16 April 2026
The war in the Middle East has introduced a fresh stagflationary risk to global growth amid disruptions to energy markets and global trade. While financial markets have reacted in an orderly fashion, at least so far, the situation remains uncertain. The duration of the conflict will determine the scale of the economic shock. If the worst of the shock is over by the summer, as we assume in our forecasts, then our still-constructive base case remains intact, with only temporary weakness in growth across major economies and modestly higher inflation in 2026, which fades in 2027.
Looking ahead, growth in major economies is likely to continue being supported by fiscal expansions and easing financial conditions. We expect the US to moderate to a still-healthy headline pace and continue to benefit from the AI and tech revolution, and outperform a Eurozone and UK held back by structural challenges. China looks set to slow somewhat as domestic challenges persist. We see Japan slowing, but still outpacing its anaemic potential rate.
Elevated public debt levels, combined with major fiscal expansions, could trigger renewed bond market instability if inflation surprises to the upside. The war in the Middle East, as well as broader geopolitical fragmentation and protectionism, threaten global supply chains and growth in export-oriented economies. Fiscal policy is expansionary across major economies. But effective stimulus will likely hinge on policymakers’ ability to keep inflation within the safe zone, maintain credibility, and adjust to technological change as well as shocks from geopolitics.
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