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Global Economics Quarterly - Running out of gas?
Early 2026 has given us the clearest evidence yet that we are living in a less stable, less predictable world, driven by geopolitical shifts: Venezuela, Greenland and now, as the humanitarian crisis and hostilities continue in the Middle East, the global economy faces the biggest disruption to global oil supply in history.
An array of energy-related prices has surged globally, reigniting inflation fears, as well as growth and interest rate concerns.
The global economic impact clearly hinges on the direction and duration of the ongoing conflict. Even a credible ceasefire would not translate into a quick restoration of energy flows or much lower prices.
Higher energy prices and trade disruption can have multiple direct and indirect effects. Our updated forecasts show that global growth will be lower and inflation higher, even assuming that the period of severe disruption eases in the coming weeks.
We see annual average global inflation in 2026 accelerating to 3.5% – with the biggest revisions in Europe and Asia – and global growth slowing from 2.8% in 2025 to 2.5% in 2026.
However, given the substantial risks, we also consider a more negative scenario where oil prices go higher and stay there for longer.
In this ‘ugly’ scenario, some regions would see much more evidence of – or at least fear of – second-round effects on inflation that would warrant higher policy rates, which would, in turn, weigh on domestic demand. This scenario, with parts of the world likely to fall into recession, would also pose the risk of a sharper drop in asset prices.
Winners and losers
As with all shocks, there will be relative winners and relative losers.
The relative winners will be the oil producers outside the Middle East (where the outlook is clearly very complex): notably Russia, Norway, Canada and the US. Among the energy importers, much of Asia – apart from Malaysia and Australia – and all of Europe are much more sensitive to the price of imported energy, while Latin America is less affected.
Governments and central banks
The threat of more persistent inflation has already fundamentally altered the near-term outlook for policy, both for governments and central banks.
Some Asian economies have already pledged fiscal support to limit the impact of higher energy costs on consumers, and we expect other emerging economies to follow suit. Governments in parts of Europe are poised to give households some support with energy bills. Given the increasingly precarious fiscal positions, this is not without risk.
As for central banks, assuming a relatively short-lived energy shock, we would expect the US Federal Reserve, the European Central Bank and the Bank of England to remain on hold this year, albeit with a bias – to varying degrees – towards rate rises rather than cuts.
However, in our ‘ugly’ scenario, we would expect policy to be tightened aggressively across Europe and in the likes of Australia, while the outlook for the US Fed, with its dual mandate, is more complex.
Overall, the outlook for the global economy is highly uncertain. A near-term resolution to the conflict would limit the damage but, the longer it endures, the bigger the risk of a global recession.
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The following analyst(s), who is(are) primarily responsible for this document, certifies(y) that the opinion(s), views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Janet Henry, James Pomeroy, Bethan Ellis, Ryan Wang, Jing Liu, Erin Xin, Lulu Jiang, Taylor Wang, Frederic Neumann, Justin Feng, Akiko Kitamura, Pranjul Bhandari, Aayushi Chaudhary, Paul Bloxham, Jamie Culling, Jin Choi, Aris Dacanay, Yun Liu, Simon Wells, Stefan Schilbe, Chantana Sam, Fabio Balboni, Elizabeth Martins, Anja Sabine Heimann, Agata Urbanska-Giner, Melis Metiner, Simon Williams, Hugo Pienaar, Daniel Lavarda, Jose Carlos Sanchez, Joseph Incalcaterra, CFA, Clyde Wardle and Allison Buck
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