Global businesses entered 2026 with improving confidence and strengthening manufacturing demand, but the outbreak of war in the Middle East now threatens to disrupt supply chains and push up costs across the global economy.

Two new releases from S&P Global provide a snapshot of economic conditions immediately before the conflict escalated. The latest Global Business Outlook Survey shows business optimism reached its highest level in a year in February, while the GEP Global Supply Chain Volatility Index indicates global factory demand was rising at the fastest pace in almost four years.

Together, the reports suggest the global economy was entering a cyclical upswing driven by stronger manufacturing activity in Asia and improving sentiment in Europe. But both surveys were conducted before the war began, raising questions about whether that momentum can be sustained.

Business confidence edges higher before the conflict

According to the S&P Global Business Outlook Survey, the net balance of companies expecting higher output over the coming year rose slightly to +25% in February, up from +24% in October, marking the highest level of optimism for a year.

Confidence improved most strongly among manufacturers. Sentiment in the manufacturing sector climbed to its highest level in three years, overtaking services confidence for the first time since February 2021, when the global economy was still emerging from pandemic disruption. The shift suggests industrial activity may be regaining momentum after a prolonged period in which services sectors drove much of the global recovery.

The improvement was uneven across regions. The eurozone recorded one of the strongest gains, with business confidence reaching a four-year high following improved outlooks among firms in Germany and France. Companies in India also reported their strongest confidence since October 2014. Elsewhere, sentiment was broadly stable compared with late 2025, although confidence slipped slightly in mainland China.

Despite improving expectations for output, companies remained cautious about hiring. The survey’s employment net balance stood at +7% in February, matching the joint-lowest level recorded outside the COVID-19 pandemic and equal to the level seen in October 2019.

Hiring expectations did improve slightly in the eurozone, UK and India, but were unchanged in mainland China, and deteriorated in several other regions, suggesting firms remain reluctant to expand their workforce despite stronger demand expectations.

Part of the improvement in profit expectations appears to be driven by productivity gains rather than employment growth. According to S&P Global, many firms are focusing on cost reductions and efficiency improvements, allowing margins to improve even as hiring plans remain subdued.

Investment plans show only modest improvement

Corporate investment intentions also remained cautious. The net balance of firms expecting to increase capital expenditure rose slightly to +7%, while expectations for research and development spending increased to +5%.

The US recorded the strongest improvement in R&D expectations, with companies reporting the highest expected increase in research spending for three years. Spain and France also saw stronger R&D investment expectations.

Capital expenditure expectations, however, remained uneven across regions. Spending plans improved in the US, but were unchanged in the eurozone, Japan and across the BRIC economies, while firms in the UK and Germany reported further declines in expected capex.

Inflation expectations also showed mixed trends. Firms predicted staff cost inflation would ease, with the net balance falling to a five-year low of +31%. However, expectations for non-staff input costs increased slightly to +25%, while the net balance for output price inflation rose to +24%, the joint-highest level in three years. The increase was driven primarily by manufacturers, where the net balance of firms expecting higher selling prices reached its highest level since October 2022.

Profit expectations also improved modestly, with the global net balance rising to +12%, the highest level in two years.

Asian manufacturing surge drives global demand

At the same time as business sentiment improved, global supply chains were experiencing a surge in manufacturing demand. The GEP Global Supply Chain Volatility Index, which tracks purchasing activity and supply conditions across around 27,000 companies in more than 40 countries, showed purchases of raw materials and intermediate goods rising at the fastest pace since March 2022.

Asia was the primary driver of the increase. The regional index jumped to 0.40 in February from 0.12 in January, marking the highest level since October 2022 and indicating that supply chains into Asia were their busiest in nearly three-and-a-half years.

Manufacturing economies including China, Japan, India, South Korea and Taiwan all reported strong growth in factory purchasing activity. The concentration of demand highlights the region’s continuing role as the centre of global manufacturing supply chains.

Europe also showed signs of recovery. The regional index rose sharply to 0.05 from -0.27, indicating that demand for manufacturing inputs was strengthening as the continent’s industrial sector regained momentum. The improvement was particularly visible in Germany, where stronger factory demand helped drive the region’s recovery. In the UK, the index increased to -0.01 from -0.17, suggesting supply chains were operating close to full capacity.

North America moved in the opposite direction. The regional index fell to -0.26 from 0.06, signalling underused supplier capacity as purchasing activity softened in US manufacturing. Canada diverged from the broader regional trend, with manufacturers increasing purchases of raw materials and intermediate goods for the first time in more than a year.

Lean inventories leave supply chains exposed

Despite the increase in global factory demand, companies did not significantly increase stockpiles of raw materials. Reports of inventory accumulation remained below historical averages, continuing a pattern seen over the past two years as firms prioritised lean inventory management rather than building precautionary stock.

This strategy may leave supply chains more exposed to sudden disruptions. With companies holding relatively limited stockpiles of materials and components, increases in shipping costs or energy prices could feed quickly into production costs and delivery times.

Reports of material shortages increased during February but remained broadly in line with long-run averages, suggesting supply constraints were present but not yet widespread.

Labour shortages were also relatively contained. Reports of production backlogs caused by staffing shortages were close to historical norms, indicating labour availability was not currently restricting global manufacturing output. Transportation costs were similarly stable, with the global transport indicator remaining close to its long-term average.

Conflict threatens supply chain outlook

The improving global outlook now faces a new uncertainty following the outbreak of war in the Middle East. Energy markets are particularly exposed to disruption, with concerns rising about oil supply and shipping routes in the region. Higher energy prices could increase transportation and manufacturing costs, potentially reversing some of the recent improvements in supply chain conditions.

John Piatek, vice president of consulting at GEP, warns that the conflict is already beginning to affect global supply networks.

“The war with Iran is already creating an oil supply shock that will disrupt global supply chains,” he says. “Companies need to assess their exposure to energy, petrochemical and shipping costs now, while US manufacturers should also move quickly to proactively secure price reductions from suppliers following the Supreme Court’s tariff ruling.”

Andrew Harker, economics director at S&P Global Market Intelligence, says the latest business outlook data captured a moment of improving sentiment just before the geopolitical shock.

“February's Global Business Outlook survey indicated that worldwide business confidence had picked up before the outbreak of war in the Middle East,” he says. “In particular, firms in the eurozone and India were increasingly optimistic in the year-ahead outlook, and manufacturers globally were at their most confident in three years.”

However, he warns that the outlook could change quickly if the conflict disrupts energy markets.

“Depending on how long the war persists, we could see disruption to oil and gas supply hit business operations and push up costs, with central banks likely to be reticent to make any more downward movements in interest rates until the war impact becomes clearer.”

Recovery momentum faces new test

Taken together, the two surveys suggest the global economy entered 2026 with improving manufacturing momentum and cautiously rising business confidence. Manufacturers were increasing purchasing activity, supply chains were becoming busier across Asia and Europe, and profit expectations were strengthening. At the same time, companies remained cautious about hiring and capital investment.

The outbreak of war in the Middle East now adds a significant new risk to that fragile recovery. If energy prices remain elevated or supply disruptions intensify, businesses may face renewed cost pressures that could weaken growth, delay investment decisions and reinforce the cautious approach to hiring already evident in the data.

The coming months will therefore provide an early test of whether the tentative rebound in global business sentiment can withstand the latest geopolitical shock.