Global economy

The war in the Middle East has pushed up inflation around the world and is weighing on global economic activity. But oil prices have fallen from their peak, and inflation is expected to ease. Investment in AI is boosting global growth.

Overall, inflation is expected to slow due to the decline in oil prices since April. However, supply chain disruptions caused by the war have increased input costs and lengthened delivery times in many regions, adding some upward pressure on inflation.

Strong investment in artificial intelligence (AI)—particularly in the United States and China—and the resulting trade spillovers to other economies are supporting global growth.

Overall, growth in global gross domestic product (GDP) is projected to ease to 2¾% in 2026 due to the war. It then recovers to slightly above 3% in 2027 and 2028.

United States

Economic growth in the United States is expected to remain solid due to strong consumer spending and AI‑related investment. While inflation is anticipated to ease because of lower oil prices, it remains elevated through the rest of 2026.

Economic activity remains strong

US GDP growth is estimated to have averaged about 2.5% in the first half of 2026, supported by consumption and strong investment growth.

Consumption has been solid, particularly among higher‑income households that have benefited from tax cuts and large gains in financial wealth. In contrast, spending by lower‑income households has been held back by subdued income growth and, more recently, high gasoline prices.

Business investment has been robust due to AI‑related spending.

The labour market has firmed up recently. Monthly job gains rose from an average of about 10,000 in 2025 to about 90,000 in the first half of 2026. Job growth has also become more widespread across industries.

Economic growth is expected to remain solid over the projection horizon, supported by rising consumer spending and strong business investment. Overall, GDP is projected to grow by about 2½% in 2027 and 2028 (Chart 17).

Inflation is expected to remain elevated in 2026

US personal consumption expenditures inflation rose from 2.9% at the start of the year to 4.1% in May (Chart 18). This increase was due to the closure of the Strait of Hormuz, which disrupted shipments of oil and other commodities, pushing gasoline prices sharply higher and raising production costs for businesses. These higher costs have started to pass through to prices for some other goods and services.

Oil prices have since fallen considerably, putting downward pressure on inflation. Nevertheless, inflation is expected to be around 3½% at the end of 2026.1 Inflation remains elevated because of the pass‑through of cost pressures from the war and persistently high inflation in services prices. Past tariff increases also contribute to inflation.

Inflation is expected to slow in 2027 as cost pressures ease and the impact from tariffs fades. A balanced labour market and moderate growth in labour costs help bring inflation back toward the Federal Reserve’s 2% target through 2027 and 2028.

High energy prices pushed inflation up to 3.2% in May. Core inflation was 2.6%. The European Central Bank (ECB) raised its policy rates by 25 basis points in response to ongoing inflationary pressures. Inflation eased slightly in June as energy prices declined and is expected to gradually return to the ECB’s 2% target by mid‑2027.

Over the projection horizon, export growth is expected to slow as additional market share becomes harder for exporters to gain. Domestic demand is anticipated to improve slowly as the housing market stabilizes. Overall, GDP growth is projected to slow to about 4¾% in 2026 and 4¼% in 2027 and 2028.

Despite the recent increase in energy prices, inflation remained subdued at 1% in June because of persistent excess capacity. Inflation is expected to remain moderate through the end of 2026 before rising gradually thereafter as domestic demand slowly improves.

Endnotes