The 2026 macro reset: Energy price hikes

The latest escalation in the Middle East is doing more than moving energy prices. It could reshape the 2026 macro story.

In this episode of "What's Brewing", Head of Political & Government Affairs Matt Holmes and Chief Market Strategist & Economist Guy Miller unpack:

• How higher input costs could change central bank paths
• Why this conflict could ripple through inflation, interest rates and global growth
• How affordability, migration and security are reshaping politics in the U.S. and Europe
• Why Asia seems to take a quieter stance, including China's long game on supply chains and Taiwan

Transcript

SPEAKER_00 0:00

What is perhaps more surprising is how this is escalated. We still have the tech spending. We've still got to get fiscal initiatives coming through. Then the question will be what are the longer-term implications of this? I've spoken many times about the vulnerability from an economic perspective that Europe has.

SPEAKER_01 0:23

Welcome to another edition of What's Brewing with Matt and Guy. Now, Matt, last time we spoke, it was the start of the year. There was great hope about what was going to happen. At the same time, we had the Monroe Doctrine or the Donro Doctrine being much spoken about. We had the intervention, of course, in Venezuela. There was talk about, you know, US territory, security, all of these things. Is the Middle East now part of that Donro Doctrine? How do you see it?

SPEAKER_00 0:47

That's a good question. Yes. Have we expanded the Western Hemisphere to uh to cover the Gulf? Uh it starts to look that way, although, to be perfectly honest, I'm not sure I really understand the drivers behind US intervention uh in the United States.

SPEAKER_01 1:00

Anybody does. That's what worries me.

SPEAKER_00 1:01

Well, I thought we seen an end to Forever Wars, but uh seemingly uh there's room for one last hurrah before uh before exit. Um yeah, look, it's uh I it had been brewing for a while. I don't think uh anyone was surprised that um frictions between Israel and Iran and the US bubbled over again. No. Uh I think what's uh what is perhaps more surprising is how this has escalated. Uh, and what is particularly worrying is the challenges in in seeing a path to a stable ceasefire going forward. But look, hopefully um that can be breached. We've had positive signals recently, and uh then the question will be what are the longer-term implications of this? Has it derailed the fairly positive view of economic growth that you outlined a couple of months ago when we caught up, or are you still positive about the prospects for 2026?

SPEAKER_01 1:48

Well, look, firstly, I think I'm not sure it should be a surprise to anybody that anything in the Middle East is never an easy solution, there's never an easy exit. And I think you're right. I mean, at the beginning of the year, no, we had quite an upbeat look on the world. We we had global growth kind of trend-like. We had three key drivers to support that. One was, of course, the capital spending boom that we felt was going to continue. Uh, the other one, of course, was the fiscal initiatives coming from China, Japan, uh, of course, Germany, and the big, beautiful bill in the US. And we also had further interest rate cuts penciled in. So that general dynamic for growth was actually quite a good one. Now, the important point from my side is that two of them are still there. You know, we still have the tech spending, we're still gonna get fiscal initiatives coming through.

SPEAKER_00 2:32

The one that's And you don't think those fiscal initiatives are gonna be uh stymied by inflation, by increased costs.

SPEAKER_01 2:39

No, I I think they're still gonna be there. Could some of it been be spent on caps or some energy subsidies? Yes, I think some of that could be. But I think there is enough in the pipeline, and actually we're beginning to see some of that come through, even in the case of Europe in terms of some of the spending and infrastructure. I think that comes through. The one that we don't have, however, is the cut in interest rates. I think the fact that we've got higher energy prices, higher input costs, um, is going to change the way the central banks operate. Now, market pricing, which we often look at, just a month ago it would say that in the UK, for example, the Bank of England was going to cut rates two times uh this year. And as of yesterday morning, it moved from two cuts to four rate hikes. That's profound.

SPEAKER_00 3:24

That's a handbrake turn, isn't it? I mean, this is extraordinary. You do ask questions about how accurate pricing is in the market if they're market changes by that quickly.

SPEAKER_01 3:30

We've always questioned a little bit, but it but it shows you um that market opinion, that opinion generally can change uh very quickly around that. We probably think that's overdone. But the point about this issue in the Middle East is you've often asked me why is it that the financial markets continue to move ever higher given everything that we saw in 2025? And my answer was generally because it doesn't impact corporate margins or revenue. This time it's different. This time it is going to impact both of those.

SPEAKER_00 3:59

So it's real economy impact from what's going on in the Middle East at the moment. I think there are also going to be political uh implications of that. So if I mirror your, you know, three areas of sort of positive drivers for growth, the sort of three areas of political pain that I see uh certainly landing in uh in Europe and North America over coming months. It's uh it's affordability, it's migration, and it's it's security. And and all of those pose particular headaches for for sitting governments and shape a little bit the political discourse. And if we look first at the US, where obviously uh we've got very consequential midterm elections coming up in November.

SPEAKER_01 4:35

But those three things that you pointed out, that was part of President Trump's manifesto, was it not? And well, exactly. All of those are looking a little bit shaky right now.

SPEAKER_00 4:43

This is exactly the point, right? Is that uh he risks undermining the platform which so successfully put him into his second term last year. So if we look at the uh affordability piece, um, you know, gas prices, a bit like uh mortgage rates in the UK. I mean, there's sort of the only one thing faster than light in the universe, and it's the reaction of US voters to higher gas prices, because it hits the pocket immediately. So affordability, I think, is gonna be is gonna be an additional headwind. It's gonna be a problem, and you see that feeding through already, I think, into some of the approval ratings.

SPEAKER_01 5:17

That's what they see, I think, as the Achilles heel in the current administration.

SPEAKER_00 5:20

Aaron Ross Powell, Jr.: 100 percent. And whether that's at the sort of federal level or whether that's in uh sort of state level races, you you see it come through. And and that will be the battleground going into the midterms, I'm sure. Aaron Ross Powell, Jr.

SPEAKER_01 5:30

So how will that look? I mean, are are the Democrats likely to win the House? I guess the Senate as out of the question, pretty much, but they're likely to win the House.

SPEAKER_00 5:38

As polling stands, yes, you assume that the House of Representatives flips. Senate is a very big reach for the Democrats. It may come into play, but I think you'd need to get closer to the election to be confident at all about calling that. But it will still cause headaches for uh for President Trump. Trevor Burrus, Jr.

SPEAKER_01 5:53

But will he be a lame duck president? I can't imagine him gently sliding off into the Trevor Burrus.

SPEAKER_00 5:57

Well, this is it. It's difficult to see uh President Trump being lame duck, but certainly he will be constrained in what he can do through uh through legislation, through Congress. So TBC, 27 will be more complicated from a domestic political perspective in the States.

SPEAKER_01 6:12

Now the US, though, has the benefit of being still in pretty good health economically. Um, you know, the dollar is still the reserve currency, interest rates are still okay in in the US. What about the other parts of the world? You mentioned Europe. We've got really important elections coming up in Europe. You know, I've spoken many times about the vulnerability from an economic perspective that Europe has. How do you see things in Europe? And is it going to be again populist mandates that are very much front and foremost?

SPEAKER_00 6:39

So it's fragmentation of politics and populism that's that's driving that, and that's that's the key political narrative, I think, across all of the major European uh member states and and UK. Um affordability is an issue in Europe as well, and that will come through increased gas prices and uh the the costs of heating your house or the inputs to manufacturing, and that's particularly a headache for Germany. But alongside that, you've got the other two sort of areas of political pain, which is migration, um, and I think there is a real risk that the conflict in Iran leaves a very damaged, very broken state. Yeah, that's not gonna help that for sure. One that is likely to see increased um uh migration flows out of Iran, and that's something that will hit Europe and will exacerbate existing political tensions. And then you've also got a uh renewed focus on the security headache. I mean, the US certainly does not look like the predictable ally with aligned interests of old. And I think anyone who is in a doubt after 2025 that um President Trump was uh seeing things the same way that the government in Berlin or Paris or London did is has been disabused of that. And that poses uh a challenge in terms of sort of strategic uh thinking about defence from a European perspective, but it also poses quite immediate, quite direct challenges in terms of where you spend the limited uh tax revenue that you've got left to play with. You've got to redeploy from welfare to uh to security in a way you've not had to for 30 odd years.

SPEAKER_01 8:10

But one thing, Matt, I mean, I I I get all of that, and of course there's risk and of all these elections that are coming up, and yes, the political or the populist movements are still very much evident. I still see this as a another opportunity, yet another opportunity that Europe has to do things better. I think it has become more unified over the years. I think back to the European crisis uh, you know, a decade or so ago. So I'm encouraged in a way that all of this conflict, all of this strife, all of this challenge with the relationship with the United States, it does make Europe realize, you know, they have to look after themselves. They have to cooperate, they have to find good solutions, good platforms, they need to be more productive going forward, and they cannot rely on others to bail them out. That to me is not a bad thing.

SPEAKER_00 8:55

So look, the incentives are clearly there, and this is well understood by the technocrats, the the sort of traditional uh governing parties of Europe. I mean, look at the Draghi report. I mean, that very clearly set out the need for greater European cooperation, you know, further advances on single market if you're going to deliver what European citizens want, which is economic growth, better a better future than a past.

SPEAKER_01 9:19

Well, listen, let's hope they do that. But one thing, and I don't want to forget this because I get lots of questions on this, which is Asia. You know, all the focus, of course, is in the Middle East. A lot of the key players, some very big players, have been very quiet given what's going on here. How do you see that? And to the question that nobody really kind of ever wants to address or answer, what does this mean about Taiwan's situation that we're seeing or the actions by the United States? Does that change uh the focus of the Chinese at all, or is it going to be business as usual?

SPEAKER_00 9:47

Look, my take on this is that the Chinese are carefully planning their approach to how they reabsorb Taiwan over time, uh, if they do, ultimately. But I would be very surprised if there's sort of opportunistic uh tactical land grab in the short term because some US carriers have been redeployed, and this Chinese government focus on dominating key supply chains, key value chains, and making sure that they are fundamental to uh all aspects of the global economy. That will continue to create headaches for those countries that are having to compete with uh cheap Chinese exports that are delivering high-quality goods right through the value chain these days. So that that's a fundamental problem when you look at you know how the global economy is going to reach equilibrium going forward. I see nothing that changes that in the short term. Um I think that probably remains positive for those countries that are able to play into that uh Chinese uh value chain uh from ASEAN. Um, it creates perhaps broader headaches for those of us in the West who, for a couple of hundred years, haven't had to think too hard about direct competition in economic terms from uh China or other large Asian markets.

SPEAKER_01 11:03

Well, look, Matt, I don't think that's a bad place to end it. I think we would both agree what is critical, of course, is what happens in the Middle East in the coming days and weeks. And can we have a ceasefire? Can we have some exit uh plan put together? Because if we don't have that, I think both in your world from a geopolitical side and from my side and the economics, I think it's going to be a much harder year ahead of us.

SPEAKER_00 11:27

The question will be the stability of a conclusion. I think there's no doubt that ultimately um there will be a ceasefire. Both sides will want to de-escalate, but is that going to be uh stable or are we going to have to recalibrate a level of risk around the Middle East, around GCC, Saudi, Iran for the for the longer term?

SPEAKER_01 11:46

Well, listen, keeping your fingers crossed is never a great strategy, but I've got mine crossed right now because I have no idea what the outcome of this is going to be. Something that's going to be impactful for all of us. So we'll keep an eye on this and we'll come back to this one again in our next recording. I say to all our viewers, thank you very much again for tuning in. As always, please do like, subscribe, and maybe even give us a thumbs up. And we'll back with you again very soon.