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After a first half defined by the Iran war and its impact on oil, commodity prices and inflation, the rest of 2026 will test the global economy, even as AI-driven optimism continues to lift growth. With the Persian Gulf’s energy exports still hobbled, the second half will be far from dull for global markets.
The pace of global growth will slow down, cooling to roughly 2.8% in 2026. Volatility will continue as inflation pressures spread from energy outward into metals, fertilizers, and industrial inputs, pushing the global inflation rate up to about 4.5%. Here is what to expect in key countries.
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The U.S. economy will remain resilient, insulated from the worst of the oil price shock by its domestic oil and gas production. Continued AI, national defense, and energy spending will serve to prop up business investment, keeping GDP growth around 2.1%.
But consumers are feeling the strain, as the personal savings rate continues to dwindle, inflation persists and long-term unemployment rises. A spending pullback seems inevitable at some point.
Europe’s macroeconomic outlook is shifting toward stagflation. Expect eurozone growth of just 0.8%, as the energy shock hits an economy lacking fiscal buffers. Germany will struggle to grow more than 0.7% as surging energy costs weigh heavily on its industrial sector.
The U.K. economy is shifting to a lower gear, with growth slowing to 0.9% as inflation squeezes incomes.
India will be a star performer in Asia, though growth will moderate to 6.5%.
China will continue to decelerate, slowing to 4.5% as the property sector remains a drag, though surging green-tech and AI-related exports offer a bright spot.
Japan faces a delicate balancing act, as it battles a weak yen and inflation imported from abroad while supporting a fragile economy expected to grow just 0.4%.
Growth in Latin America will face headwinds from weaker Chinese demand for the region’s commodity exports, tighter U.S. lending terms and rising fuel costs.
Interest rates won’t likely fall as much as investors were hoping this year. Central banks are caught between rising inflation rates and a softening labor market. The Federal Reserve is on hold for now, with rate cut expectations having evaporated, while the European Central Bank is moving toward an isolated June rate hike.
Finally, keep an eye on U.S. private credit lenders. Stresses are emerging, particularly in software loans. A systemic financial crisis is unlikely, since lenders in the industry aren’t as critical to the financial system as the biggest banks were during the mortgage crisis of 2008. For private credit, the losses will be a slow burn for investors. That could dampen the ebullient mood on Wall Street later this year.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
