The ceasefire deal that brought about stability in the region remains in doubt. Speaking at the NATO summit in Ankara, President Donald Trump declared the ceasefire over. The US Treasury has revoked the licence that allowed Iran to sell crude through August 21st. Neither government however has formally withdrawn from the Islamabad Memorandum of Understanding, and both still have negotiators working on a deal.

Markets have repriced accordingly. Brent crude climbed 3.3% in early Monday trade to $78.50 a barrel, up from a recent trough of $70.14 resulting in a 5.4% gain last week. American crude, on the other hand added 3.4% to reach $73.83. Stock markets slipped across Asia. The US dollar has strengthened along with bond yields as investors now bet on the Federal Reserve increasing interest rates to counteract rising inflation. The headline rate is expected to cool down from 4.2%, by falling fuel prices, though rising crude might undo these expectations.

Gold behaviour throughout this year makes it seem like it has stopped behaving like a safe haven asset. Gold prices fell as much as 1.4% on Monday to near $4,060 an ounce, and it also fell on the day Iranian missiles struck a Qatari LNG carrier. One reason this could be the case is as a result of interest rate expectations in the US. Higher energy prices feed into inflation, and investors are likely betting that the Fed will respond by raising rates. That expectation does two things. It suppresses long-run inflation expectations and since the market believes the central bank will act, nominal yields rising while expected inflation falls will cause real yields go up. Long term government securities, become a more attractive haven than non-interest-bearing assets such as gold, which could partly explain the dip in prices.

Given the current circumstances, it looks like the Strait of Hormuz again is neither open nor closed. Iran’s newly created Persian Gulf Strait Authority says transit is not currently possible; CENTCOM says the strait is open and traffic is flowing. American officials said some 20 vessels had been escorted through in the previous 24 hours, while ship-tracking services showed little movement.

The mediators are working on the sidelines to restore stability in the region. Oman, which has been hosting Iran’s foreign minister to discuss safe passage through the strait, summoned Tehran’s ambassador on Sunday to protest at drone attacks on its own territory. Qatar, which hosts the talks experienced one of its LNG carriers struck by Iranian missiles on July 7th. Pakistan is urging restraint.

What does this mean for Sri Lanka?

The import bill is one to keep an eye on. Fuel cost the island $886m in April and $536m in May, up 112% year-on-year; between January and May it spent $2.7bn on fuel, roughly two-thirds of its entire 2025 oil bill in five months. Additionally, the Rs20-a-litre cut to petrol on July 1st, the first since the war began, came in after global prices eased in the weeks before it. Given that this easing has now reversed what will happen to fuel prices locally will depend on how far global prices climb and for how long. If prices continue to increase as much as they did in March, it will inevitably result in elevated prices at the point of purchase.

The strikes began merely six days ago, making it difficult to pinpoint the implications the Sri Lankan economy may or may not face as a result of this renewed escalation. Whether it does at all depends on things not yet knowable such as whether Oman’s two-route proposal will be accepted by both parties or whether Iranian officials meant it when they privately told Washington the ship attacks were a mistake.

A broad-based slowdown across the bloc

It is worth noting that there has been a spread in disinflation across the Eurozone with Germany experiencing a 2.3% inflation in June from its 2.6% in the previous month. The Federal Statistical Office of Germany attributes much of this drop to fuel-duty cuts introduced to reverse the war-driven price spike which resulted energy inflation dropping from 6.6% to 3.4% in June. France also experienced a similar trend with its June inflation slowing down to 2.0% from 2.8% well below the 2.3% forecast. INSEE and AFP point these numbers to lower energy costs “after oil prices retreated amid easing concerns over Middle East supply disruptions,” with services inflation also cooling to 1.8%.

However, Spain inflation for June held flat at 3.6% unchanged from May with core inflation also remaining sticky indicating that underlying price pressures have not reduced completely. For Spanish households, the steady inflation rate means that purchasing power remains under strain, especially for lower-income families. The steady price pressure could keep European Central Bank (ECB) on alert and maintain pressure on household budget.

What this means for the ECB’s July 23 rate decision

ECB recently delivered its first-rate hike since 2023, in June due to expectations of further energy shock to spill over into broader inflation. However, with the most recent inflation numbers, Reuters reported that multiple policymakers, on and off the record have said “there’s no rush” for another hike in July following June’s quarter-point rate hike, despite June’s inflation reading still staying well above the ECB’s 2% target. The ECB is concerned that the initial energy shock could start pulling up prices of other goods and services, eventually spilling into wage push inflation as well. However, economists point out that such second-round price effects and wage pressure have not materialized supporting the stance for a rate hold.

There is still an expectation of a one more rate hike in September or October, since energy prices could remain well above pre-war levels and with uncertainty on the peace-deal between Iran and the US over the Middle East situation. There are also worries on the side of Agricultural supply with the shortage of fertilizer as a result of the Middle East conflict and the European heatwave reducing crop yield that could put upward price pressure on food, lifting inflation despite fall in energy prices.

At the time of writing this piece, the ECB Watch, point to a 96% probability of a rate hold at its current deposit facility rate at 2.25% and a 4% probability of a 25-bps increase to 2.50% for the July 23^rd policy decision signaling the market implied stand on the ECB’s policy decision.

What does all this mean for Sri Lanka?

The fall in global oil prices would have a significant favorable impact on the country’s rising oil bill. With fuel imports bill spiking at USD 630 million in March and USD 866 million in April before reducing to USD 536 million in May, a fall in global oil prices would positive impact Sri Lanka’s current account and a similar negative pressure on Inflation with CCPI rising to a 3-year high in June.

A fall in Europe’s consumer prices would also further reduce domestic inflation as a result of reduction in prices of Sri Lanka’s imports from EU which accounts for about USD 1.15 billion worth of goods annually. A fall in global oil prices would also have easing pressure on the rupee, which has depreciated 7% so far this year, possibly bringing more positive macroeconomic dynamics into the economy since the start of the Middle East conflict earlier this year.

What prompted Brexit in the first place?

The UK’s relationship with the EU has been anything but a smooth ride. Ever since joining the European Economic Community (ECC - a six-member trading bloc back then) in 1973 as result of slow economic progress, there have been multiple efforts by many parties to reverse course and take the solo path. Heavy scepticism towards deep integration with the EU was the main driver here. Given the scale of the UK economy back then compared to the rest, much of the bloc’s growth was mainly driven by the UK and this had mixed sentiments with some advocating for, while many claiming that this undermined the countries’ potential for growth. For instance, data from the Centre for Economic Policy Research (CEPR), indicated that Britain’s GDP per capita was almost 30 percent higher than that of the EEC nations in 1950, yet by 1973 it was roughly 10 percent lower.

Constant pressures by multiple parties including MPs within his own Conservative Party prompted Prime Minister David Cameron to take a gamble and re-visit the UK’s involvement with the EU by calling the referendum on EU membership in February 2016. The results turned out and the electorate had voted to leave the bloc by 52% to 48%.

The promises of the campaign were simple - “take back control” of immigration, restore the country’s sovereignty, free up more money for the country’s health service, and forge trade deals with the rest of the world with the hopes of boosting economic prosperity.

How is it looking now?

Ten years later, as the data suggests, the economy has shaped to be quite different as a result of the move AND the rapidly changing global landscape on top of multiple shocks including the Covid-19 outbreak, the energy shock as a result of the Russia-Ukraine war in 2022, Trump tariffs and a bigger global energy shock as a result of the US-Iran war that are all outside of UK’s control.

However as far as Brexit alone is concerned, the results have not been very euphoric as promised. In terms of growth, the country hasn’t really picked up dramatically. Growth has been fairly contained and remained at levels similar to other EU countries such as Germany and France. Investments have not done dramatically well either, due to years of political or regulatory uncertainty. Employment and Productivity have also seemed to take a hit due to a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources from a protracted Brexit process.

Despite the promise to “take back control” of immigration, The UK now has net emigration with EU countries, but migration from non-EU states with work supply shortages, increase in international students, and emergency visa schemes extended to countries such as Ukraine. Similarly, studies show how the Sterling Pound, trade, inflation and equity markets have also indicated a downturn due to Brexit and a combination of other shocks that has changed how the economy has fared over the past decade.

Despite all of this, the UK continues to play a major role in the global economic landscape while maintaining its place among the top five economies and contributing to much of the world’s consumption and overall demand. The country has persistently made efforts to revive trade, attract investments, resolve social barriers and establish stability. In its latest sign towards change, the country is set to appoint Andy Burnham as the next Prime Minister who vowed on Monday to deliver radical change to the nation’s politics, pledging to give away a chunk of his power by handing greater autonomy to local leaders in a “circuit-breaker” for the sclerotic British state.

What could this mean for Sri Lanka?

As one of Sri Lanka’s largest trading partners, the UK plays a critical role in Sri Lanka’s foreign exchange earnings both in terms merchandise trade as well as service exports, Tourism in particular. As Sri Lanka re-builds and continues to gather momentum in terms of economic stability, strong demand conditions from its trading partners remains key to amplify exports and attract investments. Outside the traditionally known areas such as exports and tourism, the UK over the years, has evolved to become a key destination for Sri Lankan migrant workers as well. By end 2025, the UK stands as the third largest country in terms of remittances inflows to the country. It has, and still is contributing massively to sustain the performance of worker remittances despite the war in the Middle East.

Therefore, any demand slowdown that could possibly take place - outside of the effects of the Iran war - due to higher inflation, lower productivity or any other factor could affect Sri Lanka as well. In that sense, keeping an eye out for any domestic policy changes subsequent to these political and economic reforms taking place is advisable particularly for those operating in international markets.

Since the Middle East went to war, a major oil supply route was under threat, and rising inflation has become a cause for concern across multiple economies, including Sri Lanka. These are conditions under which gold has historically performed well. It has not done so this time, at least not in the way many expected. Gold prices started falling a short while after the war began following which it recovered partially and has since been oscillating in a range that might seem like it lacks a clear directional movement. Is this the beginning of a longer decline in gold prices, or a temporary disruption before returning to its elevated nature, though not as strong as the rally experienced in 2025?

Given this context, Sri Lankan institutions in particular that lent at higher loan-to-value ratios during gold’s rally in 2025 are potentially at risk of any sustained downward adjustments of gold prices. This concern is greatly present in the LFC sector, where lending practices are less uniform, loan-to-value ratios have historically been higher, and the borrower base is more financially vulnerable.

Our clients would have already received a detailed report to their emails on this. The full report has also been accessible on our Athena reports platform since the 5^th of June 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

In addition to the leaders of the G7 member states and representatives of the European Union, French President Emmanuel Macron extended invitations to several prominent figures. Notable attendees included Indian Prime Minister Narendra Modi, Ukrainian President Volodymyr Zelenskyy, and the heads of government or state from Australia, Brazil, Egypt, South Korea, Kenya, Qatar, and Saudi Arabia. The summit also welcomed leading figures from the technology industry, reflecting the increasing prominence of technological innovation in global policymaking. Among these participants was OpenAI Chief Executive Officer Sam Altman, whose presence underscored the growing significance of artificial intelligence in international discussions.

History of the G7 Summit and its significance

The Group of Seven (G7) is an informal forum comprising seven of the world’s major advanced economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Established in 1975, the G7 serves as a platform for leaders to discuss and coordinate responses to global economic, political, and security challenges. This year marks the 52^nd edition of the summit, which has brought Évian to the centre of international diplomacy, 23 years after the city hosted the 2003 G8 Summit. The forum serves as a crucial platform for policy coordination among member states and for addressing pressing financial, geopolitical and other challenges affecting the global economy.

What was discussed?

This year, the summit focused on issues such as international security, economic stability, artificial intelligence, climate-related challenges, and global cooperation, highlighting the G7’s continuing role in shaping international policy and fostering multilateral dialogue.

In particular, the Ukraine war had been a key topic of discussion. It has been reported that President Trump had showed a “real change in approach” in this regard as the G7 leaders issued a joint statement that expressed a unified commitment to further supporting Ukraine and preserving its territorial integrity, while also agreeing to impose further sanctions on Russia. On a similar note, the leaders expressed their support for U.S. President Donald Trump’s preliminary agreement with Iran aimed at reopening the Strait of Hormuz and extending the fragile ceasefire currently in place. They viewed the arrangement as a positive step toward reducing regional tensions and promoting stability in the global economy. In this regard, discussions were also held on seeking possible alternatives to reduce the reliance on the Strait of Hormuz, which accounts for around a fifth of all of the world’s crude oil passage.

Besides security, the participants also held conversations about the topic of artificial intelligence and its future. During the summit in Évian-les-Bains, G7 leaders engaged with leading figures from the artificial intelligence sector, including Sam Altman of OpenAI, Demis Hassabis of Google DeepMind, and Dario Amodei of Anthropic. The discussions examined approaches to leveraging the opportunities presented by artificial intelligence while mitigating associated risks through effective governance and regulation. French President Emmanuel Macron emphasized that both governments and businesses can no longer overlook the profound impact that artificial intelligence may have on democratic institutions and society. On the other hand, OpenAI Chief Executive Officer Sam Altman called on governments to play a leading role in establishing regulatory frameworks for artificial intelligence. He noted that the debate surrounding the usefulness of AI has largely been settled and emphasized that increasingly advanced AI systems are expected to emerge in the years ahead. The leaders also considered the establishment of a “trusted partners” framework that would allow non-U.S. countries access to advanced artificial intelligence models developed by American firms such as Anthropic. In a joint statement, they announced that finance officials, regulators, and cybersecurity experts would be assigned to evaluate the potential effects of frontier AI systems on financial stability, productivity, and labour markets.

Furthermore, similar to past G7 summits, the influence of China on global markets was reviewed again in this year’s summit. China unsettled the global economy last year when certain industries were brought close to a standstill after Beijing introduced export restrictions on rare earth permanent magnets, which highlighted the extent to which Western supply chains in the energy, defence, and technology sectors depend on these materials. As such, the G7 countries committed to enhancing coordination to reduce reliance on China for critical minerals, including efforts to align stockpiling policies and develop a new platform with an expanded mandate for the International Energy Agency.

What could this mean for the global economy and trade

In general, the 2026 G7 Summit in Évian focused on stabilizing global energy markets, strengthening supply chains, and managing trade imbalances. The most immediate impact on the global economy is likely to come from the US–Iran peace deal reopening the Strait of Hormuz, which could ease oil prices and reduce inflationary pressures worldwide. However, a considerable amount of uncertainty continues to loom over the global economy, as President Trump threatened to order further military action in Iran, if there is any violation of the present agreement.

How will Sri Lanka be impacted from all this?

Eventhough there were no direct discussions on Sri Lanka, the discussions and commitments at this year’s G7 summit could have certain implications on the Sri Lankan economy. In particular, falling oil prices associated with the increased possibility of a more stable US-Iran ceasefire agreement can aid growth in demand, and improve chances of the island nation continuing its growth trajectory for 2026. There might also be knock-on benefits should the India=US trade agreement materialises fast, given that both these nations are significant trading partners of Sri Lanka. In addition, given the emergence of the IT sector as a strategic sector within Sri Lanka, the future of AI and how regulators of these advanced G7 economies govern AI would be of considerable relevance to local stakeholders.

What precisely has been agreed, however, is a question to which no complete answer can yet be given.

The Known Knowns

The framework of the announcement is at least clear in a broad sense. President Trump declared an end to the United States naval blockade of the Strait of Hormuz. Iran’s deputy foreign minister confirmed that the text of a memorandum of understanding had been finalised and would be signed on Friday. Prime Minister Sharif was unequivocal. All military operations have been declared immediately and permanently terminated.

The Known Unknowns

Three issues stand above the others in their ability to determine whether this agreement holds.

Trump’s initial declaration of an immediate, toll-free opening and the removal of the naval blockade has now changed to be contingent on the Friday signing and initially limited to mine removal. Iran’s state media reported that the memorandum calls for reopening within thirty days under “Iranian arrangements,” which creates considerable tension against the American stance that no single party would control the waterway. The UK, France, Germany and Italy have quickly added that any reopening must be unconditional and accompanied by unrestricted freedom of navigation. The question of authority over the strait remains uncertain.

The second unresolved matter is Lebanon. Prime Minister Sharif and Iranian deputy foreign minister Kazem Gharibabadi both explicitly mentioned that the ceasefire will cover all fronts, including Lebanon. Trump, however has made no mention of Lebanon. Israel, which has not been in favour of the Iran negotiations, have not officially responded to news of the deal and struck a building in Beirut’s southern suburbs on Sunday, killing three and injuring six. Prime Minister Benjamin Netanyahu arguably has his own domestic political reasons to continue pursuing conflict with Iran and its proxies, including Hezbollah. The question of the durability of any arrangement that does not formally bind Israel remains uncertain.

The third, and arguably most consequential, known unknown is Iran’s nuclear programme. Nuclear negotiations are set to continue over the next sixty days, with the threat of renewed military action if talks fail. Iran has not publicly committed to surrendering its enriched uranium which amounts to more than 400 kilograms at near bomb-grade purity, held across three sites which are damaged due to American strikes. The UK, France, Germany and Italy group have stated their willingness to lift relevant sanctions in exchange for “ clear, verifiable steps by Iran on its nuclear program”. The question of what those steps would look like, and whether Iran will accept them remains uncertain.

What does this mean for Sri Lanka?

The most immediate impact would be on the import bill. Sri Lanka lately has been spending a considerable amount on petroleum related imports. A sustained fall in global oil prices, which the reopening of the Strait of Hormuz would produce reduces that outflow, strengthening the current account further and relieving pressure on the rupee. A more stable rupee and a cheaper import bill can dampen imported inflation which has been a significant component of Sri Lanka’s recent inflationary pressure, given the economy’s dependence on fuel for transport, electricity generation and industrial activity. Headline inflation can be expected to trend downwards in the near future.

The fiscal side has remained largely insulated from the Middle-Eastern tensions. Even so, lower global prices reduce the political pressure to subsidise which in turn protect the current primary surplus that the IMF programme requires Sri Lanka to maintain.

The known unknowns however pose risks to the positive implications the peace deal can have on the Sri Lankan economy. Until the memorandum is signed, the situation in Lebanon is made clear, the nuclear issue is addressed, and the Strait is unconditionally open, the peace deal, at the time of writing leaves us with more questions than clear cut answers.

This month, Frontier’s focus turns to what this means for 2026 and 2027. The fundamental drivers underpinning consumer momentum; private sector credit expansion, rising formal sector activity, improving household incomes, and an upward shift in consumer preferences, remain broadly intact. At the same time, the price dynamics introduced by the US-Iran conflict represent a near-term disruption, and our analysis examines how this interacts with an otherwise strong consumer trajectory.

A key theme in this month’s report is what we characterize as consumer “upshifting”; a discernible movement across income brackets and consumption tiers that we believe is now structurally underway. We explore how this transition is unfolding across different segments of the population, where it is most concentrated, and how cost pressures may temporarily alter, without fundamentally reversing, its direction.

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Our clients would have already received a detailed report to their emails on this; alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 29th of May 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

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Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

Part of this is also due to the current war, which we see two broad pathways where the could unfold. In one avenue, a prolonged limbo that gradually deescalates is possible, where escalations exist but at much lower intensity than in the last few months. In the other, a sharper but shorter escalation precedes a new normal settling in. We think both scenarios still carry significant costs, with the broader impact differing across the two pathways but creating volatilities nevertheless.

Given that May was largely an eventful month with the currency spiking to 350, a 100 bps CBSL rate hike, and market rates rising nearly 150 bps we believe all of this looks like an overshoot driven by sentiment, while the fundamental story, we feel, still holds enough firepower to correct these spike movements. Given the economic performance of the Sri Lankan economy over the few months and years fundamental strength remains the centerpiece of our view.

Factoring all of this we hold the current view that the present context reflects an accumulation of negative shocks, which we view as interruptions rather than structural reversals from Sri Lanka’s economic trajectory. That said, we do not rule out the possibility that risks remain, with significant knock-on effects worth watching — including further Iran War escalation with rapid intensity, Middle East supply destruction, and weather-related and geopolitical shocks that could leave a meaningful dent on the new fundamental trajectory.

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Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

The latest update by the World Meteorological Organization (WMO) indicates an 80% likelihood of an El Niño event during June-August 2026 with over a 90% probability of it continuing until at least November this year. While this is not the first time the world faces an El Niño condition, the alarming feature is the intensity of it compared to the past and the possible implications it could enforce on the world economy that is already dealing with a lot currently.

What is El-Nino and how has it occurred in the past?

El Niño is a climatic phenomenon distinguished by intermittent increases in sea surface temperatures within the central and eastern equatorial Pacific Ocean. Its occurrences are sporadic, typically happening every two to seven years, and it possesses extensive consequences to worldwide weather patterns. When the sea surface temperatures in the eastern equatorial Pacific Ocean is relatively warmer compared to the central equatorial Pacific Ocean, these conditions are known as “El Niño” conditions. When the reverse is true, these are known as “La Niña” conditions.

Simply put, shifts in rainfall and temperature patterns across continents, raise the likelihood of drought in some regions and floods in others. Those meteorological shifts then cascade down to agriculture, energy, health and go all the way down to the social lives of people causing broader demand and supply disruptions that may alter the economic trajectory of countries.

The last El Niño, in 2023 to 2024 – which meteorologists said was strong, ⁠contributed to making 2024 the hottest year on record, said WMO Secretary-General Celeste Saulo. Predictions by the UN Agency at the point of writing this piece indicates the upcoming El-Nino phenomenon to be “at least moderate – and possibly strong”.

While each El Niño event is unique in terms of its evolution, spatial pattern and impacts, the broader perspective for the South Asian region signals below average monsoon rainfall and above average temperatures according to the South Asian Climate Outlook Forum.

How can it affect the current economic landscape?

Farmers, fishermen and small-scale producers often absorb the first blow. Be it floods or draught – depending on which part of the world one is at – severe disruptions to the harvest, spreading of pollutants and increased risks to cultivations may be common.

In the event of a worse-case scenario, commodity markets which are already facing steep ups and downs, can face further price volatility even amidst moderate disruptions – particularly across fertilizer, fuel and agriculture commodities. Supply disruptions due to lower yields may push farm costs up and reduce food supplies that could weigh in food inflation. Low rainfall could also impact energy generation and fuel prices may experience further spikes causing more stress on vulnerable economies – particularly those in dry regions and rely heavily on hydro. Consumer markets may also face some level of demand destruction especially in non-essential spending if energy prices bite into inflation and raise everyday cost of living which are already on the rise in many countries.

A combination of these costs could further dampen growth which is already revised down as a result of the most recent oil supply shock. Depending on how bad the situation gets, governments may also enact export controls, subsidies, rationing or emergency imports which could possibly distort markets and cause distress in the short term. Given the volatile and heavily uncertain nature of the current global economic context, a severe climate disruption of a large scale – as most expect – would be the last thing the economy would welcome.

What this means for Sri Lanka?

As we’ve repeated many times before, the structural change in Sri Lanka’s macroeconomic landscape has now put the economy in a better footing to deal with external shocks like this than in the deficit driven past. A good example of this is how the country remains resilient currently despite the effects of arguably the biggest oil shock it has faced. While strong Fiscal space and FX surpluses serve as strong buffers to shield the country from the costs of such events, it doesn’t mean short-term pains are out of the picture.

Yes, the government does possess better ability to amplify relief efforts and increase imports if disruptions happen but maintaining growth and stable price levels remains key within the country’s broader macroeconomic trajectory. The structural changes taking place in the country’s energy mix and inflation are also factors that could support therein, helping the country to better deal with a El-Nino condition.

What caused this rise? What has been the impact within US so far?

US inflation surged to its fastest pace in three years in April, as the ongoing US-Israel war on Iran continued to strain global energy markets and squeeze household finances. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index rose 3.8% year-on-year, up from 3.5% in March, according to the Bureau of Economic Analysis. On a monthly basis, PCE gained 0.4%, following a sharper 0.7% rise in March. The primary driver of this raise remains energy prices. The national average retail gasoline rose by 12.3% in April alone, with prices at present being at USD 4.42 per gallon, a 48% increase since hostilities began on 28^th of February. Food prices rose by 0.5%, which was the steepest monthly climb since November 2022, while housing and utility costs rose by 0.6%. Core PCE which excludes food and energy too saw an uptick rising 3.3% year-on-year, which signals that inflationary pressures are beginning to impact beyond the energy sector.

The impact of this is mostly felt by households. Real disposable income fell for a third consecutive month in April, consumer savings fell to 2.6% of disposable income; their lowest level since June 2022. First-quarter GDP growth was revised down to 1.6%. With tax refund season drawing to a close, economists warn that consumer spending, which accounts for over two-thirds of US economic activity, is likely to decelerate further. The timing of this data is crucial as the Federal Reserve intends to hold its first policy meeting under its new Chair Kevin Warsh on 16^th and 17^th of June 2026. The reality is that the Fed’s options are constrained. Raising interest rates could dampen demand but cannot resolve the ongoing supply disruption from the US-Iran war. Retaining the rates as is, would risk inflation expectations to become unstable. The minutes from the April policy meeting indicate that many officials are in favour of a rate hike despite the slowing economy and weakening consumer spending.

Markets now expect the benchmark rate to remain in the 3.50 - 3.75% range well into 2027, with JPMorgan Chase flagging the possibility of a rate hike rather than a cut by mid-2027. Long-term Treasury yields; already at their highest since 2007 suggest markets are pricing in prolonged uncertainty without waiting for the Fed to act. The burden of the above lands on Kevin Warsh as he is challenged to not only changing or retaining rates, but to ensure inflation targeting of the Fed be cohesive and reliable without causing further damage to the US economy.

What are the ripple effects of this outside of the US?

One of the key components that saw an immediate impact were commodities, specifically Gold; whose prices dropped on Thursday following the release of the US inflation data. However, the metal was momentarily declining for a third straight session given the scepticism of the US-Iran deal. While this isn’t a long-term impact to the commodity itself, the current trend seen in gold acts as a symbol of the confidence in capital markets within the world at large.

The global economy is not immune from PCE inflation data either. Experts note that price pressures have continued to compound following the COVID-19 pandemic, the PCE data can well exceed the 4% mark by May of this year in this current trend. A majorly impacted sector is food; planting seasons are disrupted by food shortages which is pushing nations affected to ration certain commodities and goods such as cooking oil. Oil-producing countries too are affected, in that many lack the ability to refine oil which means they are unable to leverage their own resources. The spillover effects from the war and resulting inflation can move into 2027 if this continues.

International institutions such as the IMF in their Spring Meeting 2026 has noted that the world economy is drifting from the best-case outcome as per their projections. Which means they expected global growth to be around 2-3% and inflation to be in the 4-6% range. However, not all is bleak. Even if the conflict were to conclude this week, the shortage in oil is said to be comparable to the 1970s in terms of how much oil has been withdrawn from the market, but the world is not as dependent on oil as it was in the 1970s and central banks at present have built robust inflation-targeting frameworks. All of these factors help in maintaining expectations a lot more cohesively than decades ago. Despite the challenges, what is suggestive from all expert opinions is that the world economic systems are better geared to withstand the absolute worst outcomes in comparison to the past. While a shock to different sectors will take place, the ability to bounce back is stronger now.

Can Sri Lanka be impacted from this?

The impact from US’s PCE data is two sided. On the negative end, with the latest domestic CCPI inflation data of Sri Lanka coupled with PCE inflation data of the US, the impact is already seen in oil prices and is impacting many industries’ costs of production. This trend can last for some time provided the war continues and no resolution is reached. However, there are two pathways that counterbalances or softens the blow.

One aspect is the IMF’s Extended Facility Fund which is expected to disburse USD 695 Mn to Sri Lanka. The basis for this disbursement is the strong performance of Sri Lanka’s economy where the country met all end-December 2025 targets which resulted in a strong fiscal front. Overall, most of the structural benchmarks were met or completed with a short delay. However, it was flagged that the ongoing war coupled with the aftermath of the cyclone Ditwah can dampen the outlook to an extent, but the progress so far suggests a never before seen resilience in the economy at large on a macro-level. At the same time, the disbursement alone helps prevent adverse outcomes on the currency as well.

The second pathway is the structural changes in energy dependencies in the economy. Many households and some industries are moving towards renewable energy such as solar power. While the economy as a whole is still very much oil dependent, the trend from a household level does build the case for some cushioning on energy moving forward. If this trend grows and expands with greater investments by the public and private sector, it could improve the resilience of the energy sector.

Drivers of the deviations and what has been done so far

Interestingly, even though recent global events have been impactful, the extent of the volatility of each of these Asian currencies seems to be determined equally by domestic factors and policies in each country. For instance, the Indonesian Rupiah fell and reached a record low of 17,658 against the US Dollar this week, amid pre-existing pressure driven by growing investor concerns over Indonesia’s fiscal position and governance framework. The Indian rupee has emerged as the worst-performing currency in emerging Asia, declining by over 6% year-to-date, while foreign investors have withdrawn more than $20 billion from Indian equities since the onset of the war, with cumulative outflows already surpassing last year’s record levels. The Thai Baht has also underperformed year-to-date, declining by 2.72%, as energy price shocks and mounting fiscal concerns have further intensified downward pressure on the currency. These economies are especially vulnerable as oil-importing nations facing simultaneous capital outflows, with investors reallocating funds elsewhere, while shifting expectations of a hike in U.S. interest rates this year, have added further downward pressure. By contrast, bullish sentiments have strengthened towards the Singapore dollar and the Malaysian ringgit, reflecting the Singapore central bank’s safe-haven status and Malaysia’s role as a net energy exporter.

As currencies fall to record lows alongside mounting pressure to drive interest rates higher, Asian policymakers are taking measures to support their economies amid the global energy supply shock. Governments face a difficult policy dilemma, as efforts to preserve economic growth are complicated by weakening currencies that risk undermining confidence and fuelling inflation, while potential raises in interest rates to support currencies could further burden consumers and constrain economic growth amid the ongoing fuel shock. Indonesia announced a 50-basis-point interest rate increase to support the rupiah, while also taking control of commodity exports to ensure export proceeds remain onshore and are transacted in the local currency. India has urged citizens to reduce overseas travel and limit gold purchases in an effort to protect the rupee from further depreciation.The Philippines’ central bank has already implemented interest rate increases, while rising inflation has fuelled speculation that an unscheduled rate hike could occur ahead of the next policy meeting scheduled in a month’s time. However, pressure remains persistent, with several investment banks advising clients to sell weaker Asian currencies in favour of stronger regional counterparts.

What could this mean for the global economy and trade?

Due to the present uncertainty around the future of the scale of geopolitical tensions across the globe, it becomes challenging to capture the extent of the impact and the duration to which these currencies might continue to weaken. Nevertheless, it might be reasonable to expect tight regulations, to curb imports arriving into these Asian countries whose currencies are declining in value, while their governments may simultaneously implement various policies to further incentivise exporters and FDI inflows. For instance, Indian Prime Minster Modi has already visited various European states with the aim of boosting trade and investment flows, while Union Commerce Minister Piyush Goyal has outlined an ambitious plan of achieving $1 trillion in exports this year, while also advocating for stronger import substitution.

In addition, market pressures have been particularly severe in countries, such as Indonesia, which moved to centralise commodity export management, thus heightening fears among investors of greater state intervention in the market. S&P Global Ratings has warned that such policies could weaken export performance, reduce government revenues, and place additional pressure on the balance of payments position.

How will Sri Lanka be impacted from all this?

The Sri Lankan Rupee has also been equally unstable over the past week, after depreciating and then appreciating at a considerable pace. However, neighbouring countries too have been encountering similar movements, which implies the strong impact of the prevalent energy crisis and global uncertainty, which is essentially an external hit on these economies. Even though this makes it challenging to determine the impact in general on Sri Lanka’s external sector in the short term, the existing external buffers both in terms of the current account surplus in the Balance of Payment and the Net Foreign Assets of the banking system should help the country weather some of these shocks that comes it way.

When Donald Trump re-entered the White House in January 2025, he arrived with the tariff as his preferred instrument of economic diplomacy. The so-called “Liberation Day” levies of April 2025 pushed duties on Chinese goods past 140%. China retaliated swiftly, becoming the first major economy to match the escalation and imposing 125% counter-tariffs of its own. Throughout the rest of 2025 was something similar to a stalemate as Beijing used its control over rare earth minerals as leverage to protect its markets. China mines more than 60 percent of the world’s rare earth materials and processes roughly 85 percent of global output, which includes but are not limited to, the heavy rare earths embedded in F-35 fighter jets, electric vehicle motors, and also for AI data centre hardware. When Beijing introduced licensing requirements for seven heavy rare earths in retaliation for the Liberation Day tariffs, rare earth magnet exports to the United States reportedly fell 93 percent year-on-year in May 2025.

A partial détente was reached in Busan, South Korea, on the sidelines of APEC in October 2025 where both sides agreed to a one-year trade truce. Under that agreement, China deferred its rare earth export controls for a year and agreed to resume purchases of American soybeans. America, in turn, reduced tariffs by ten percentage points. The October truce stabilized markets sufficiently to allow for a more formal engagement, leading ultimately to Trump’s state visit to Beijing in May 2026.

What happened during the summit?

Both governments confirm the establishment of a Trade Council and an Investment Council, frameworks designed to institutionalize the kind of structured dialogue that has, historically, been absent in US-China relations. A reciprocal tariff-reduction framework covering approximately $30 billion in goods appears to be under active negotiation, with the United States likely targeting energy and agricultural exports and China seeking reductions on certain consumer goods.

The technology angle of this meeting may potentially be more consequential than the agricultural deals. Jensen Huang of Nvidia joined Trump’s delegation to address stalled discussions over American H200 chip sales to China. Shortly after Trump’s bilateral meeting with Xi, Reuters reported that Washington had cleared H200 sales to several major Chinese technology firms, which if confirmed and sustained could shift competitive dynamics in artificial intelligence. Xi’s response, as relayed by Trump on Air Force One, was that China preferred to develop its own chips which signals China’s continued industrial ambition and unwillingness to part from using this as a negotiating tool. On rare earths, analysts at Chatham House suggest that any deal is likely to be a “managed pause” rather than a structural resolution as Beijing has little incentive to permanently get rid of a licensing system that gives it leverage.

On the political front, the two leaders agreed to describe their relationship as a “constructive and strategically stable US-China relationship,” which Beijing says should provide strategic guidance for at least the next three years and likely beyond. Some analysts observed that this looked rather like Beijing “trying to lock in a truce on terms that were favorable to it”. Others are divided on whether this serves American interests, but what seems difficult to dispute is that Xi is operating on the longer strategic timeline that authoritarian systems enjoy, while his counterpart needs to show results before November’s midterm elections.

What does this mean for Sri Lanka?

If the Beijing summit produces a sustained reduction in US-China trade tensions, the effects for Sri Lanka still remain unclear. Looking at this from a more sectoral level perspective, if the $30 billion dollar tariff reduction framework includes Chinese apparel questions do arise on whether this will have a negative impact on Sri Lanka’s apparel sector. Sri Lanka produces technically complex garments in categories such as lingerie, activewear, and performance wear that do not compete directly with the high-volume, low-cost commodity output that predominantly makes up China’s manufacturing apparel output. This offers a degree of insulation since those who source from Sri Lanka are, by and large, not the same buyers who would pivot to China.

What caused this rebound? And how did the PMI move regionally?

The Composite PMI is the broadest measure of global economic activity, combining both manufacturing and services sectors into a single index. In April 2026, the Composite PMI rose from 51.0 to 51.8, recovering from March’s sharp decline. A PMI reading above 50 indicates expansion in business activity relative to the prior month whilst below 50 signals contraction. There were several key factors driving this raise, one of which is the effects from the ongoing Middle East conflict and subsequent closure of the Strait of Hormuz This resulted in rising input costs for manufacturers; the fastest raise since June 2022, whilst supplier delays worsened to the levels of August 2022. In the meantime, stockpiling was another factor contributing. With overall supply disruptions and a U.S. tariff deadline approaching in July, buyers were pushed to build inventory, resulting in inflated order volumes. This trend is not unique to this conflict; it was notably seen during the Russia-Ukraine conflict as well where stockpiling and cautionary purchasing drove up the PMI early 2022 and faded out mid-2022. Following this, global PMI index began reflecting the true impact of the war causing a worldwide downturn of the PMI.

In addition to the above, manufacturing production grew for the ninth consecutive month, hitting a near five-year high, with growth across consumer, intermediate and investment goods. Of the 32 countries surveyed, 19 recorded growth. This was reflected in a high Manufacturing PMI value of 52.6 in April from 51.3 in March. This factor was further catalysed by overall regional growth in the largest economies. The U.S. was the clearest outperformer with the Manufacturing PMI climbing 2.2 points to 54.5; a four-year high. The cause for the uptick in US reflects the broader underlying factor of stockpiling, whereas other sectors remained fairly weak due to the ongoing war, impacting overall consumer behaviour. The Eurozone Manufacturing PMI saw an eight month high of 52.2 whilst the composite index fell to 47.4. Manufacturing picked up due to influx of new orders with front-loaded buying driving bulk purchasing to its highest since mid-2022. The slump in services is noteworthy which was coupled with contracting business confidence. China saw an uptick where the Manufacturing PMI rose to 50.3 supported by similar factors as seen in the Eurozone. Growth was supported by continued expansion in output and new orders, while export orders rose above 50 for the first time in two years. China’s Services PMI rose to 52.6 in April, up from 52.1 in March. This was supported by domestic demand given that new export businesses declined for the second consecutive month.

What is the implication of this?

While the April PMI headline number is positive, the underlying factor for the rise carries significant macroeconomic consequences. The stockpile-driven demand surge is widely considered unsustainable and likely to reverse in Q3 2026 as inventory buffers are filled and the artificial demand impulse fades. Inflation will show more transparent outcomes of this. The World Bank projects energy prices to rise 24% in 2026, with Brent crude averaging USD 86 per barrel versus USD 69 last year. As a result, fertiliser prices are rising and has gone up by 31% so far with urea specifically increasing much more. This will impact the agriculture sector and food production thereafter with rising input costs and overall driving up food costs. In developing economies, inflation is now forecast at 5.1% for 2026. The inflation trajectory constrains policymakers, particularly central banks. Already the Fed, ECB and Bank of Japan are dealing with supply-induced inflation, which means they face a risky trade should they raise interest rates. There can be a risk of borrowing costs rising globally which further depletes economic growth. There’s no doubt that the Hormuz closure has made global shipping significantly more expensive, for instance insurance premiums have risen with the added costs due to rerouting.

One thing that can change the current trajectory is the strait of Hormuz reopening which can drive down energy and freight costs and the turnaround for the global PMI can be driven by broad based improvements as opposed to factors such as stockpiling. Any further escalation or damage to energy infrastructure could push Brent crude further up and cause even higher inflation around the world, followed by rising input costs. However, the mere fact that regionally – in this case US, China, EU doing well indicates a counterbalancing mechanism even if stockpiling continues or is taken out of the picture which can anchor the global economy towards a positive direction in certain ways. Beyond the conflict itself, two trade policy events warrant close attention. The U.S. tariff restructuring is due on the 24^th of July 2026, where country-specific tariffs are chosen over a blanket imposition. This could meaningfully restructure global trade flows depending on which economies face higher or lower rates. However, early-May there was a setback where the US Court of International Trade ruled that the 10% universal import tariff is “unlawful” and “unauthorized by law,”. This ruling blocks collection from specific plaintiffs, but the tariffs generally remain in effect until the July deadline expiration or further court action. Finally, the China-U.S. summit this week carries significant weight for Asia’s export-driven economies. Any agreement that clarifies the tariff outlook or eases trade tensions could provide a meaningful demand boost to regional manufacturing, while a breakdown in talks could further dampen uncertainty.

How will Sri Lanka be impacted from this?

While April PMI numbers is yet to be released by CBSL, March PMI data indicated an overall uptick where Manufacturing PMI was at 66.7 and services PMI at 59.4. Despite external challenges, this does point to a strong macroeconomic base and some sectoral strength.

The ability to sustain this momentum has gotten complicated as inflation for April jumped to 5.4% from 2.2% in March, mainly driven by an increase in energy cost. Given that domestic inflation was driven largely by energy prices rising causing transport costs to rise, the momentum in manufacturing PMI could slow down.

However, one thing that anchors Sri Lanka and prevents any long-lasting adverse damage is the macroeconomic conditions that have prevailed until now. Nonetheless, if the conflict worsens and energy costs goes up further this can start challenging the strong buffers that are in place.

The 2026 April Monthly report – The Lion Resilient – focuses on Sri Lanka’s macroeconomic landscape on the backdrop of multiple shocks seen during the recent past with a special focus on the Iran war and its implications on both Sri Lanka’s fiscal and external fronts.

So far with regards to the war in the Gulf, while there have been immediate market reactions, we continue to see the macroeconomic fundamentals remaining strong enough for us to feel that the Sri Lankan economy will remain quite resilient. While the shock will unquestioningly have an impact, we currently see it only as a temporary interruption to the Sri Lankan story.

Even as some of the costs of the war accumulate across the year, we think that the Sri Lankan economy’s new economic structures will keep it resilient in almost all pathways possible. We see this coming both from counterweights that automatically reduce the external pressure, but also from new mechanisms that prevent a spiraling of the situation as we would have seen in Sri Lanka’s twin-deficit past.

For those interested in the key data points on Sri Lanka’s macroeconomic developments, the final section provides the latest on the trade balance, current account balance, reserves, exchange rate, interest rates, and inflation – including our forecast on CCPI inflation up to end-2027. We also provide a comprehensive outlook on our Views on the Fiscal and External indicators in our Focus for the month.

Our clients would have received the report to their emails and is accessible on our Athena reports platform since the 30th of April, 2026. If you still haven’t had a chance to read through click here! If not, please get in touch with us for a trial subscription to our reports (clientconnect@frontiergroup.info).

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

Although the spectre of the Iran War looms large, the fundamental story of the Sri Lankan economy looks to stay strong. In our focus for this month, we take a specific look at the fiscal and external performance of the country and how it ties into forecasted performance in the context of the Iran War.

While the Iran War adds clear uncertainty, and this itself reduces the extent of some of the fiscal and external strength, we think that Sri Lanka’s fiscal and external strength is likely to persist and continue their recent overperformance. We see the strength in the domestic economy acting as a counterweight to insulate itself from most of the costs of disruption and uncertainty that continues to be the case globally. As Sri Lanka’s long-running twin deficits were replaced by fairly consistent twin-surpluses since the crisis, we how costs of a disruption accumulate or absorb are functionally different to the past.

However, the unpredictability of the duration and direction of the conflict raises the uncertainty quotient globally. To account for a precarious geopolitical backdrop, we have widened some of our forecast ranges to reflect this wider probability space.

Our clients would have already received a detailed report to their emails on this; alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 30^th of April 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

Oil price hits a wartime high last week

The global benchmark oil prices, Brent crude rose above $120 a barrel last Wednesday, briefly soaring to a wartime high of $126.41, its highest since 2022. This was after Brent crude dropping to $90 a barrel on the 17^th of April, after a ceasefire between Israel and Lebanon was announced where the US claimed it would pause all attacks on Iran. Despite this, oil prices continued to average at a much higher rate than the pre-conflict prices and nearly doubled since the start of the year when tensions between Washington and Tehran began escalating.

Despite the ceasefire, oil prices continued to rise over the last 2 weeks with the US continuing its blockade in the Strait of Hormuz and President Trump warning that the blockade could last months while peace talks continue to remain uncertain and stalled. US officials hope the blockade will force Iran to cap its oil wells and shutter production once its oil facilities, such as Kharg Island, have filled to the brim.

While prices have since retreated down to $100-110 ranges, analysts are warning than an extended interruption to oil into the second half of the year could tip the global economy into recession with countries already facing heightened inflationary pressure, fuel shortages, weakened household consumption and slower growth. Vandana Hari, founder of Vanda Insights, said that oil prices have “nowhere to go but up”, until the permanent reopening of the strait comes into view. Janiv Shah, vice president of oil markets at Rystad Energy, said any further military escalation could trigger even steeper price gains.

UAE leaves OPEC in a blow to oil cartel during war

Meanwhile, on Tuesday, the United Arab Emirates announced that it would be leaving the Organization of Petroleum Exporting Countries (OPEC) and its sister organization, OPEC+ from the 1^st of May reflecting the country’s “long-term strategic and economic vision and evolving energy profile”. With UAE, a member that produces nearly 4.8 million barrels a day and nearly 4% of global oil supply, leaving the OPEC coalition could weaken the oil cartel at a time where Gulf producers have already been struggling to export through the Strait of Hormuz.

While the UAE Energy Minister Suhail Mohamed al-Mazrouei said that the decision was taken as a policy decision “after a careful look at current and future policies related to production levels”, it adds to the OPEC’s declining influence over the oil market. With the OPEC’s third largest oil exporter leaving the organization taking with it, 15% of its capacity, OPEC’s declining share of oil could mean a more open oil market. It also means that the country will now be free to increase its oil output in the long-term at its own discretion.

OPEC+ announces 188,000 barrels-per-day output increase in first meeting without UAE

On Sunday, OPEC+ announced that it would increase its daily output by 188,000 barrels a day to send a signal that it was conducting business as usual after UAE’s announcement. This decision was largely symbolic with the ongoing oil crisis due to the supply that is choked off by the war. This was the second announced supply increase in the last 2 months following a previous decision in early April to raise oil production quota by 206,000 barrels a day.

This announcement could cushion the oil crisis to a certain extent and if supply is increased, could possibly lower the highly elevated global oil price from its current level. Oil prices also fell on Friday by around 3%, following an updated peace proposal from Iran that was sent to Pakistan raising hopes of a possible peace settlement with the US.

What this means for Sri Lanka?

Sri Lanka has already been experiencing the brunt of the Brent prices since March, with a relatively higher oil bill, widening trade deficit and elevated inflationary pressure. This was visible through the declining Current Account Surplus due to a 122% YoY increase in its trade deficit for 1Q26. In March alone, Imports increased 30.3% YoY to $2.13 Bn with fuel imports being its biggest driver surging 74.7% in March due to higher global prices. April also experienced its highest inflation since February of 2024 with a 5.4% YoY inflation largely due to price increase in Petrol, Diesel as well as Gas prices in March and April.

Financial Times is warning that Asian economies could experience further inflation pressure if the ongoing conflict continues for a few more months while ADB has sharply downgraded Asian and Pacific regional growth outlook as ME conflict disruptions deepens further. However, there is a renewed sense of hope on some level of peace negotiation with Iran’s Foreign Ministry stating that it is reviewing US’s response to its ceasefire proposal and it will issue a reply after completing its assessment.

While conversations around this were already in the picture even before the war, it is fair to assume that the war might speed up this process as growth outlooks are revisited and revisions are made across the world. Analysts have already accounted for a global slowdown and revised their growth forecasts down with some even projecting a possible recession depending on how long the war progresses. However, one thing that runs deeper than the topline numbers is how the world may perceive growth in itself following the consequences of the current war as well as the structural changes that it may amplify. Traditional models that drove the global economy over the past 30+ years or so may change to fit a world with severe debt and high geopolitical fragmentation. Keeping track of such adjustments that could possibly re-define global capital and trade flows, and adapting accordingly could be the x-factor that separate the winners and losers in this newly emerging global order.

What are some prominent structural changes that define the new world?

The Artificial Intelligence (AI) boom is the most obvious one here. In the latter half of the 20th century, some of the brightest minds in the United States and the Soviet Union were focused on the race to develop nuclear weapons. Today, it’s a different kind of competition - this time with China - centered on achieving technological dominance, particularly in AI. Similar to these two giants, other developed nations and emerging economies are also aligning themselves to this age of AI with massive investments in technological infrastructure. Data centres emerged as a major force shaping global investment in 2025 driven by surging demand for AI infrastructure and digital networks. Similar to countries that attract such investments, more emerging economies may also look forward to ride this wave and place themselves within these supply chains that may re-define domestic policies within countries.

Defence spending is another prominent feature in this newly emerging order. As competition intensifies and more inter-state conflicts are expected in future, countries are heavily increasing their share of expenditure allocated for defence. 2025 turned out to be the 11^th consecutive year of rising global military expenses with defence spending as a % of GDP reaching 2.9% - the highest since 2009. This trend may present a series of opportunities particularly to the players within those supply chains that provide and assist the production or exchange of advanced military technologies and materials. This could also present a significant challenge to policymakers by restricting other fundamental investments geared towards areas such as education and healthcare that drives more longer-term growth and productivity.

Conflicts in the Gulf have consistently proven that being entirely dependent on Middle-eastern fuel and energy pose a significant threat to countries. Hence, achieving energy independence have made its way to the priority list of world leaders that could define domestic strategies in the years to come. The EU for instance is currently accelerating its efforts in this direction and setting the trend for the rest of the world. Following the heavy disruption faced due to the current crisis, the commission launched its latest initiative - AccelerateEU - the toolbox to bring immediate relief to European households and industries, especially the most vulnerable ones, while putting Europe on a steady pathway to energy independence. Climate risks and the transition towards green technologies compliments this further as growth and development of countries in this new age will be more closely linked to developing more sustainable energy sources.

What are some downside risks prevailing in this new context?

While the above-mentioned trends may provide policymakers, investors and businesses plenty of room for growth, it’s also important to note that it’s happening on the backdrop a global environment that is drowning in unprecedented levels of debt. The IMF says global public debt could exceed 100% of GDP by the end of the decade. Governments around the world now owe nearly $100 trillion in public debt. That’s almost double what they owed just a decade ago. While mature markets – particularly due to massive investments in AI account for most of this growing levels of debt, emerging markets have also reached a new high of more than $115 trillion, with Brazil, Russia, South Korea, Poland, and Mexico following China in debt accumulation. While increasing government borrowing serves as the main reason behind debt accumulation, the ability for authorities to operate in such tight fiscal conditions in the long run while maintaining low interest rates is the common question monetary authorities face across the world. Even though an immediate fallout is not within the cards as of yet, this approach of running large deficits and financing them using debt raises concerns around the long-term sustainability of public budgets across the world.

Another not-so immediate but certainly an area that may pose a new kind of challenge is the demographic shift that happening across labour and consumer markets across the world. This is also an area that indicates divergent implications across regions that could be increasingly visible with time. For instance, according to the United Nations, while Central Asia continues to experience youth-driven population growth, with a rising share of working-age people offering significant economic potential, many European countries are grappling with shrinking and ageing workforces, as fertility rates are low and populations become older.  A number of countries – particularly in the EU and East Asia - are already having to deal with increasingly ageing and shrinking population growth which have caused disruptions in domestic markets and require the need for carefully devised policies to face a new demographic reality. Labour markets in particular pose a risk of skill mismatch especially within traditional sectors as technological innovations and AI boost amplifies. Navigating such changes remains key for both governments and businesses in order to maintain the rapidly evolving consumer and labour markets of economies.

What could this mean for Sri Lanka?

Outside of dealing with the short-term implications of the current war, the changing economic landscape provides Sri Lanka with a mix of growth opportunities and challenges. The transition of the country from a deficit to a surplus economy itself places the country on a strong footing. As Sri Lanka continues on its recovery pathway while easing off its debt burden, in a context of rising global debt, it is highly likely that a possible credit rating upgrade will allow the country to regain access to global capital markets. Maintaining fiscal discipline on the other hand will allow the country to efficiently allocate resources towards social development and reform efforts. As reforms come into play and the private sector further expands its involvement in domestic economic expansion, the ability for the country to plug in to these newly emerging AI supply chains wouldn’t be a long shot. It also presents the country the opportunity to attract investments for the development of infrastructure and labour particularly for those outside of the traditional sectors. The key remains in how proactive policymakers are when it comes to accelerating reform efforts while maintaining broader economic recovery and how invested the private sector is to expand their game within a structurally different Sri Lankan economy in the midst of a rapidly evolving global landscape.

What drives the growth and what constrains it?

The recovery from slower growth in the second half of 2025 was propelled by the manufacturing sector, although the world’s second-largest economy continues to face pressure from declining property investment. Industrial production increased by 6.1%, with high-tech manufacturing standing out as a strong performer, growing by 12.5%. Manufacturing of products such as semiconductors, industrial robots, lithium batteries, and 3D printers performed particularly strongly, recording double-digit growth between 24% and 54%. Demand for manufactured goods was boosted by a 14.1% increase in exports during the first three months of 2026, according to earlier released data. In addition, fixed asset investment, which had contracted in the second half of 2025, increased by 1.7% in the first quarter.

However, China’s consumer services industry has been facing difficulties, with restaurants shutting down across the country and those that remain open often having noticeably empty dining areas. A prolonged and sharp decline in apartment prices has reduced Chinese household wealth, leading many consumers to rein in spending. Residential construction has slowed significantly over the past four years, but apartment sales have fallen at an even quicker pace, resulting in a rising surplus of unsold properties and making potential buyers hesitant to invest their savings in real estate. Meanwhile, retail sales grew by only 2.4% year-on-year in the first quarter and just 1.7% in March, falling well short of most economists’ expectations. Furthermore, car sales dropped by 17% over the quarter after the government reduced subsidies that had previously fuelled a surge in demand last year. Exports have supported the Chinese economy through much of its housing downturn since 2021. However, this time they were unable to offset wider weakness, following a sharp increase in China’s largest import category—computer chips.

What could risk China’s economic blossom moving forward?

China opened the year with stronger-than-expected growth, but analysts say this does not yet indicate resilience to the economic impact of the Iran war, which is clouding the global outlook and may still raise costs and weaken demand for the world’s second-largest economy. External demand helped sustain growth in the first quarter. However, this dependence also raises questions about how long it can last. Meanwhile, China’s factory-gate prices turned positive last month for the first time in more than three years, as surging commodity costs particularly oil—began to impact the country’s vast industrial sector. In recent years, major Chinese industries have been affected by excess capacity, leading to intense price competition and sustained deflationary pressure across the economy. According to data from the National Bureau of Statistics (NBS), the producer price index (PPI), which measures factory-gate inflation, rose 0.5% year-on-year, returning to positive territory for the first time since September 2022. Chinese policymakers have long sought to end deflation as they work to revive an economy burdened by oversupply and weak consumer demand. However, analysts caution that this “cost-push inflation,” driven by rising input costs rather than stronger demand, is not the ideal form of recovery. Instead, higher production costs passed on to already cautious consumers could further weigh on the economy by reducing household disposable income and dampening spending. Some economists caution that a prolonged Middle East conflict could drive up costs and squeeze producer profits, while also weakening consumer demand including from abroad, as rising prices reduce overall spending power.

China has traditionally depended on infrastructure development such as roads, bridges, ports, and other large-scale projects to stimulate its slowing economy. However, increasing debt levels, particularly among local and provincial authorities, are making this approach more difficult to maintain. Weak domestic demand has prompted Chinese firms to look overseas for growth. Exports rose in the first three months of this year at their fastest quarterly pace in over four years, driven mainly by electric vehicle and lithium battery shipments. Economists say these overseas sales have helped keep factories operating at high capacity across the country. However, the durability of this export strength remains uncertain. Tariffs and higher raw material costs linked to the Iran conflict appeared to weigh on the Chinese economy in March. Although China is relatively well positioned compared to other major economies to withstand disruptions to oil and gas supplies thanks to large fossil fuel reserves and its leadership in renewables, recent trade data points to unexpected changes that significantly narrowed its trade surplus. A key shift has been a sharp increase in semiconductor imports, despite a a weak Renminbi, as China rapidly expands data centre infrastructure to support artificial intelligence development. At the same time, exports of toys and footwear, once strong sectors—declined as rising plastic costs from the Middle East conflict squeezed manufacturers.

How will Sri Lanka be impacted from this?

As a key trading partner, Sri Lanka is likely to feel both direct and indirect effects from these developments in China. Slower and uneven Chinese growth could weaken demand for Sri Lankan exports such as tea, rubber, apparel inputs, and other commodities, while reduced Chinese outbound investment may delay infrastructure or development projects linked to Sri Lanka. The growing reluctance to spend amongst Chinese households, amid global uncertainties can also have an impact on Sri Lanka’s tourism sector.

At the same time, if Chinese manufacturers face higher costs and weaker global demand associated with the conflict in the Middle East, competition in export markets could intensify, placing pressure on Sri Lankan producers. Rising energy prices caused by Middle East tensions would also be significant for Sri Lanka, as a net fuel importer, increasing import costs, inflationary pressures, and pressure on the trade balance.

How will this change Sri Lanka’s macro-trajectory?

In January 2026, we spoke about Sri Lanka’s fiscal overperformance and external surpluses that would help reserve build up and put the country in a much better footing to absorb any shocks coming its way. Since then, the fundamental macroeconomic story has only gotten stronger outside the war with key domestic macro indicators showing continued positive momentum at the start of the year.

However, given the current situation in the middle east and its effects both on the global and domestic end, we do think there could be contained changes to our previous baseline.

The impacts of the Iran War will be large but with many counterweights as well

The obvious message is that an oil shock is negative onto Sri Lanka - as would a global military situation. Alongside oil, we take a closer look at other areas such as remittances, tourism, local and global demand conditions that could possibly take a hit while we also explore some of the ‘counterweights’ that tied to the current context which can go unnoticed since much of the focus is directed towards the clear negatives. It is really how these factors play against each other that will affect the way the war’s impacts play out onto Sri Lanka.

Three main scenarios amidst the fog of war

With all this uncertainty, we’ve gone through multiple scenarios on top of scenarios - but ultimately ended up on 3 key scenarios – as outlined in our Focus here.

What will the combined impact onto Sri Lanka be?

One way to understand this situation is through the lens of “The new Sri Lanka figuring out how a global conflict affects it”. Given the structurally different macroeconomic setting that Sri Lanka is right now, how domestic economic factors would evolve this time can be VERY different to how they did in the past - and that’s part of why we only think 80% of scenarios are covered through our thinking. Additionally, we recognize that there are other knock-on effects that can complicate this situation – stemming both from the local AND global front – that can take us beyond our 3-scenario expectations.

Right now, while we have put our views into these three scenarios, the developments over the next few weeks can change this. By the end of April, we think there will be enough clarity to rule out at least one of the three scenarios as a result, and we hope to be able to give clearer views at that point.

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Our clients would have already received a detailed report to their emails on this, alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 31st of March, 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.

Right now, Frontier is working with three scenarios.

1. A Shorter War – This is a scenario where we envision de-escalation within less than a quarter. We think there have been historical occasions where conflicts in the Gulf region have seen high levels of escalation, only to find resolution after some form of a ceasefire. We think this remains a plausible path from here.

2. The Longer War – This is a scenario we think resembles the ongoing situation in Palestine and Lebanon, where conflicts persist without a clear or decisive resolution. Within a scenario like this, hostilities could drag on for an extended period, keeping pressure across global markets and supply chains elevated for much longer than most would anticipate.

3. The Sharper War – This is a scenario where significantly more parties become directly involved, resulting in a major, large-scale, all-out war. However, unlike the Longer War, this scenario may not necessarily persist over an extended period — the sheer intensity of the conflict could, in fact, accelerate its conclusion.

Across these three scenarios, we think the overall impact on both the global economy and the local economy could be broadly different in nature, magnitude, and duration.

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Our clients would have already received a detailed report to their emails on this, alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 31st of March, 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.

Disclaimer: Information collected/analyzed is from sources believed to be reliable or from the Central Bank/Government. Frontier Research Private Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute our judgment as of the date of the material and are subject to change without notice. The reports and presentations given are not intended as an offer or solicitation for the purchase or sale of any financial instrument. The reader must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. This communication including any attachments contained herein is governed and bound by the “Confidentiality and Disclaimer” detailed and available for your specific reference at our corporate website.