The world economy is becoming increasingly fragmented along geopolitical lines. Governments are increasingly willing to trade economic efficiency for security and strategic autonomy, reshoring supply chains, securing access to energy, chips and critical minerals. As self-sufficiency becomes the priority, globally coordinated solutions are less available and policymaking is becoming less predictable. This is leaving the global economic system exposed to more frequent and disruptive supply shocks.

The Middle East conflict is the latest such shock, and the fourth in the past six years. Even as trade resumes through the Strait of Hormuz, through which roughly a fifth of the world’s seaborne oil flows, the global supply outlook remains fragile.

However, a key counter-current to this risk is the global artificial intelligence build-out. The capital flowing into data centres and the power to run them, is underpinning growth in the US. Across parts of Asia, surging semiconductor exports have more than offset the impact of higher oil prices.

Investment on this scale will likely be inflationary in the medium term as data centres, electrification and new factories compete for the same energy, grid capacity and construction resources. This may add to cost pressures even as it lifts growth.

As the growth boost from the AI buildout offsets the negative impact of the supply shock, we forecast the world economy to grow by 2.5% this year in real terms, and by 2.7% in 2027. This is lower than our pre-conflict forecasting, but still robust. However, the impact falls unevenly, as energy importers will grow the slowest this year.

We forecast global inflation to average around 4% in 2026, again higher than we anticipated before the conflict, but well below the 2022–23 inflation surge and no repeat of past stagflationary episodes. Given resilient growth and higher inflation, we also expect interest rates stay higher for longer in most major economies.

Interest rates to stay higher and more volatile than in the pre-COVID-19 decade

AI investments contributed 0.5‒1ppt to US GDP growth recently and should continue supporting solid but uneven growth