GCC economies face trade, tourism and real-estate risks despite high financial buffers and we have revised their growth forecast by -2.1pps. For Asia, the end-2025 growth tailwind of +0.2pp has been erased. Latam is relatively more insulated from the shock, with countries such as Argentina, Brazil and Mexico benefiting from their position as commodity exporters.

• For corporates and consumers: a broad-based cost shock, on top of pre-existing vulnerabilities. Higher energy, metals, and fertilizer prices are creating a cost-push shock amid weak demand and elevated US tariffs, expected to hover around 10%. Energy producers and defense benefit, while energy-intensive, transport and consumer sectors face margin pressure. Tighter financial conditions and weaker demand are expected to push global insolvencies higher in 2026. Weakened consumer sentiment, labor markets and purchasing power in the context of high fuel and food prices are the main challenges ahead.

• Capital markets: pricing in a geopolitical stagflation scare. Since the outbreak of the Middle East conflict, investors have shifted decisively into a stagflationary risk‑off mode. Yield curves have risen and bear-flattened (front end: +50–90bps; long end: +40–70bps) as markets factor in a short‑term inflation spike and, as a consequence, hawkish reactions from central banks (expected end-of-year policy rates for the Fed and ECB rose 60bps and 90bps). At the same time, overseas demand appears to be softening as EM central banks draw down FX reserves to stabilize weakening currencies and finance elevated oil and gas imports. The growth scare is reflected in broad equity losses (US: –8%; Europe: –10%; EMs: –12%) and a pronounced flight to the ultimate safe asset: USD (trade‑weighted +2.5%) cash. Even gold has retreated (–13%), unwinding its earlier exceptional rally and facing selling pressure from countries tapping savings to pay for energy. Credit spreads have widened only modestly (+13bps for Euro IG; +26bps for HY), but broadly in line with previous geopolitical shocks. Importantly, markets still do not expect a structural regime shift: longer‑term inflation expectations remain well anchored (5y5y), and oil forwards for December are 30 USD below the current price. Our baseline scenario broadly aligns with this view: assuming the conflict and energy disruptions ease within three months, we expect a broad‑based asset‑market recovery as the year progresses (US 10y: 4.5%, DE: 2.8%, S&P500: +6%, Euro Stoxx +5%). In the near term, however, further volatility and new market extremes remain likely.

• It could get worse before it gets better: A worsening of the conflict would cause a stagflationary recession. Mind the chain reaction. In our downside scenario, a prolonged closure of the Strait of Hormuz (>3 months) would magnify the economic shock, with oil rising temporarily to 180 USD/bbl and gas to 200 €/MWh before easing back to 85 USD/bbl and gas to 65 €/MWh towards the end of the year, given the demand-side destruction. The global economy would be pushed into a stagflationary regime, with the Eurozone falling into a technical recession (annual growth at +0.2%) and the US economy significantly slowing down for two years on second-round effects as a strong equity market correction would hit the consumer. Inflation would peak at 4.6% in the Eurozone and 4.9% in the US, forcing central banks into a more aggressive tightening response despite the economic slowdown (ECB: three hikes, Fed: two hikes). For capital markets, this implies a clear risk-off regime: higher yields (US 10y up to 5.7%, DE up to 3.7%), sharp equity corrections with a max drawdown of -30% in Europe and -25% in the US and materially wider credit spreads (Europe IG up to 150bps, HY 440bps), alongside a stronger USD and rising liquidity stress. In this scenario, nonlinear dynamics dominate, with consumer confidence shocks, forced deleveraging and private market stress amplifying the macro downturn.

The full report and the detailed slide deck at your fingertips here & here.

Our euro, your solution: How to strengthen the international role of the euro

The paper can be found on the CAE’s website here.

I am thrilled to share a new policy note for the Conseil d'analyse économique (CAE) co-authored with Hélène Rey on strengthening the international role of the euro. In “Our Euro, Your Solution”, we outline 8 actionable recommendations to help the euro realize its full potential as a global currency in an evolving monetary landscape. A pivotal moment for the euro—looking forward to the discussion and your insights!

The key recommendations:

• Expand European safe assets, including bonds financing common public goods such as defense.

• Develop euro-denominated corporate bonds.

• Expand ECB swap lines to reinforce financial infrastructure.

• Link access to EU recovery tools to euro invoicing in supply chains.

• Integrate euro invoicing clauses into EU trade agreements.

• Adapt regulation to support euro-denominated stablecoins.

• Accelerate the adoption of an interoperable digital euro.

• Support research in post-quantum technology for payments.

The paper can be found on the CAE’s website here.

AI capex cycle – war-proof for now

The full report at your fingertips here.

• AI hype deflates amid the capex-monetization debate. Despite strong recent earnings, investor focus has shifted from profitability boost to revenue growth trajectory and cash-flow visibility, particularly given hyperscalers’ elevated capex plans (≈USD575bn, +50% expected in 2026) and weakening sentiment toward software amid risks of AI-driven revenue dilution. Our AI Bubble Risk Monitor continues to signal moderate bubble pressures: exuberant positioning has cooled but widening credit spreads send signals of a higher market sensitivity over balance-sheet quality. Rising geopolitical tensions in the Middle East have further reinforced a rotation away from high-valuation tech as risk-off dynamics regain prominence.

• The higher volatility regime will test the AI development regime, but the capex super-cycle remains intact for now, supported by strong, counter-cyclical demand. Technology capex has historically been sensitive to the macroeconomic environment and notably energy shocks as new inflationary pressure often results in higher interest rates, and consequently higher investment costs. In the US, tech is among the capital-intensive sectors most negatively impacted by severe energy price variations (~-30% correlation) but unlike energy, basic materials and utilities, the drop in investment does not result from windfall benefits stirred up by price effects. Nevertheless, hyperscalers’ dominant market positions and substantial cash reserves reduce sensitivity to macroeconomic and geopolitical shocks. In parallel, public-sector investment is accelerating, driven by digital sovereignty and infrastructure build-out agendas. The data-center pipeline is robust (x2 at ~200GW by 2030) and momentum remains resilient despite geopolitical tensions, as illustrated by Germany’s plan to double its capacity over the same horizon.

• Energy volatility may reshape capex allocation rather than overall scale. While near-term spending levels appear secure, the current concentration in data centers and cloud infrastructure could evolve. AI-related orders benefit from priority access within semiconductor supply chains, limiting immediate exposure to potential disruptions in South Korea and Taiwan linked to LNG and helium supply risks. However, a further ~50% increase in chip costs – as seen in Q1 2026 – could delay project timelines and accelerate the shift toward leasing models to share capital intensity (with estimated savings of 20–30%). At the same time, the case for expanding critical equipment and raw material production outside Asia is strengthening as current tensions expose the risks of supply-chain concentration and may rebalance investment away from the current bias toward software and computing services.

• How are markets trading the “AI theme”? Focus is shifting from efficiency gains to revenue delivery. While consensus broadly reflects current momentum, it is increasingly exposed to execution risk on both capex discipline and revenue realization. Valuations – mid-20s P/E for large caps – remain broadly justified but are vulnerable to short-term rotations in a high-volatility environment. The long-term outlook remains supportive, with capex anchored in tangible infrastructure orders that are partly decoupled from the pace of AI adoption. However, value creation is likely to be uneven across the technology stack, with relative winners in semiconductors and telecom equipment, and more challenged segments in software and consumer electronics.

The full report at your fingertips here.

Signal without response: Why the EU ETS needs resolve, not redesign

The complete analysis can be found here.

• The EU Emissions Trading System (ETS) is at a political and structural inflection point, with allowance prices falling sharply by around -24% in the first two months of 2026. The conflict in Iran and associated energy price and inflation expectations have additionally spurred proposals to use the ETS as a lever for short-term price relief. Unlike earlier episodes of price volatility rooted in energy-market fundamentals, the current turbulence reflects growing political questioning of the ETS’s long-term design, compounded by concerns over industrial competitiveness as free-allowance phase-outs begin. Geopolitical pressure around Iran adds to this risk. The use of ETS revenues for price support or direct market intervention risk defeating the steering purpose of the system or creating dangerous lock-in effects.

• Three ETS fault lines: free allocation has shielded more than 90% of industrial emissions from direct carbon costs but this is set to change; the ETS has driven substantial emission reductions in the power sector but not in industry and revenue recycling is falling short of its potential. At current prices, full exposure would cost 0.9% of gross value added in the industry sector, a real burden for energy-intensive firms that cannot pass carbon costs through to customers given high energy costs, strong international competition, and the limited offsetting potential of the Carbon Border Adjustment Mechanism (CBAM). Since 2005, power sector emissions have fallen by -54%, while industrial combustion emissions declined by a more moderate -33%. Renewables have made decarbonization viable at prices below EUR50/tCO2, while industrial options such as green hydrogen and low-carbon steel carry abatement costs well in excess of EUR100/tCO2. Persistent price uncertainty, with allowances oscillating in a EUR50–98/tCO2 corridor since 2022, has further weakened the investment case for capital-intensive industrial transformation. Last, only 16% of recycled revenues flow back into energy and industry, the sectors directly covered by the ETS, while 51% is directed toward non-covered sectors. A cumulative EUR41bn went undeployed for climate action between 2013 and 2024, risking a financing trap where industry bears rising carbon costs without the capital needed to decarbonize.

• ETS2 is better positioned than ETS1 but that advantage is eroding. Unlike ETS1, where abatement economics were the binding constraint, low-carbon alternatives in transport and buildings are already cost-competitive. The remaining barriers are political and financial: EUR113bn in annual fossil-fuel subsidies undermining the price signal, policy reversals on fossil boiler phase-outs, unaffordable EVs and financing frameworks still unequipped to meet household-level transition costs at scale. With household exposure potentially reaching EUR420 per year by 2030, these are policy choices that should be addressed before the carbon price arrives in 2028.

• The ETS does not need a redesign but rather targeted reforms to restore price credibility and close the investment gap. Seven priorities stand out: establishing a credible long-run EUA price corridor; scaling up Carbon Contracts for Difference to bridge the abatement cost gap in hard-to-abate sectors; introducing binding revenue recycling standards linked to the new decarbonization bank; prioritizing shared infrastructure for CO2 transport, hydrogen and industrial clusters; conditioning the free allowance phase-out on the availability of abatement technologies and transition funding; expanding CBAM to cover downstream sectors currently left exposed and ensuring ETS2 revenues are transparently earmarked for households most exposed to its regressive cost distribution.

The complete analysis can be found here.

Related publications:

• Allianz Green Transition Tracker 2025 – climate transition benchmark

• The second energy shock – energy security & geopolitical context

• Mining for the future – materials & infrastructure constraints.

Like podcasts? In case you like to revisit some of our recent publications in a podcast format – at your fingertips here.

Not all Emerging markets are equal: Hormuz, triple deficits, and the new energy risk premium

The complete analysis can be found here.

• Less than 2 months’ disruption of the Strait of Hormuz could push average EM inflation higher by +0.8-1.0p with limited recessionary effects – apart from GCC countries. We estimate that the closure of the Strait of Hormuz up to six weeks would result in a -1.6pps decrease in GDP for Saudi Arabia and -3.3pps for the UAE. Tourism – a key pillar of diversification across the Gulf – would also be hit in the short term, with knock-on effects on FDI and mega-project timelines including AI.

• From price shock to supply shock? As the conflict drags on, Asian economies could face supply disruptions on top of stronger inflationary shocks, given that 56% of their oil imports and 30% of their total gas imports originate from the Middle East. In Asia, Taiwan, Vietnam, Thailand, Pakistan, Bangladesh, and Sri Lanka are more exposed to a supply shortage while in Africa, Egypt, Ethiopia, Kenya, and Tunisia would suffer the most from a global oil supply shortage, given their exposure to Middle Eastern hydrocarbons. A temporary shortfall could be partially mitigated through adjustments in the energy mix (i.e., coal and renewables to a lesser extent), but energy supply disruptions for an extended period would require demand rationalization of -5 to -7% in the final energy consumption should prices double.

• Beyond three months of closure for the Strait of Hormuz, many more EM countries are at high recession risk as they run triple deficits (fiscal, current account, energy). GDP growth impact would average at least -0.5pp to 3.1% for emerging markets excluding China. Bangladesh, Egypt, Ethiopia, Jordan, Kenya, Morocco, Pakistan, Poland, Romania, Sri Lanka, and Tunisia would be most at risk. Meanwhile, a second group of economies sits in moderately high risk as they have more room to maneuver to support their economies: Chile, China, Hungary, India, the Philippines, Taiwan, Thailand, and Türkiye. By contrast, large commodity exporters such as Brazil and Mexico appear structurally resilient despite fiscal deficits as energy exports cushion the impact of higher prices.

• The shock came at a supportive moment for EM carry. It calls for selectivity along a targeted energy risk premium. Early market repricing has begun: FX markets reacted quickly, with the Egyptian pound experiencing the largest depreciation (-9.2%), followed by the Hungarian forint (-8%) and the Chilean peso (-4.9%). Repricing in local bond markets reveals a highly differentiated picture. In Mexico, the rise in nominal yields is largely explained by higher inflation expectations, while in Central and Eastern Europe – where the sell-off has been strongest – markets are pricing a larger share of risk and liquidity premia. The shock also complicates the policy outlook: With energy-driven inflation risks rising, many EM central banks are likely to remain on hold for longer despite slowing growth. A prolonged conflict could see inflation expectations repricing more forcefully across EM curves, steepening local yield curves, and delaying monetary easing cycles. Overall, the adjustment is likely to remain selective rather than systemic. The most likely outcome is therefore the emergence of a targeted energy risk premium across vulnerable EM economies rather than a broad-based sell-off across the asset class.

The complete analysis can be found here.

Warsh’s double dilemma: When the Middle East rewrites the Fed’s playbook

The full report at your fingertips here.

• The energy price shock will delay the Fed’s single rate cut in 2026. Rising energy prices should push US inflation towards +3.6% y/y in April-May, up from +2.8% expected before the Middle East conflict, under the assumption that oil prices remain around 90 USD/bbl on average in Q2. Despite a still weak labor market, the Fed will have to keep rates on hold at least through the summer amid risks of de-anchoring inflation expectations. We continue to expect only one 25bps rate cut this year but pushed out to September.

• Fed chair nominee Kevin Warsh combines a dovish view on interest rates with a hawkish approach to the Fed’s balance sheet, which could drain liquidity from a highly leveraged financial system. Increasing frictions in the US money market would have a global impact on financial markets mainly though the channels of FX and interest-rate volatility. Warsh opposed additional rounds of quantitative easing (QE) in the 2010s, warning that prolonged asset purchases fueled financial excess and risked inflation. With hindsight, his concerns about loose financial conditions and asset valuations appear partly validated. But reducing the Fed balance sheet drastically or even returning to a scarce-reserves regime would ignore the intermediation mechanisms on which the US funding market has been founded since the GFC. The critical point is not the amount of reserves but the dealers’ balance sheets available to warehouse Treasuries and intermediate repo flows. Dealers face regulatory limits that are capping the size of their balance sheets. They cannot do both: absorb heavy Treasury issuance and provide smooth funding for the private sector. It would drive up prices for hedging instruments (swap spreads and cross-currency basis) but in a worst-case scenario such mismatch could trigger a deleveraging spiral affecting valuations of risky assets and increasing default risk for highly leveraged entities (e.g., hedge funds). The Treasury and the Fed have options to mitigate this, but it would require a massive easing of leverage regulation and/or a substantial decrease in Treasury issuance, the first being more likely than the latter.

• We expect the Fed to move cautiously towards a modestly smaller balance sheet from Q4 2026 at the earliest, keeping Treasury holdings steady while continuing the run-down of the USD2trn MBS holdings. This would limit money-market volatility but still risk higher mortgage rates. Wars typically involve monetizing deficits, i.e., restarting QE and departing from Warsh’s pledges for rapid quantitative tightening (QT). The Fed will likely adopt a hybrid model: a leaner balance sheet combined with standing repo facilities as permanent liquidity backstops, preserving rate control while mitigating systemic funding risks. Regulatory moves on bank liquidity regulations could also support the transition toward lower bank’s reserves. We would expect banks’ reserves balances to drop gently from 9.5% of GDP currently to reach the level of the 2019 money-market meltdown (below 7% GDP) only by Q4 2028, though uncertainties are large, and episodes of money market volatility will likely become more frequent. The MBS reduction would however blunt the administration’s attempts to lower mortgage rates. The conflict in the Middle East could also drastically change the course of monetary policy in the US. In a downside scenario, quantitative easing may be needed to help finance the effort of the war.

The full report at your fingertips here.

The second energy shock: Why Europe isn’t still energy secure

The complete publication can be found here: The second energy shock: Why Europe still isn’t energy secure | Allianz

• The escalation of the conflict in the Middle East is a stark reminder of Europe’s unfinished business: achieving energy autonomy. Although Europe’s reliance on Russian gas has improved since 2022, it is merely replacing one dependency with another. Recent events have destabilized global energy markets and highlighted the need for greater energy resilience. Around 20 million barrels of oil per day – about a quarter of global seaborne trade – pass through the Strait of Hormuz, making it a key supply chokepoint. Since hostilities began, oil prices have risen, peaking near 120 USD/bbl. Although the Middle East supplies only about 4% of Europe’s gas, European benchmark prices have nearly doubled as traders fear Asian buyers could compete for supplies. Europe’s industry is most vulnerable to gas disruptions (39% of final energy), transport to oil shocks (with road transport consuming 73% of EU oil), while gas often sets power prices, spreading risks across the economy. The situation recalls the 2022 Ukraine energy crisis and highlights the need to strengthen energy resilience and competitiveness. Russian pipeline gas to the EU fell from 150 bcm in 2021 to 38 bcm in 2025, largely replaced by US LNG (45%), increasing exposure to global market cycles and shipping limits. The EU now operates 33 LNG terminals (215 bcm capacity), with 22 bcm under construction and 78 bcm planned, but without faster electrification and grid expansion it risks replacing pipeline dependence with costly LNG reliance.

• First, Europe must reactivate its energy emergency toolkit. The 2022 energy crisis showed that while price volatility cannot be avoided, its economic impact can be limited through coordinated policy responses combining demand reduction, supply stabilization and targeted fiscal support. Policymakers should therefore replay the crisis playbook: demand reduction, encourage efficiency and compensate industry for temporary curtailment. Power generation can also shift away from gas by maximizing nuclear output and temporarily using other available capacity. On the supply side, rebuilding storage and securing LNG imports are essential ahead of winter. Finally, emergency market tools and targeted financial support can stabilize markets while protecting vulnerable households and energy-intensive industries.

• Secondly, this time around, Europe’s energy autonomy agenda should also be a strategic transition program towards more resilience. The near-term gas pivot worked because governments treated energy security as wartime logistics. But resilience now requires fixing structural weaknesses in market design and delivering a best-in-class power grid. Nuclear power can strengthen Europe’s energy resilience by providing reliable, low-carbon baseload electricity that stabilizes power prices, and ensures system reliability, however it is costly and comes with other challenges (e.g. uranium sourcing, waste management etc.). Europe should address the primary bottleneck to the renewable transition : the inflexibility of the power grid, by building and digitalizing networks, expanding cross-border interconnection and making demand price-responsive at scale in order to enable consumers to shift electricity use when power is cheapest. With congestion costs projected to reach EUR12.3bn by 2030 and EUR56.7bn by 2040 without upgrades, Europe needs to act to avoid price shocks that could reach +22% by 2030 and up to +103% by 2040. To solve this and improve its energy system, we estimate Europe will need to invest around EUR2.27trn in the grid by 2050 (i.e. about EUR 91bn per year), plus EUR101bn per year in wind and solar through 2030 to substantially improve networks, interconnectors, and enable consumers to shift electricity use when power is cheapest.

The complete publication can be found here: The second energy shock: Why Europe still isn’t energy secure | Allianz

Allianz Social Resilience Index 2025: The Middle-Resilience Trap

The comprehensive analysis can be found here: Allianz Social Resilience Index 2025: The Middle-Resilience Trap | Allianz

• In 2025, the Allianz Social Resilience Index (SRI) records a third consecutive – albeit modest – improvement, but underlying divergence remains pronounced. The global average rose from 47.4 in 2024 to 47.9 (on a 0-100 scale) across 171 economies, driven by lower imported inflation pressures and greater currency stability in Emerging Asia and several advanced economies. Firmer governance was another driving force, including institutional stabilization in parts of Emerging Asia and Central Europe. At the same time, weaker social cohesion in the Middle East, Emerging Europe and high-income countries continued to weigh on social resilience. Northern European economies lead the ranking, with Finland (1st, 84.3), Denmark (2nd, 83.8) and Iceland (3rd, 81.4) at the top of our index. Germany (8th, 78.5), France (13th, 74.7), and the UK (18th, 72.9) remain strong, while Italy (28th, 66.8) and the US (32nd, 65.3) ranked lower but stayed in the top third. China (59th, 52.5), India (81st, 46.8), Mexico (105th, 41.3) and Brazil (112th, 40.0) ranked significantly lower, with conflict-affected states like Lebanon (169th, 17.7) and South Sudan (171st, 11.8) at the bottom.

• The conflict in the Middle East and the resulting energy inflation will test the strength of social fabrics, particularly in countries such as Vietnam, Thailand, Morocco, Tunisia and Malaysia. The SRI helps measure vulnerabilities to such exogenous shocks: countries with weaker resilience and limited fiscal buffers could be particularly affected by higher-for-longer energy prices. Indeed, sustained energy-price increases raise inflation (including food inflation), weaken growth and heighten political tensions, particularly where societies have limited capacity to respond. Coping mechanisms will be pivotal, including crisis-response mechanisms, economic stabilizers and optionality. Two clusters stand out: Low-to-mid resilience economies with high exposure – including Vietnam, Thailand, Morocco, Tunisia and Malaysia – could see price spikes more easily translate into social pressures. Meanwhile moderate-resilience countries with medium exposure to the energy price shock – including Chile, Egypt, Serbia and South Korea – should be in a better position to cushion the impact of a temporary energy shock on social resilience. Europe is likely to be more affected than the US given its greater reliance on imported energy, though social spending may cushion the impact.

• Taking the long view, four trajectories of global progress in social resilience emerge: low-resilience countries catching up (e.g., Romania and Saudi Arabia); countries weakening further (e.g., Nigeria and Brazil); high-resilience countries consolidating strength (e.g., Germany and Finland) and countries experiencing slippage (e.g., Canada and Sweden). Some countries seem stuck in a middle-social-resilience trap among these diverging paths. Rankings show limited change since 2024, though Sri Lanka (+12.7pts; +39 ranks) and India (+7.8pts; +27 ranks) improved notably, while Brazil (-8.7pts; -41 ranks) and the Czech Republic (-6.9pts; -15 ranks) saw steep declines. A cluster of advanced economies persistently scoring 65-70 – including Czechia, Hungary, Italy, the US and Japan – appears caught in a middle-SRI trap (in reference to the middle-income trap phenomenon coined by Indermit Gill and Homi Kharas in 2007). Material prosperity increasingly coexists with political polarization and policy volatility. Prolonged stagnation in this range risks greater instability, weaker reform capacity and declining policy predictability, with implications for long-term growth and sovereign risk. These tensions are increasingly visible: between 2020 and 2025, mid-resilience countries – including India, Indonesia, South Korea, the UK and the US – accounted for up to 70% of global strikes, riots and civil commotion (SRCC) events.

The comprehensive analysis can be found here: Allianz Social Resilience Index 2025: The Middle-Resilience Trap | Allianz