International and Monetary Economics Network

The world economy has shown resilience amid headwinds, but the dampening effects of high oil prices, supply chain stress, geopolitical uncertainty, and potential food shortages are considerable.

• At the beginning of the year, we wrote: “The world economy shows resilience amid headwinds, but do not underestimate its fragility.” The conflict in the Middle East is now significantly testing this resilience.
• In 2025, global GDP growth remained solid, and global trade proved more resilient than expected. Nevertheless, higher tariffs and rising protectionism are structurally weighing on global growth and trade, thereby dampening our forecasts for 2026 and 2027.
• The conflict in the Middle East has led us to considerably increase our baseline assumptions for the path of oil and natural gas prices. In addition, supply chains for a number of other products, such as fertilizers, are disrupted, adding to inflationary pressures and possibly causing food shortages.
• In our baseline, we expect Brent spot prices to slightly ease to $95 per barrel by the end of June. In this scenario, the pre-crisis price level will not be reached before 2027. This will have considerable negative effects on the economy, but it will not cause dramatic economic disruptions for most countries. Weaker aggregate demand will exert moderate downward pressure on oil prices. Producers elsewhere will increase their production. Compared to our previous Global Economy Flash, we have revised our growth forecasts slightly downward and our inflation forecasts modestly upward.
• In our baseline (see figures 1 and 2), we expect global economic output to increase by 2.8 percent in 2026 (-0.1 percent compared to our previous GEF in March). For 2027, we currently anticipate a slight acceleration to 3.0 percent. For most countries, we have only moderately increased our 2026 inflation forecasts compared to our GEF in March (where we raised our inflation forecasts by 0.3-0.5 percent for most countries).
• In a more severe scenario with oil prices persistently above $100 per barrel, stagflationary scenarios would become relevant for several countries. Global GDP growth would then drop to 2.5 percent in 2026. Inflation would rise by an additional 0.3-0.5 percent in most countries.
• The U.S. economy still benefits from the AI boom, but the rest of the economy is less robust. Economic growth in the first quarter of 2026 was solid (+2.0 percent). U.S. households benefit from an expansionary fiscal policy and past interest rate cuts. However, the labor market has weakened. Inflation remains too high and will likely continue to rise, at least in the short term. Instead of interest rate cuts, one should expect stable or even rising interest rates. Inflation has been elevated for several years, which could structurally raise inflation expectations. In addition, the transition from Powell to Warsh is marked by uncertainty, and there are concerns about the independence of the Fed.
• The Chinese economy depends on exports and manufacturing, while domestic demand continues to struggle. The real estate crisis still looms over the economy, and young people struggle to find well-paying jobs. Rising debt across various levels of government weighs on economic activity.
• The Euro area remains on a moderate growth path despite structural challenges and high debt in some countries. The German fiscal stimulus will gradually lift growth in Germany and spill over to other European countries. However, the crisis in the Middle East threatens hopes for a stronger economic expansion. In our baseline, we have cut our 2026 growth forecast to 0.9 percent.
• The Swiss economy remains resilient with modest growth rates. Inflation will remain low, and the Swiss franc is likely to appreciate further. The pharmaceutical sector will be a less significant growth driver than in the past due to headwinds such as higher international competition.
• Monetary and fiscal policy: Fiscal policy is mostly expansionary despite often rising debt levels. Monetary policy is currently on hold. Interest rate cuts anticipated before the start of the Middle East conflict are now delayed. In some countries, we are starting to expect modest interest rate increases during the summer although most central banks will try to “look through” temporary pronounced inflationary pressures.
• There are both downside and upside risks, including: Conflicts and geopolitical tensions have the potential to further escalate. At the same time, a faster-than-anticipated end of the conflict in the Middle East or in Ukraine could be associated with upside effects on economic growth. Supply chains for a number of products, such as critical raw materials or fertilizers, remain fragile. The AI boom could end abruptly, but might also lead to a stronger-than-anticipated productivity boom. Public debt remains high in many nations and is also increasing in various countries. In the medium term, we should be concerned about potential public debt crises.