“The duration and extent of the shock from the Middle East conflict will have a lasting impact on the global economy. We now see lower growth, higher inflation and more hawkish central banks than we did at the start of the year. However, this is a story of resilience dented but not derailed,” says Luigi Speranza, Head of Markets 360 and Chief Economist.
The duration and extent of the shock from the Middle East conflict will have a lasting impact on the global economy. However, this is a story of resilience dented but not derailed.
Luigi Speranza, Head of Markets 360 and Chief Economist
Despite ongoing geopolitical tensions, Markets 360 believes the global outlook for 2026 remains resilient enough to avoid a recession scenario. While the team has cut its growth forecasts and raised inflation expectations in response to the conflict, structural drivers including AI investment, defence spending and solid pre-conflict growth momentum will help cushion the impact.
Energy shock created inflation pressure
The conflict-driven disruption to energy supply chains has prompted Markets 360 to revise its forecasts, cutting growth expectations while increasing inflation forecasts.
The team expects higher oil prices, supply chain disruptions and reduced risk appetite to weigh on both consumption and investment. Indirect inflationary effects could prove persistent as economies continue to navigate structural pressures.
Central banks are generally expected to move in a more hawkish direction, albeit to varying degrees given differences in starting point, reaction function and exposure to the shock.
AI and defence spending remain growth drivers
While geopolitical tensions create near-term uncertainty, structural growth drivers supporting the global outlook for 2026 remain firmly in place.
Markets 360 believes that continued AI investment and rising defence spending will help support global growth, offsetting some of the economic drag created by higher energy prices and weaker sentiment. The report also highlights AI’s potential to boost productivity over the medium term, with smaller impacts on aggregate unemployment than often perceived.
Regional trends shaping the global outlook for spring 2026
US: Markets 360 expects a modest drag on GDP from the conflict, with unemployment likely to edge down, leaving inflation sticky.
Eurozone: The economy is likely to prove resilient despite higher inflation, though the team no longer forecasts a significant GDP acceleration.
Japan: Growth will slow but not collapse, according to the team, with inflation staying elevated beyond mid-2026.
Emerging markets: The team sees some mitigants for energy producers in Latam, while high energy prices suggest growing stagflation risks in CEEMEA and lingering production concerns for South Korea and Taiwan.
Markets reposition for a changing environment
The team sees duration pressure building across the eurozone, US and Japan as yield curves adjust to a higher-for-longer rate environment. In foreign-exchange markets, broader USD weakness is anticipated, with the JPY and some EM Asian currencies standing out as exceptions.
In credit markets, analysts see normalisation, carry and some compression as key areas of interest.
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