- Yellow card only: As the Middle East conflict de-escalates – despite temporary flare-ups – we expect only a mild slowdown in global growth in 2026 to +2.5%, followed by a rebound to +2.9% in 2027, broadly in line with our previous baseline outlook. AI is strongly propping up the global economy, offsetting the drag from the energy shock and the trade war. The energy shock is still working through balance sheets, with consumer purchasing power recovering only in Q4 2026 and firms' profitability still exposed. The US is set to grow at +2.1% in 2026 supported by energy exports, a savings rate at its lowest since 2008, AI investment (a third of growth) and fiscal support (7.3% deficit). The Eurozone (ex-Ireland) will grow by just +0.9% in 2026 but rebound to +1.2% in 2027, held back by higher energy dependence, minimal AI offset and subdued growth in Germany as bold reforms are needed on top of the fiscal stimulus. China will stay resilient at +4.7%, led by exports and high-tech manufacturing, but faces headwinds from weak domestic demand and US tariffs. Global trade of goods will avoid a recession, growing by +2.9% in volume terms in 2026 and +2.4% in 2027 as the US trade war reloads with Section 301 following the expiry of Section 122 from 24 July, raising the US effective tariff rate from 8% to 13%.
- Has inflation been knocked out? The peak should already be behind us. With oil flows normalizing and crude prices even falling back below pre-war levels, the energy shock should prove short-lived, limiting second-round effects on broader inflation and avoiding a repeat of the 2022 inflation surge. We still expect some volatility during US-Iran negotiations triggering temporary oil price spikes but overall we see them dropping to USD75/bbl and USD67/bbl by the end of 2026 and 2027. Gas prices are still higher compared to pre-war levels, but with EUR41/MWh expected at the end of 2026 and EUR32/MWh in 2027 they remain in the trading range of the past three years. This suggests a far more muted inflationary impact than in 2022, when prices surged by over 500% to above EUR300/MWh. Headline inflation should therefore reach central bank targets in 2027 in major economies. We expect the ECB to stay on hold at 2.25% (around neutral) after having already delivered one insurance hike in June, while the Fed will raise policy rates at least once this year to 4.0% amid persistent inflation, driven by strong AI-related investment demand, before a normalization back to 3.5% in H2 2027.
- The goalposts are shifting for corporates: Earnings held up in Q1 2026 but the delayed impact will hurt down the line. Most European sectors posted positive EPS growth in Q1, while US earnings were buoyed by AI-driven tech. But a profitability squeeze might be building: Turnover growth was revised down for 12 out of 16 sectors, led by pharma (-2.0pps to 0%), utilities (−1.6pps), and motor vehicles (−1.3pps). Only electronics (+1.7pps to 11%), information & communication services (+0.7pps) and food & beverages (+0.4pp) bucked the trend. The auto sector remains most exposed via elevated net leverage meeting higher rates. Against this backdrop, we expect global insolvencies to increase by +4% in 2026 before plateauing in 2027.
- Capital markets are playing the advantage, largely looking through near-term risks. US rates should gradually decline to 4.35% by the end of 2026 and 4.1% in 2027 as inflation pressures and monetary tightening fade next year. German Bunds will hover around 3% amid ongoing supply pressures from quantitative tightening and a high fiscal deficit around 4% of GDP – above Italy and Spain. Equities remain supported by nominal growth and AI upside, although valuations leave little room for disappointment and relative value becomes more relevant. After strong year-to-date gains, further upside in 2026 looks limited with our full-year forecast of 13% total return for the S&P500 and 14% for the Eurostoxx, but in 2027 we see ongoing solid performance of 11% on both sides of the Atlantic. EM stocks are leading the charts (29% total return expected for 2026) driven by the strong weight of top South Korean and Taiwanese semiconductor companies in the index. Credit markets should continue to deliver attractive carry, even as ultra-tight spreads leave valuations stretched and skew risk to the downside. Rising issuance and falling interest coverage ratios are likely to drive a mild widening in spreads over the next two years – but elevated carry should still be enough to offset those valuation losses. Private markets remain a story of rising dispersion, with AI-related infrastructure and high-quality private credit outperforming more challenged segments.
- More shocks ahead? The number of risks ahead has certainly not decreased. AI is doing the heavy lifting that geopolitics and fiscal policy cannot. But it is also concentrated, unevenly distributed and itself a source of downside risk if delivery disappoints as it would hit trade, investment and consumption. In addition, global policy uncertainty remains well above trend, with many risks ahead including a reloaded escalation of the trade war, US midterm elections, a subdued German fiscal push and polarization ahead of upcoming elections in key European countries. Climate risks remain omnipresent – the latest heatwave in Europe has passed, but risks of a severe El Nino year are still looming. Labor markets are still tight, but the medium-term outlook is more fragile. In several European economies, AI-driven layoffs could outweigh productivity gains, ultimately weighing on growth.
Half-Time Outlook 2026-27: AI holds the score, growth slows to +2.5%
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Authors
Simon Krause
Allianz Investment Management SE