Global economic outlook: Resilience under pressure

It was true at midyear, and it remains true this fall: the global economy continues to show remarkable resilience, with tailwinds continuing to prevail in their tug-of-war with headwinds.

We believe these tailwinds will persist and ultimately win, leading to an acceleration in growth in 2027, particularly in the largest advanced economies. But there are some downsides to the situation, the tug-of-war remains tough, and risks are numerous. Here is a brief overview of our recently updated economic forecasts and their key messages.

The first of these messages is the resilience of growth. The AI boom plays a central role here, fueling a global investment cycle and world trade. But it is not the only factor. Investments in the green transition are also supporting growth, alongside rising defense spending.

Europe is also benefiting from the past, present, and future spillovers from the NextGenerationEU plan, Germany’s massive investment plan, and the “One Europe, One Market” agenda. That is why we continue to expect a relatively high growth rate of 1.5% next year for the Eurozone, compared with a bit more than 2% for U.S. growth.

So far, all these positive factors have helped cushion and offset the negative shock to energy prices caused by the conflict in Iran. But this conflict remains a major source of uncertainty and a significant downside risk.

This is the second key point. In our baseline scenario, we assume that the conflict will remain “frozen” in the short term before a slow – and unstable – normalization of traffic through the Strait of Hormuz.

This would result in Brent crude prices averaging around 80 dollars per barrel but within a wide range, between 75 and 100 dollars. And the price of crude oil is not the only important variable: prices for refined products (such as gasoline, diesel), natural gas, and electricity prices are also under pressure.

This brings us to the third key message of our scenario: persistent inflation. To date, the rise in inflation remains primarily energy-driven, but the risk of direct, first-round effects spreading cannot be ruled out.

A rise in food inflation is also expected. And indirect, second-round effects are also a risk, fueled by relatively strong growth. This is the (first) downside to the situation.

We forecast that inflation in developed countries will peak (between 3.5 and 4%) between the fourth quarter of this year and the first quarter of 2027. It would then ease back toward the 2% target by the end of 2027. However, the balance of risks tilts toward higher rather than lower inflation.

Under these conditions of supported growth and high inflation, there is little doubt that monetary policy needs to be tightened. The goal is to recalibrate it toward, at least, a neutral stance, if not slightly restrictive. This is the fourth feature of our base-case scenario.

For the Federal Reserve, we anticipate two more rate hikes (in December and January); for the ECB, a third one (in December); for the Bank of England, a single hike (in November); and for the Bank of Japan, three more by the end of 2027. And the dominant risk today is that these central banks will have to do more rather than less.

All of these factors, combined with others, lead to the fifth notable development of recent months: the significant rise in long-term sovereign yields, to levels not seen in about twenty years.

This rise is driven by multiple factors and is, in part, due to good reasons (positive economic prospects). This is another flip side of the coin. Market inflation expectations, for their part, remain broadly anchored. And global financial conditions have not tightened significantly.

On the other hand, the rise in long-term rates is also partly a sign of increased vigilance regarding the sustainability of public finances. It further reinforces the need for fiscal consolidation while also making it more challenging.

But, to conclude, given the current reflationary forces supporting economic activity, prices, and interest rates, it is a good thing that fiscal policy supports monetary policy and that both are working to slow the economy. It is the role of the policy mix to prevent the economy from running too hot and to preserve price stability in order to extend the cycle for as long as possible. 

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