Five risks for the global economy in 2027

A severe correction in US stocks triggered by an AI meltdown

The US tech correction extends into a full-blown, deep bear market. Why? Demand for Artificial Intelligence disappoints, perhaps because of weak enterprise adoption. Cheaper models break through at a time when corporates grow wary of pricey tokens. Overcapacity builds and higher financing costs bite across the industry, triggering credit events outside the major hyperscalers.

US activity takes a big hit; around a third of growth has come from AI so far in 2026. As a rule of thumb, a further 30% equity drawdown would wipe out $24.5tr of household wealth. This is concentrated among high-income consumers who are less likely to cut back on spending. Consumers barely flinched when the dotcom bubble popped, but this time those high earners are the only ones spending.

Investment would bear the bigger brunt. Investment in data centres and infrastructure is an obvious risk, but tighter financing conditions – via wider credit spreads – would hit businesses well beyond AI. Non-tech investment took a bigger hit post-dotcom than tech itself.

The good news is this is not 2008; household and business balance sheets are much healthier. The Fed would also likely deliver sharp rate cuts. Chair Warsh is not convinced that policy is currently restrictive, no doubt because equity markets are supported. But if that changes, a key pillar of the Fed’s tightening cycle falls away.

Impact: Potential US recession, while Europe is less affected. Curtailed Fed hiking cycle and faster rate cuts.

Second-round inflation effects emerge at scale

One of our main calls across Europe is that second-round effects from the energy shock remain contained, allowing major central banks to cut rates toward the end of 2027. But this could be wrong for four reasons.

First, the lack of second-round effects so far simply reflects longer lag times. Businesses have built more resilience to shocks since 2022, via hedging (think European airlines) and supply chains. But as the crisis lasts longer, this resilience is increasingly challenged. The recent spike in natural gas prices also means this is no longer solely an oil crisis. That could see a dramatic turnaround in food inflation through the winter. The big test could be price resets in the new year across the services sector.

Second, the jobs market starts to tighten. Vacancies increase at a time when labour supply is constrained by low migration in many countries. Workers gain the upper hand in wage bargaining processes and benefit from bigger pay settlements and/or one-off bonuses. That amplifies the impact on services inflation.

Third, energy prices themselves spike higher. Prolonged escalation in the Middle East could take oil to $130/bbl or above this winter. Central banks have explicitly argued that energy prices and the probability of second-round effects are positively correlated.

Finally, governments start to bear the cost of the energy shock on their balance sheets, boosting support to households and businesses, despite rising borrowing costs. That would ease the hit to growth. And though it could temper the rise in headline inflation if support directly lowers energy costs, it would add to inflationary pressures over the medium term.

Impact: Core inflation remains well above target in 2027. More significant rate hikes, proving market expectations right. Rate cuts delayed.

Weather and critical infrastructure failures shock the global economy

This decade has proved that supply shocks are becoming more common, supporting our long-held view that inflation cycles are getting shorter. There are two obvious shocks that could strike in 2027.

First, weather. El Niño, if particularly severe, could dramatically increase agricultural prices (though our research suggests this isn’t inevitable). Low water levels in the Panama Canal could also pose a wildcard for shipping and supply chains. Overlaid on the existing energy shock, headline inflation could remain at 4%, especially in Europe, well into 2028.

Second, a major critical infrastructure failure. A cyberattack or cascading technical failure disables electricity, payments, communications or cloud services across multiple European economies for several days. The economic damage is likely to rise non-linearly with the duration, frequency and geographical reach of an outage. The 18-hour power outage across much of Spain in 2025 had little discernible impact on GDP. But repeated, high-impact and unpredictable outages would hit confidence, and also require firms to divert significant sums to building resilience, via more complex supply chains, better systems and hedging.

Impact: Lower growth and potentially higher inflation, especially if there is a commodity price aspect to these shocks. Central banks are more likely to lean hawkish.

Geopolitical de-escalation delivers an energy peace dividend

With the Republicans in a weakened state post the midterms and President Trump increasingly focused on his legacy, a US-driven settlement ends the Ukraine war earlier than expected and facilitates a broader accommodation with Russia. Washington pressures Kyiv to accept territorial compromises in return for security guarantees, while offering Moscow phased sanctions relief and renewed economic co-operation in exchange for a durable ceasefire.

Improved US-Russia relations, in turn, create scope for faster, wider Middle East diplomacy, including Russian support for a negotiated settlement with Iran and tighter nuclear constraints. Faster-than-expected de-escalation across both theatres reduces immediate European security risks and disruption to energy and shipping, while supporting confidence, investment and Ukraine’s reconstruction.

Impact: A significant and durable fall in oil (and crucially, diesel) and European natural gas prices, via a lower risk premium and later improved flows. Inflation stays high in the first quarter, given the pressure already in the pipeline, but falls below 2% by summer in the US and Europe. Central bank rate cuts are accelerated.

The bond market rout gets even worse

Our Rates Strategy team argues that US 10-year yields could hit 6% if US growth accelerates to 3-4%, the fiscal deficit gets even worse, or inflation fails to come down.

Which of those factors dominate clearly matters; a positive demand shock clearly has very different ramifications from the inflation shock discussed above.

Regardless, even higher yields – particularly in a volatile bond market – would present another significant stress test for the global financial system. It risks exacerbating existing concerns about leveraged AI players and would act as an even larger brake on the US economy beyond the data centre rollout. And it could spark more serious and widespread concerns about European public finances. A raft of elections makes it difficult for incumbent leaders to enact – or promise – austerity at a time of rising populism. French spreads blow out beyond 200bp and that seeps into other markets, like Italian BTPs.

The ECB faces a dilemma, but signs of more widespread contagion beyond France would be a catalyst for action – starting with sounding (or acting) more dovish, inflation permitting, or with an end to the Quantitative Tightening programme. The bar for activating the Transmission Protection Instrument isn’t met, however.

Impact: Weaker growth across the US and Europe. Central banks struggle to turn more dovish, particularly if the rise in bond yields is rooted in higher inflation.

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