Global growth outlook weakens as oil shock and inflation weigh on economy

Global growth prospects have weakened due to the oil crisis triggered by the US-Iran conflict, according to Fitch Ratings in its latest Global Economic Outlook. The agency has lowered its 2026 global growth forecast by 0.2 percentage points to 2.4%.

Forecast downgrades are widespread as higher inflation erodes real wages, dampens consumption and increases business input costs. However, the impact of the oil shock on global activity is being partially offset by stronger-than-expected momentum in artificial intelligence-related IT investment, which is supporting global trade and Asian exports.

Fitch has cut its 2026 growth forecasts for the US and eurozone by 0.3 percentage points and 0.4 percentage points, respectively, to 1.9% and 0.9%. Growth in emerging markets excluding China has been lowered by 0.2 percentage points to 3.2%, while China’s forecast has been raised by 0.3 percentage points to 4.6% following stronger-than-expected data in the first quarter of 2026 and resilient export performance. South Korea’s outlook has also been upgraded, supported by stronger technology exports.

“The oil price shock is hitting world growth prospects and increasing downside risks. But we are also amid a very pronounced boom in global spending on IT and that is cushioning the impact on activity in the near term, particularly in Asia,” said Brian Coulton, chief economist.

The closure of the Strait of Hormuz has now lasted 14 weeks, with Fitch assuming it will not begin reopening until July. The agency has revised its 2026 Brent crude price assumption to USD 87 per barrel, up from USD 70 in its March outlook. It said the oil shock remains a strong drag on global growth, though less severe than historic shocks such as those in the 1970s, when real oil prices reached USD 170 per barrel in current terms.

Despite elevated geopolitical risks, Fitch also outlined a downside scenario in which Brent crude averages USD 100 per barrel in 2026, equity markets fall 10% and credit conditions tighten. In that scenario, US growth could slow to 0.8% over the next 12 months, eurozone growth to 0.3%, and China to 3.4%.

US IT investment rose 18% year-on-year in the first quarter of 2026, while global semiconductor sales surged 80% in March, reflecting a broader technology investment boom. US capital goods imports also jumped nearly 30%. Strong semiconductor exports helped boost first-quarter GDP in South Korea and Taiwan, while technology trade supported China’s export performance.

Fiscal policy is expected to provide modest support to US growth this year as the budget deficit widens compared with 2025. Fitch also estimates that defence spending will add a cumulative 0.8% to German GDP over the next three years.

The inflationary effects of the oil shock are also reshaping global monetary policy expectations. Central banks remain cautious about persistent price pressures, given memories of post-pandemic inflation, but policy rates are already significantly higher than in 2021, while labour markets and wage pressures have eased and fiscal policy is less expansionary.

Fitch now expects the US Federal Reserve and the Bank of England to hold interest rates this year before resuming cuts in 2027. The European Central Bank is expected to raise rates by 25 basis points in June, but Fitch anticipates that increase will be reversed next year.