Summary of Key Points
The main theme of the global economy in 2026 is the tug-of-war between "AI driving growth upwards and conflicts in the Middle East pulling it downwards": AI investments boost capital expenditure and corporate profits, supporting economic growth; however, conflicts in the Middle East (especially those affecting shipping through the Strait of Hormuz) drive up oil prices, forcing central banks to adopt a more "hawkish" stance (tending to raise interest rates). The baseline scenario assumes that traffic through the Strait of Hormuz resumes by the end of June, and oil prices will fall to $86 per barrel in the fourth quarter. If the conflict extends into the third quarter, oil prices could soar to $150, leading to a recession in Europe and weakened growth in the United States. Overall, global growth is only slightly projected to decline (3.0% in 2026), but inflation is expected to rise significantly (3.8%), shifting central bank policies from expectations of interest rate cuts to a more cautious or even hawkish approach. On the asset side, stocks remain optimistic (with the S&P 500 target at 8,000 points), while bonds and European corporate debt are under significant pressure.
I. The Middle East Conflict: Oil Prices as the Decisive Factor
The impact of the Middle East conflict on the economy is primarily through oil prices, with the Strait of Hormuz being a critical bottleneck, as approximately one-third of the world's maritime oil trade passes through this route.
- Baseline Scenario: The United States and Iran reach an agreement by the end of June, and the strait reopens. Brent oil prices average $109 per barrel in the second quarter and fall to $86 per barrel in the fourth quarter (rising to $80 per barrel in 2027).
- Risk Scenario: If the closure of the strait persists into the third quarter, oil prices could approach $150 per barrel. Europe, due to its high dependence on energy imports, would experience a direct recession; U.S. growth would suffer significantly.
- Limited Buffer Capacity: Currently, the oil market relies on the United States reducing crude imports and increasing refined product exports, as well as China lowering refinery operations (a total adjustment of 5 million barrels per day), along with the release of strategic reserves. However, if the situation lasts too long, these measures will become ineffective.
II. AI: From a Concern About Deflation to a Short-Term Driver of Inflation
Previously, there were fears that AI would displace jobs and lead to deflation; however, the situation has reversed:
- Short-term Inflationary Impact: AI investments (in data centers, software, and equipment) are boosting demand, with the United States and North Asia (South Korea, Japan) benefiting the most, which could offset some of the negative effects on the energy sector.
- Long-Term Uncertainty: While AI may indeed impact employment and potentially cause deflation, the timing and extent remain uncertain, leading to market volatility (with investors alternating between optimism about AI's benefits and concerns about job losses).
- Stable Labor Market for Now: The United States has not yet seen large-scale unemployment due to AI, and its labor market remains stable.
III. Divergent Performance Among Major Economies
- United States: The most resilient economy, with growth expected at 2.2% in 2026 (slightly lower than previously projected). Rising oil prices reduce household incomes, but fiscal spending, loose monetary conditions, and AI investments are supporting the economy. The main challenge is inflation: core inflation (the Fed's primary concern) is expected to reach 3% by the end of the year and could approach 4% in the short term, making it difficult for the Fed to cut interest rates; instead, it may raise them.
- Europe: On the brink of recession, with growth projected at 0.5% in 2026 (down from 1.1% previously). The economy shrank by 0.1% in the second quarter and is expected to experience zero growth in the third quarter, potentially leading to a technical recession. Rising energy prices are driving inflation, prompting the European Central Bank to raise interest rates by 50 basis points. Germany is relying on fiscal stimulus, but consumer demand is weak; in the UK, the unemployment rate rose to 5.4% by the end of summer.
- Asia:
- China: Strong export momentum (thanks to AI, green initiatives, and increasing market share in emerging markets), rapid import growth (of raw materials), and a turnaround in PPI from negative to positive, accelerating inflationary pressures.
- Japan: Rising oil prices are pushing up inflation, prompting the Bank of Japan to tighten monetary policy by raising interest rates quarterly starting in July 2026, with rates reaching 1.75% by April 2027.
- India: Growth slowed from 7.5% to 6.7% due to oil prices and monsoon impacts; the central bank will need to raise interest rates twice (by 25 basis points each time).
IV. A Major Shift in Central Bank Policies
Previously, markets expected central banks to cut interest rates; now the situation has reversed:
- Federal Reserve: Likely to maintain a wait-and-see approach for now and may raise interest rates if inflation proves more persistent.
- European Central Bank: Plans to raise interest rates by 50 basis points in the summer, bringing deposit rates to 2.5%.
- Bank of Japan: Will raise interest rates quarterly starting in July 2026, with rates reaching 1.75% by April 2027.
The reason is simple: Inflation is higher than expected, forcing central banks to tighten monetary policy to control it.
V. Asset Prices
- Stocks: The S&P 500 is targetted at 8,000 points by the end of the year (unchanged), supported by AI and corporate profits (expected to grow by 14.2% in 2026). Portfolio allocation should favor the United States and Europe, with sectors such as finance, manufacturing, and healthcare being favored.
- Bonds: 10-year U.S. Treasury yields are expected to rise to 4.7%, and German government bond yields to 3.2% due to central banks' reluctance to cut interest rates or even raise them.
- Corporate Debt: European corporate debt is under greater pressure (due to the energy crisis and the impact of rising interest rates on small and medium-sized enterprises), while U.S. corporate debt faces relatively lower risks.
- U.S. Dollar: Weakening gradually, but U.S. energy exports and capital inflows will support it; however, the dollar may not weaken significantly due to high oil prices.
- Emerging Markets: Latin America is more resilient to rising oil prices (due to its commodity exposure and higher interest rates), while Asian countries that rely on energy imports are under greater pressure.
In One Sentence
The global economy in 2026 will be a contest between the benefits of AI and the risks associated with conflicts in the Middle East, with inflation being the main variable. Central bank policy shifts will influence asset prices. Stocks still offer opportunities, but bonds and European assets require caution.
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