Global economy

Reduced oil supply from the Middle East and strains on refining capacity are pushing up inflation globally. Higher energy prices are weighing on economic activity. Global growth remains resilient, boosted by strong AI‑related investment.

Growth in global gross domestic product (GDP) is projected to pick up in the second half of 2026 and stabilize at around 3% through 2028. Investment related to artificial intelligence (AI) continues to support economic activity in the United States and parts of Asia. High energy costs weigh on growth in the euro area and other energy‑importing economies.

Inflation remains above target in many economies, mainly because of high energy costs (Chart 19). Strong demand for AI‑related products is also adding to inflationary pressures. In response to persistent inflation, some central banks have raised their policy interest rates.

United States

Economic growth in the United States is projected to remain solid, supported by strong private domestic demand. Inflation remains elevated because of high energy prices and robust AI‑related demand.

Economic activity remains strong

GDP growth is expected to average about 3% in the second half of 2026, supported by continued strength in consumer spending and AI‑related investment. The strength in consumption remains uneven across households (Chart 20). Lower‑income households are disproportionately affected by high gasoline prices, while higher‑income households continue to benefit from earlier gains in equity markets.

The US labour market is expected to remain in balance, with moderate job gains and the unemployment rate holding just above 4%.

GDP is projected to grow by 2½% in 2027 and 2028, supported by consumer spending and business investment (Chart 21). Solid income growth bolsters household spending, with strong productivity growth helping sustain gains in real wages. At the same time, higher interest rates restrain interest‑sensitive spending, partly offsetting the strength in demand.

Inflation is expected to stay high in 2026

US personal consumption expenditures (PCE) inflation has remained elevated and is expected to rise from 3.4% in August to about 3.7% in late 2026, largely reflecting the increase in energy prices.1

Core inflation remains high at about 3%, with recent pressures coming from strong growth in prices for transportation services and the effects of past tariffs. So far, the sharp climb in energy prices has had relatively limited spillover effects on broader consumer prices. But inflationary pressures are expected to increase as high energy costs work their way through supply chains.

In addition, strong AI‑related demand is raising costs and inflationary pressures across the economy. This includes prices for some technology goods.

In response to these inflationary pressures, the US Federal Reserve raised interest rates by 25 basis points in September.

Inflation is anticipated to moderate over the projection horizon as the effects of high energy costs and tariffs fade. Higher interest rates also weigh on household spending and inflation. Longer‑term yields have risen, and financial markets expect at least two additional rate increases by the end of 2027 (see In focus: Factors behind the rise in long‑term sovereign bond yields).

Euro area

High energy prices pushed up inflation in the euro area to 3.8% in September. Core inflation ticked up to 2.5%, partly reflecting the pass‑through of high energy costs to prices in sectors such as transportation, delivery services and tourism.

The European Central Bank has increased its policy rates by 50 basis points since June. This reflects concerns that the energy shock would prove persistent and keep inflation above target for an extended period.

GDP growth was resilient and broad based in the second quarter of 2026 (Chart 22). Growth is projected to remain solid in 2027 and 2028 as the drag from high energy prices diminishes and government spending on defence and infrastructure supports domestic demand. As high energy costs gradually pass through to other goods and services, total inflation is expected to remain elevated before easing later in the projection.

China

Growth in China rebounded in the third quarter, supported by strong exports and a pickup in government spending. However, growth in consumer demand remains subdued (Chart 23).

Over the projection horizon, growth is anticipated to average 4¼%. Fiscal policy and strong exports of AI‑related and green technologies are expected to continue to support activity. At the same time, the drag from the property sector is anticipated to gradually subside.

Higher energy prices have pushed up inflation in recent months. However, subdued domestic demand constrains growth in consumer prices over the projection horizon.

Endnotes