United States (US)

The US economy ended the third quarter of 2026 with strong business activity, although the composition of growth became more differentiated. September’s manufacturing and services PMIs increased to 55.9 and 58.8, respectively, indicating faster expansion across the private sector. Industrial production also strengthened, rising 0.7% month-on-month and 2.2% YoY, although utilities contributed substantially to the headline increase while manufacturing output rose a more moderate 0.3%. These developments indicate continued resilience in production and business demand. However, the stronger survey readings should be assessed alongside slower hiring and differences in performance across industries, which temper the assessment of the expansion’s underlying strength.

The combination of weaker employment growth and renewed inflation has made the outlook more challenging. Nonfarm payrolls increased by only 29,000 in September 2026, compared with a downwardly revised 133,000 in August 2026, while unemployment edged up to 4.2%. Headline consumer inflation accelerated to 3.7% YoY, core inflation increased to 2.6%, and producer inflation reached 6.3%, indicating stronger price pressures at both consumer and upstream levels. Retail sales increased 6.3% YoY, but sales excluding vehicles and gasoline rose only 0.2% over the month. Consequently, the strength of nominal expenditure provides a less convincing signal of household demand once higher fuel prices and spending composition are considered.

Monetary conditions remained restrictive following the Federal Reserve’s September 2026 decision to increase the federal funds target range by 25 basis points (bps) to 3.75–4.00%. Updated projections placed the median policy rate at 4.1% at both end-2026 and end-2027, alongside projected 2026 growth of 2.3% and persistently elevated inflation. Subsequent releases have sharpened the policy trade-off: stronger prices favor continued restraint, whereas weaker hiring increases the potential cost of additional tightening. In our assessment, this balance sustains uncertainty over the future interest-rate path and leaves global markets sensitive to inflation and employment surprises, with implications for the dollar, bond yields and emerging-market financing conditions.

Euro Area

The Euro Area ended the third quarter of 2026 with improving business surveys, although the recovery remained incomplete across sectors. September’s manufacturing PMI increased to 52.9, while the services PMI strengthened to 53.0, supported by improving orders and domestic business activity. Construction, however, remained deeply contractionary, with its PMI at 43.4 and residential activity recording its sharpest decline since February 2025. Actual industrial production also remained weak in the latest available release, declining 0.5% month-on-month and 1.1% YoY in August 2026. Taken together, these indicators point to greater resilience in selected activities, but insufficient evidence of a sustained recovery across production and investment.

Renewed inflation and cautious household spending remain the principal constraints on domestic momentum. Headline inflation accelerated to 3.8% YoY in September 2026 from 3.2% in August 2026, driven primarily by energy inflation of 18.9%, while core inflation increased to 2.5%. Consumer confidence deteriorated to −16.5 after four months of improvement, and August 2026 retail sales volumes increased only 0.8% YoY. Although unemployment remained stable at 6.4%, employment resilience has yet to generate a convincing recovery in consumption. The external position also weakened, with an August 2026 goods-trade deficit of EUR16.1 billion, reflecting faster import growth and a larger energy deficit. Higher energy costs therefore continue to weigh on both purchasing power and external balances.

The European Central Bank projections envisaged growth of 0.9% in 2026 and 1.4% in 2027, while inflation was projected to average 3.0% and 2.5%, respectively. The subsequent inflation acceleration reinforces concerns about persistent cost pressures, but weak construction, industrial output and consumption underline the economy’s vulnerability to tighter financing conditions. In our assessment, the outlook depends on whether stronger business demand can sustain activity while energy pressures moderate. Until then, the recovery remains exposed to the combined effects of weak real-income growth, cautious investment and restrictive borrowing costs.

China

China’s economy gained some momentum toward the end of the third quarter of 2026, supported primarily by manufacturing and external demand. September 2026 industrial production increased 5.5% YoY, accelerating from 5.2% in August 2026, while exports surged 36.3% and widened the monthly trade surplus to approximately USD133.5 billion. The official manufacturing and non-manufacturing PMIs also returned to modest expansion at 50.1 and 50.2, respectively. These improvements accompanied third-quarter gross domestic product growth of 4.5% YoY, up from 4.3% in the second quarter. Nevertheless, stronger production and trade have yet to establish a comparably robust recovery in domestic spending, leaving growth concentrated in selected industries and external markets.

Domestic demand remains the main constraint on a more balanced expansion. Retail sales growth improved to 1.1% YoY in September 2026 from 0.4% in August 2026, while surveyed urban unemployment declined to 5.2%. However, fixed-asset investment contracted 7.2% over January–September 2026, with property-development investment falling 20.6%, indicating continued weakness in capital spending. Consumer inflation remained modest at 0.9% YoY, with core inflation at 1.0%, whereas producer inflation accelerated to 5.0%. The divergence between upstream prices and subdued consumer inflation points to stronger cost pressures without an equally strong recovery in final demand. Household caution and weak investment therefore continue to limit the transmission of industrial gains into broader domestic momentum.

Policy support continued through targeted measures, while September 2026 one-year and five-year loan prime rates remained at 3.00% and 3.50%, respectively. New yuan lending recovered to RMB1.08 trillion, but outstanding loan growth slowed to 4.8% YoY and household borrowing remained broadly flat, indicating limited evidence of a sustained recovery in private credit demand. Foreign exchange reserves declined to approximately USD3.400 trillion, partly reflecting valuation effects, while remaining a substantial external liquidity buffer. In our assessment, the central challenge is to strengthen household confidence, stabilize property activity and revive commercially viable investment. Continued export strength supports near-term growth, but persistent reliance on external demand also increases exposure to trade restrictions and changes in global technology spending.

Indonesia

Indonesia's economic recovery remains vulnerable to both external and domestic risks. Fiscal policy shows a widening deficit, although revenue growth remained strong. Higher commodity prices and a weaker rupiah supported tax and customs revenues, while Coretax and improvements in tax administration contributed to higher income-tax collections. Retail sales grew by 1.3% YoY in August 2026, although consumer confidence weakened, indicating continued caution in household spending. Manufacturing activity returned to expansionary territory as new orders and moderating input-price inflation eased cost pressures. Bank lending expanded, supported by investment loans, while the banking sector maintained strong capital and liquidity buffers. Taken together, these indicators suggest that economic activity continues to expand, although the recovery remains uneven across sectors and demand components.

Key risks include higher inflation and continued external pressure on the rupiah. Headline inflation increased, driven mainly by weather-related food-supply disruptions, while core inflation eased. Escalating tensions in the Middle East have kept oil and commodity prices elevated, while expectations of tighter US monetary policy and high US Treasury yields have weighed on emerging-market assets. Meanwhile, the latest MSCI announcement has raised concerns about potential foreign equity outflows, adding to existing pressure on the rupiah. These developments complicate Bank Indonesia's policy trade-offs: higher energy prices and a weaker currency could increase imported inflation at a time when monetary and liquidity conditions must also support domestic growth.

Against this backdrop, Bank Indonesia maintained the BI-Rate at 5.75% during its 20–21 October 2026 Board of Governors Meeting (RDG). Although the policy rate remained unchanged, BI adjusted other instruments to balance exchange-rate stability and domestic liquidity needs. It raised the Deposit Facility rate to 5.00% while maintaining the Lending Facility rate at 6.50%, narrowing the interest-rate corridor. BI also increased premium discounts on DNDF hedging for foreign-funding transactions to encourage capital inflows and support rupiah stability. Taken together, these measures indicate that BI is maintaining the policy rate as an anchor for stability while using other monetary and macroprudential instruments to manage liquidity and support economic activity.