Paul Diggle

Aberdeen, the specialist asset manager, has issued its latest quarterly ‘House View’ on the macro-economy and investment outlook.

The outlook is for continued global economic expansion in the second half of 2026 and beyond, supported by AI-driven investment, resilient consumption, and fiscal easing. Growth is expected to run above trend at around 3.2% this year^[1], although inflation remains elevated following the recent energy shock.

While the macro environment remains supportive for risk assets, Aberdeen highlights that uncertainty is high, with geopolitical risks, inflation volatility, and late-cycle dynamics limiting overall conviction.

Peter Branner, Chief Investment Officer, at Aberdeen Investments said: “The global economy continues to show resilience, supported by strong corporate earnings and the ongoing AI investment cycle. However, we are clearly in a more complex phase of the cycle, where geopolitical risks remain elevated and inflation shocks are more frequent.

Our base case scenario assumes a stabilisation in oil markets and continued economic expansion, but tail risks remain material. Investors should therefore remain constructive on risk assets, while maintaining diversification and resilience in portfolios.”

Aberdeen expects inflation to remain higher than previously anticipated due to lingering energy effects, although underlying pressures are expected to moderate. Central banks are therefore likely to move rates by less than markets currently expect:

• The Federal Reserve is expected to remain on hold in 2026, with rate cuts resuming in 2027
• The Bank of England and ECB are also likely to pause tightening
• The Bank of Japan is expected to continue gradual rate increases

China continues to benefit from AI and green-tech demand, although weak domestic consumption and property sector challenges are likely to prompt further targeted policy easing.

Emerging markets broadly remain resilient, supported by AI-linked capital expenditure, though performance varies between regions.

Paul Diggle, Chief Economist, at Aberdeen Investments added; “The global economy has entered a regime of higher inflation volatility, driven in part by geopolitics and disruptions to supply chains. While the energy shock is proving temporary, future supply-side shocks may become more frequent.

This raises the probability of environments where equities and bonds move together, reinforcing the importance of diversification across other asset classes and regions.”

US Dollar

Aberdeen has downgraded its view on the US dollar, though it still sees the currency appreciating. The reduction reflects an easing in geopolitical risk premium, but the currency continues to be supported by relative United States (US) growth outperformance, AI‑driven capital inflows, and the potential for a lasting hawkish shift at the Federal Reserve. Over the longer term, however, gradual diversification away from the dollar, including rising central bank gold holdings, may act as a structural headwind.

Emerging markets

Aberdeen remains positive on emerging markets bonds and equities, where growth continues to outperform pre‑pandemic trends and benefit from AI‑driven capital expenditure, particularly across emerging Asia. While the recent energy shock may temporarily weigh on non‑commodity exporters, structural tailwinds remain supportive, and many Latin American economies retain scope for further monetary easing. However, dispersion across the region is increasing, with performance concentrated in a narrow set of technology‑linked exporters.

Private credit

The Aberdeen House View maintains a neutral stance on private credit, reflecting building late‑cycle concerns. Investment grade segments remain resilient and the yield pick-up over public markets is attractive. But there are emerging signs of stress in parts of the direct lending market, with concerns around underwriting standards, fund liquidity, and the potential for deterioration as the cycle matures.

Real estate

Resilient tenant demand and stable income streams support Aberdeen’s decision to remain positive on global direct real estate. Performance is becoming more balanced across regions and sectors, reflecting improving fundamentals, although select sectors such as UK student accommodation remain less attractive. Overall, the sector continues to offer dependable income in a more uncertain macroeconomic environment.

Infrastructure

Aberdeen retains a strong positive view on infrastructure, underpinned by powerful structural drivers including digitalisation, decarbonisation and rising defence spending. Significant global infrastructure investment needs are expected to create a sustained pipeline of opportunities, with private capital playing an increasingly important role. While renewable energy continues to dominate deal volumes, digital infrastructure is capturing a growing share of total value, and valuations are generally most attractive in small and mid‑market transactions.

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Notes:
[1] Source: Aberdeen, 2026 June. Forecast is offered as opinion and is not reflective of potential performance. Forecast is not guaranteed and actual events or results may differ materially.

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Paul Diggle

Paul Diggle, chief economist, at Aberdeen sets out the scenarios from Aberdeen’s global economic outlook for Q2 2026 covering the Iran conflict and global economy more broadly.

“This is a very challenging environment to make predictions in, and we are conscious many of our scenarios may be seen as negative. Our role as economists is to identify what might fail, this means undertaking robust scenario analysis to rigorously stress test portfolios and understand downside exposures.

“Whilst forecasts may miss the mark, the purpose is not perfect prediction but to prepare for potential downturns. From our House View’s medium-term perspective, we continue to maintain signals of positive equities, modestly positive duration, and neutral dollar.”

Everything everywhere all at once

Our baseline scenario sees the Iran conflict impart a large but short-lived geopolitical shock lasting two-to-four weeks. We’ve conditioned on the average oil price over March being $90 per barrel (which allows for spot to remain volatile in coming days), falling to $70 by the end of the year. As a result, 2026 average global inflation is 40bps higher, global growth 30bps lower, and a single rate cut for the likes of the Federal Reserve (Fed) and Bank of England (BoE) is taken out, relative to what would otherwise be the case. Once the geopolitical shock abates, the macro narrative returns to being one of decent-enough growth, slightly above-target inflation, and modest further central bank easing in some economies. We put a 40 per cent probability on this scenario playing out over our three-year forecast horizon.

Conflict risks dominate

This scenario sees oil and gas flows through the Strait of Hormuz disrupted for months rather than weeks. We’ve conditioned on oil prices averaging $120 over March, remaining above $100 for six months, and still above $80 by year-end. The recent experience of high inflation means inflation expectations are less well anchored than normal. So central banks do not “look through” this shock, with cutting cycles abandoned and rate hikes in some cases, including in the Eurozone. We put a 30 per cent probability on this scenario, but that may change rapidly.

Stagflation

In this scenario we’ve modelled an even larger oil price and broader supply chain shock. Non-linear oil price dynamics kick in, with limited storage capacity used up and production shutdowns not easy to reverse. We are using a $180 average oil price over March, and a forward path that is still above $100 by year-end. Transport, chemical, fertilisers, and food production all experience a significant cost shock. Inflation spikes into the high single digits and doesn’t return to 2 per cent for several years. This tips the global economy into recession. Central banks are hiking rates multiple percentage points. We are currently putting a 20 per cent probability on this scenario, which is very large given the magnitude of the shock. However, if the conflict ends in the coming weeks, this downside risk could just as quickly drop out of our distribution.

Looking away from the Middle East, Paul outlines several other upside and downside scenarios Aberdeen is considering for the quarter.

AI and capex collapse

AI-related spending collapses, tech stocks fall sharply and private credit defaults surge, triggering a US recession similar to the dotcom bust. US unemployment rises 2ppts, GDP declines 1.5 per cent over three quarters, and sequential core inflation falls below 1 per cent. The Fed eases policy sharply in response to the weaker growth environment, taking interest rates well below neutral. We give this a 15 per cent probability. Sharp-eyed readers may note this takes us above 100 per cent that’s because we are no longer thinking of these scenarios as mutually exclusive, so they don’t need to sum to 100 per cent. Multiple of these shocks could play out at points over our three-year forecast horizon.

AI eats all the jobs

A new downside which takes inspiration from the recent Citrini memo, but grounds the scenario in more internally coherent economic dynamics. Rapid advances in AI mean it substitutes for a wide variety of service-sector work, raising unemployment. Central banks are slow to react, perhaps because of a misdiagnosis that rising unemployment reflects a higher natural rate. Eventually, policy rates fall to the effective lower bound, but the economy is already in a liquidity trap. Fiscal positions deteriorate, as income tax takes decline. Low marginal propensities to consume mean the higher incomes enjoyed by capital owners are not spent on new wants and needs that would create new employment. US unemployment rises to 10 per cent, GDP is contracting, and the fed funds rate is ultimately cut to zero. We put only a 5 per cent probability on this scenario, because of the strong economic conditions that have to hold for it to occur.

Bond market rout

Here the Warsh Fed rapidly shrinks the balance sheet, while fiscal easing in Japan and prospect of a new UK government causes market concerns. Active Fed bond sales start again, and investors become concerned that it will no longer backstop the market in future crises. In Japan, fiscal policy is eased significantly, while moral suasion to discourage the BoJ from tightening is interpreted as politicisation. And in the UK, a shift in the fiscal strategy to allow for more deficit-financed government spending causes serious concerns about fiscal sustainability. All of this causes a large increase in term premia, with the yield curve aggressively steepening. We give this scenario a 10 per cent probability because, while certain aspects of the scenario are plausible, it requires a much more dramatic shift in policy that does not itself respond to the market signal of higher yields.

Productivity boom

In this scenario US potential growth is boosted by AI and perhaps the supply-enhancing aspects of President Donald Trump’s agenda. But there is no material increase in technological unemployment. Unit labour costs shrink, reducing inflationary pressures, and firms’ profit margins widen, encouraging further investment in AI. US potential growth rises from under 2% to more than 3%. But the lower inflationary impulse allows the Fed to cut more rapidly. We have put a 20% probability on this scenario, as there are some early signs of AI boosting productivity, but the speed and extent of the boost would need to be much greater than currently visible in the data.

Fiscal expansion

A new scenario in which easier fiscal stances in the US, Eurozone, and Japan boost global growth and inflation, but also push up on policy interest rates and term premia. In the US, easier fiscal policy comes from corporates receiving rebates for the IEEPA tariffs, while the administration fails to rebuild the tariff wall to the pre-IEEPA strike-down level due to opposition in Congress. Stronger nominal US growth and labour market outcomes mean there are no Fed rate cuts this year. In Japan, Prime Minister Sanae Takaichi delivers a two-year suspension of the consumption tax on food. The Bank of Japan (BoJ) hikes rates four times this year. German fiscal easing comes online quicker than expected, and there is even higher defence spending with a greater emphasis on keeping the spending within Europe. We give this scenario a 15 per cent probability, in part because it requires a relatively benign market reaction to more aggressive fiscal policy.

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