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Since our last edition of Peregrination, markets, policymakers, and investors have been forced to navigate the economic fallout of the conflict in the Middle East. Nevertheless, the global economy has demonstrated remarkable resilience in the face of a fragile geopolitical landscape.
The good news, however, is that while United States (US)-Iran tensions have re-escalated, both the US and Iran still want a resolution to the conflict, albeit behind closed doors. In the US, politics is playing a major role in accelerating efforts toward a diplomatic resolution as consumer confidence has seen a rapid decline and the voter base is not content with all of the decisions coming out of the White House. Iran, on the other hand, also faces its own economic pressures, with trade restrictions, limited access to international markets, and shortages of hard currency, all creating strong incentives for rapid normalisation. As both sides stand to benefit from a resolution, markets reflect a belief that a negotiated agreement is still achievable.
Inflation risk remains elevated
While the initial fear of the worst-case scenario has not materialised, infrastructure damage, disrupted supply chains, and logistical bottlenecks mean an economic normalisation will likely take many months. We describe this as a “protracted disruption,” which assumes ongoing economic headwinds, weaker growth, and elevated inflation over an extended period.
Even if oil prices ease, inflationary pressures will remain stubborn for several reasons.
- Rising freight costs and supply constraints as freight networks have not fully normalised.
- Middle East energy infrastructure rebuilding costs will continue to filter through the global economy.
- Knock-on effects are beginning to emerge in agriculture and food production, with fertiliser shortages and supply chain disruptions placing upward pressure on food prices.
- Concerns surrounding the El Niño climate phenomenon – which may extend into 2027 – have heightened fears of reduced agricultural output and further food inflation, globally.
Before the conflict began, many analysts anticipated multiple interest rate cuts across major economies. Those expectations U-turned after the outbreak of hostilities. The consensus view now is that rate cuts have been put on hold. The debate among central bankers is no longer about how quickly rates will fall, but whether additional hikes may still be necessary before inflation returns convincingly toward target levels.
From a J-shape to a K-shape recovery
When the Middle East tension started, we expected a J-shape global economic recovery, with growth falling by about 0.5% before slowly moving back to capacity. Three months later, and the global growth outlook has improved modestly compared with the worst-case assumptions made earlier in the year. If the US and Iran can reach an agreement to end the war, there is hope that global growth could turn out more resilient and that the J-shape might be much less severe. This scenario presents a far more favourable outcome than initially feared, and the global economy will avoid the severe disruptions that many worried could trigger a much deeper slowdown.
What must be noted, however, is that while the global growth outlook has stabilised, not all regions are positioned equally. Current growth patterns among developed markets increasingly resemble a K-shaped recovery. The US continues to move upward, while Europe, the United Kingdom (UK), and Japan struggle to achieve meaningful growth. Several factors explain America’s relative strength to its peers.
THE US: Buoyed by tech investment
The US economy has been supported by massive investments in technology, artificial intelligence, and digital infrastructure, which are generating substantial productivity gains. This focus on tech is supporting corporate profitability and helping sustain economic growth while underpinning the equity market as well.
However, despite the resilience of the US economy – driven by tech and high-income consumers – US voters have become increasingly dissatisfied with rising inflation and living costs. This has resulted in consumer confidence weakening significantly particularly amongst citizens in the lower income bracket who feel the impact of inflation and higher oil prices more keenly. The US is also seeing declining savings rates, which is a further indication of the pressure on lower-income consumers, who are tapping into their savings.
For US President Donald Trump this political pressure is mounting ahead of mid-term elections in November, forcing policymakers to focus more heavily on domestic priorities such as housing affordability and consumer welfare. In fact, in a rare moment of political cohesion, the Bipartisan Housing Bill has been enacted, which aims to make new housing more affordable for Americans.
Given the US’s enduring competitive advantages-particularly the significant productivity gains driven by sustained investment in technology and innovation-the US economy continues to command a growth premium relative to its developed-market peers. This stronger growth outlook should, over time, support the dollar’s relative strength against other major currencies.
While several structural trends are creating pressure on the dollar, including efforts by the BRICS bloc to increase trade in local currencies and reduce reliance on the greenback, these developments should be viewed in context. As long as the US maintains a meaningful economic and productivity advantage over its peers, the notion that the dollar is at risk of losing its dominant role in global trade and finance appears overstated. The dollar’s status is underpinned not only by the size and resilience of the US economy, but also by the depth of its financial markets, institutional strength, and continued leadership in innovation. Consequently, concerns about an imminent erosion of the dollar’s reserve currency status are arguably unwarranted.
We don’t see the US’s tech boom petering out any time soon. These companies are all extremely profitable, their future capex plans are very strong, and they are being fuelled by global capital. This means that the US economy and the dollar will remain on the front foot for the foreseeable future.
In this climate, we expect the US to continue growing slightly above capacity, at about 2.2% per annum, which is well ahead of its developed market peers.
EUROPE AND UK: Hit hard by inflated energy costs
Europe remains particularly vulnerable. Even before the current conflict, many European economies were grappling with deep-seated structural challenges, including ageing populations, weaker productivity growth, rising social tensions, and increasing political fragmentation. These pressures have been reflected in the growing appeal of nationalist and Eurosceptic movements, persistent wage stagnation in several economies, and a worsening housing affordability crisis. At the same time, European manufacturers are facing intensifying competition from lower-cost Chinese imports, particularly in the electric vehicle sector, placing additional strain on the region’s industrial base and economic growth prospects.
So, from a growth perspective, they are coming off a very low base that has nothing to do with the war. The disruption of energy supplies has only intensified these weaknesses as the region has a heavy dependence on imported energy.
Over the quarter, numerous ships carrying oil and gas, which were originally destined for Europe, were redirected elsewhere, like Asia and Australia, forcing European nations to seek alternative suppliers. Interestingly, the US benefited significantly from this development. Having achieved energy self-sufficiency, the US was able to increase exports of oil and refined products, including jet fuel, to European markets. While this has contributed to the US economy, it has helped alleviate some of Europe’s energy concerns.
Given its challenges, if the war continues indefinitely, Europe would be the first major economy to face a recession. As it stands, Europe’s growth trajectory remains subdued, coming from below 1% growth. We expect that it may only average around 1% over the next three years.
The UK is facing many of the same headwinds as its European neighbours. While continental Europe continues to grapple with rising euroscepticism and political fragmentation, the UK is still contending with the economic consequences of Brexit a decade on. Many measures of economic performance suggest that growth, investment, trade, and productivity have been weaker than they might otherwise have been, adding to the country’s long-term structural challenges.
Political instability has compounded these difficulties. Since the Brexit referendum, the UK has seen a succession of prime ministers, with its seventh leader in just over a decade, highlighting the challenges policymakers face in delivering consistent long-term reforms. Together, subdued economic performance, political uncertainty, weak productivity growth, and ongoing fiscal pressures underscore the structural issues that continue to weigh on the UK’s economic outlook.
UK growth is moving in tandem with the European Union, and we expect the country’s economy to also average around 1% growth over the next three years.
CHINA: Facing structural challenges beyond the conflict
China continues to face a range of economic challenges, yet policymakers remain focused on preserving growth momentum and supporting long-term stability. The economy is contending with subdued consumer demand, ongoing structural adjustments, and a prolonged downturn in the property sector, which has historically been one of the country’s most important engines of growth. Property investment remains under significant pressure, declining by approximately 24% year-on-year, reflecting weak confidence, excess housing supply, and tighter financing conditions. Despite these headwinds, authorities continue to deploy targeted policy measures aimed at stabilising activity, boosting domestic demand, and guiding the economy through a gradual transition towards a growth model, driven more by innovation and consumption.
In order to maintain its current growth outlook, China continues to rely heavily on exports. While a number of traditional exports are down, the current concentration lies in technology and vehicles – putting it at risk of increased vulnerability to external demand shocks. With China’s trade with the US down, it has successfully redirected its trade toward other markets, and, as such, its exports to the rest of the world have more than offset the US declines.
As they look to the future, China’s policymakers are increasingly focused on what has been termed the “Six Networks” strategy. Unlike previous growth models built around property and traditional infrastructure, the new approach emphasises technology-driven investment of up to 5% of GDP, which would include:
- Data centres
- Semiconductor manufacturing
- Advanced communication networks
- Digital infrastructure
- Artificial intelligence capabilities
- High-tech industrial expansion
These initiatives could generate significant investment demand, particularly for commodities such as copper and other industrial metals, but the deployment timing remains uncertain.
Currently our China growth outlook is around 4.25% which is slightly below consensus of 4.5%.
Global trade evolving
Global trade trends are also shifting. While the US has started to pursue more protectionist policies, China has sought to strengthen international economic relationships and secure new markets. This shift is gradually reshaping global trade networks and could have significant long-term implications for economic influence and trade flows.
While the US was the dominant trading partner for most major economies in the early 2000s, that landscape has shifted significantly over the past two decades, with China now occupying that position for a growing number of countries. China’s expanding economic footprint, extensive trade networks, and strategic investment initiatives have strengthened its influence across both developed and emerging markets.
An interesting reflection of this shift is that Chinese President Xi Jinping rarely travels abroad compared with many global leaders. Instead, an increasing number of heads of state and business leaders are making the journey to Beijing to strengthen diplomatic ties and secure trade and investment agreements. In many cases, these engagements now attract more attention than visits to Washington, underscoring China’s growing role as a central hub in global trade and economic diplomacy.
While global trade has remained remarkably resilient, supported by countries diversifying their trading relationships and opening new markets, we did see some softness in trade volumes this quarter. Importantly, this slowdown appears to be less a consequence of US tariffs and more a reflection of logistical disruptions around the Strait of Hormuz.
At one point, nearly 3,000 vessels were delayed around the Strait, with approximately half carrying cargo valued at an estimated $125 billion. Given the Strait’s critical role as one of the world’s most important maritime trade routes, these disruptions inevitably affected the movement of goods and supply chains globally. As a result, the recent dip in trade activity is likely attributable to these temporary logistical bottlenecks rather than a deterioration in underlying global demand. Once shipping flows normalise, trade volumes should recover accordingly.
Managing your wealth in an uncertain world
From an investment perspective, Peregrine Wealth Investment Management will continue to do what it has been doing for the last 2 decades. In light of the hostilities in Iran, we have tempered our growth assumptions but we are not making any aggressive adjustments to our investment allocation. Harold Strydom will discuss how this is expressed in our portfolio positioning in his article on our three-year High Conviction scenario.