Economy in Brief

The global PMI data for a select group of 24 countries and their composites, provided on the graph, indicate a slight overall improvement for the total PMIs in June, with the service sector getting slightly stronger as the manufacturing sector is slightly weaker.

Conditions, however, remain uneven. The overall average for the PMI composite in June moved up to 51.4 from 50.7 in May, but the May reading had fallen from 51 in April. The median rose to 50.8 in June from 50.2 in May, but it had been at 51.2 in April. There continues to be a great deal of weakness and irregularity in the progression of the global economy—not surprisingly with the recent data coming during the period when oil prices had surged in the Strait of Hormuz had been closed. We now are seeing different conditions in force, and we'll see how much improvement occurs in July if the current global situation remains improved.

In June, nine of twenty-four reporters had PMI readings below 50, indicating contraction in economic activity. In May, there had been ten such reporters, while in April there had been nine. These readings, of course, are less than half of the reporters; however, it's still a very large proportion of the reporters where the total PMI gauges are indicating economic contraction. Over three months, there are nine reporters with average readings below 50; over six months, there are only seven; and over 12 months, there are six. This progression tells us that the situation has been getting worse rather than better.

Based on monthly data, the European Monetary Union, Germany, France, Russia, Egypt, and Qatar each recorded three consecutive months of readings below 50, indicating contraction in each of those months. Sequentially, over 12 months, six months, and three months, only France, Russia, Ghana, Egypt, and Qatar show consistent readings that average below 50 (based on raw data).

The queue standings of the levels reported by countries in June show only seven with standings above the 50th percentile; this means there are only seven countries whose PMIs in June are higher than their average back to January 2022. Not surprisingly with the recent events really focused on oil prices and the situation in the Middle East and the closure of the Strait of Hormuz, some of the weakest ranking readings are coming from oil producers in the Middle East such as Qatar (6.1%), the UAE (1.5%), Saudi Arabia (6.1%), and Egypt (18.2%). Clearly, the interruption of the oil flow and war damage has had an outsized impact on these data.

However, quite apart from the current situation and the closure of the Strait, if we calculate the average PMI standing rather than the ranking just the average of the PMI total sector ranking, there are four countries that have averaged readings below 50 based on monthly data back to January 2022. Those countries are France, Zambia, Egypt, and Kenya. The average readings across all countries back to January 2022 is a reading of 52.3. The highest ranking during this previous period is from India; its ranking is at 58.1. Ironically, some of the strongest readings in the earlier period come from oil producers whose current rankings are so low such as Saudi Arabia at 56.6, the UAE at 54.6, and Qatar at 53.4.

There has been upward momentum this month, particularly in services, while manufacturing backtracked. However, the trend to improve conditions is no longer so clear. What is clear is that the outlook is going to depend upon whatever peace agreement proves durable involving Iran and traffic through the Strait of Hormuz. This conclusion is not rocket-science; it is obvious. And it's going to take close-watching because there have been so many missteps around alleged ceasefires and treaty discussions that we can't be very sure about what's going to play out in the future and what will last.

In this week's Letter, we trace how an energy shock and a resilient AI upcycle shaped Asia through the first half of 2026 and weigh the risks that may define the second. The year opened hopeful on AI, though some feared stretched valuations, before the US-Iran conflict and a closed Strait of Hormuz shook the mood (chart 1). A later MoU eased energy prices and inflation fears, yet valuations largely held on AI optimism, despite bouts of reassessment. The oil surge hit import-reliant emerging Asia hardest, leaving India, Thailand and the Philippines doubly exposed through their Middle East sourcing (chart 2). Pass-through inflation, subsidies that some governments later pared back, and currency pressure followed, though resuming Strait traffic should ease these strains. Rising inflation then boxed in policymakers, straining already-stretched fiscal positions and limiting more pro-growth monetary policy stances in some economies (chart 3). Our latest Blue Chip survey found a slim majority reassessed the risk balance after oil fell, though the shifts stayed mild versus the June survey (chart 4). Most still rank upside inflation risk above downside employment risk, even as a slightly larger share now see the balance as more even. AI remains the region's key offset, with Taiwan and South Korea riding a sharp rise in memory and chip exports (chart 5). Malaysia and Thailand instead draw data centre FDI, so Asia gains from the buildout phase rather than the West's hoped-for productivity gains. We close on an uncertain second half, where a possible Super El Niño could revive food-driven inflation even as energy pressures fade (chart 6). Beyond that, an AI reassessment, fresh geopolitical flashpoints, trade tensions and the US midterms could each reshape the outlook.

The year thus far We began the year on a relatively hopeful note, buoyed by AI optimism and market valuations that reflected it, although some investors worried that valuations had become overstretched. The geopolitical mood shifted quickly in early January, however, when US military forces captured former Venezuelan leader Maduro, though the event did little to move markets (chart 1). A far greater shock came when the US-Iran conflict erupted in late February, closing the Strait of Hormuz and dealing a negative blow to global energy supplies. More recently, the US and Iran have reached a Memorandum of Understanding (MoU) aimed at ceasing hostilities and resuming trade flows through the Strait. This has allowed energy prices to ease, softening policymakers' concerns about energy-driven inflation. Even so, equity valuations have largely remained underpinned by AI optimism, albeit with interim bouts of reassessment and price retracement. This drew on repeated reports of strong growth along the AI supply chain, and on signs that supply could not keep pace with demand. This continued even as AI models with leapfrogging capabilities reached the public. At several points, the US government stepped in to rein in public access to some models, given security concerns about such immense capabilities falling into the wrong hands.

Unemployment rates in the European Monetary Union (EMU) were steady in May at 6.2%, the same level as in April, after April had fallen to 6.2% from 6.3%. The 6.2% reading is the lowest for the community since it was formed. Meanwhile, for the larger community, the EU, the unemployment rate has stabilized at 5.9%, the same as in April, again, a tick lower than it was in March. This 5.9% reading is a tick above the historic low for the European Union (EU). In both cases, the performance of these two economic conglomerations is quite excellent.

Monthly The table looks at 12 of the most senior members of the monetary union, including an observation for the United Kingdom based on its claimant-count unemployment rate, presented at the bottom of the table. In May, the monetary union saw 4 of 12 members in the table with lower unemployment rates than they had in April. In April, five members had lower unemployment rates than in March. In March, seven members had lower unemployment rates than they posted in February. The progression to lower unemployment rates has slowed based on monthly data.

Sequentially Looking at changes in the unemployment rates over broader sequential periods—three months, six months, and 12 months—6 out of 12 reporters have lower unemployment rates over three months; 7 have lower unemployment rates over six months; only 4 report unemployment rates that are lower over 12 months. The broader periods for comparison show changes in the unemployment rates that report more declines over the shorter and more recent periods compared to the longer/older periods. This is not the same trend leaning that we get from the last three months of data. It'll be good to watch these developments in the coming months to see if the tendency to lower unemployment rates is slowing or whether dropping unemployment is continuing in force.

Rankings The ranking of unemployment rates since 1990 finds only three of these 12 monetary union members with unemployment rates above their medians. Those are Luxembourg, with a 98.2 percentile standing, Finland with an 81.9 percentile standing, and Austria with a 76.6 percentile standing. Italy, on the other hand, is reporting the lowest unemployment rate that it has seen during this period. The Greek unemployment rate has been this low or lower only about 3% of the time, while in Spain the unemployment rate has been this low or lower 11% of the time. For Portugal, the unemployment ranking figure has been weaker 13% of the time. The monetary union continues to report excellent labor market results even though economic growth has been relatively disappointing.