Despite the turbulence, global growth stays on track

Washington, DC—The global economy continues to expand at a solid pace, as the artificial intelligence (AI) boom helps cushion the effects of increased energy prices, inflation, and interest rates. Real global GDP is projected to rise 3.2 percent in 2026 and 3.1 percent in 2027, according to analysis presented by PIIE nonresident senior fellow Karen Dynan at the PIIE Fall 2026 Global Economic Prospects event. Higher interest rates will hold back economic growth next year, with the drag tempered by a gradual retreat in energy prices.

Higher energy prices are weighing on growth and pushing up inflation

The war in Iran delivered a significant adverse shock to energy markets early this year. Brent crude oil prices are now around $100 per barrel, close to 40 percent above their level at the beginning of the war. Prices for European natural gas, diesel, and some other refined products have risen by much more. The forecast assumes that energy prices will gradually retreat in line with futures markets. For example, Brent is expected to fall to just over $80 per barrel by the end of 2027, within $10 of its pre-war level.

Growth in most of the major economies next year is likely to be similar to this year's pace

The energy shock and higher interest rates are important common factors shaping the global economic outlook. The AI boom is expected to continue supporting growth in a number of economies through its effects on investment and stock prices, with an especially pronounced boost to growth in the United States. Among the other major advanced economies, growth in the euro area is expected to pick up modestly in 2027, with a further rebound in Germany. Japan is likely to continue its above-trend growth, supported by strong microchip exports and fiscal expansion. Economic momentum in the United Kingdom is also holding up, as technology investment cushions the energy shock.

Strong demand is supporting growth in the United States, while inflation remains elevated

US economic growth remains healthy, powered by robust consumer spending and business investment. Real US GDP is projected to rise 2.3 percent this year and 2.2 percent next year. In the United States, private demand remains robust. As a result, the US labor market continues to be healthy, with the unemployment rate close to the level the Fed considers consistent with full employment. However, the strong economy, together with the increase in energy prices since the beginning of the war with Iran, have led to a significant pickup in inflation.

The Fed is carefully monitoring the effects of the energy price shock on inflation. At its September meeting, the rate-setting Federal Open Market Committee (FOMC) raised the policy rate by 0.25 percentage point. Additional hikes will likely be needed to cool the economy and maintain the Fed's inflation-fighting credibility.

US inflation is expected to retreat over the coming year as energy prices gradually decline and tighter monetary policy restrains demand. Core inflation is likely to fall more gradually than headline inflation, given the general persistence of nonhousing services inflation as well as upward pressure from lagged diesel cost pass-through and chip shortages. All told, the personal consumption expenditures (PCE) price index is projected to rise 3.7 percent over the four quarters of 2026, and core PCE prices are projected to rise 3.3 percent. PCE inflation is projected to moderate to 2.3 percent in 2027, while core PCE inflation eases to 2.7 percent.

High-skill immigration

PIIE senior fellow Michael A. Clemens discussed the effects of high-skill immigration on innovation, productivity growth, and macroeconomic performance. Immigration by highly educated specialist workers has large positive effects on productivity, which arrive with a long lag but can shape growth for a generation. This is because global talent has an outsize impact on the corners of the economy where most innovations come from. For example, 43 percent of all people with a science or engineering PhD employed in the United States were born abroad.

US policy is reshaping international talent flow by reducing the incentives for high-skill workers to enter and remain in the United States. New policy touches every part of the pipeline through which talent arrives: placement of international students in US universities, the work permits and work visas they can obtain after graduating, and their access to permanent residency. A leading indicator is that international student inflows dropped 34 percent in 2025 relative to prior trends.

According to economics research, a plausible reduction of one half in annual inflows of high-skill workers into the United States would reduce US GDP by 1.1 to 2.7 percent by the end of 10 years. These productivity effects, the same literature finds, would ripple through the economies of Europe, India, and elsewhere.

The future of USMCA

Inu Manak, a PIIE senior fellow, discussed how three decades of North American economic integration are at risk due to rising US tariffs and uncertainty over the future of the United States-Mexico-Canada Agreement (USMCA). While the stated aim of US tariff policy is to strengthen supply chains, boost economic competitiveness, and reduce dependence on China, recent trade actions, particularly against Canada and Mexico, may undermine those goals. While overall US tariffs on USMCA partners remain relatively low, they are a strong departure from the nearly tariff-free trade that Canada and Mexico enjoyed up until 2025.

Importantly, the tariffs have hit hardest in sectors that will make it difficult to sustain North American economic integration, and by doing so, reduce incentives for future cooperation. While the evolution of USMCA hangs in the balance, it is clear that US interests are best served by more integration with Canada and Mexico, not less.

Media Contact
Carlos Gomez, PIIE Media Relations and Outreach Director, [email protected]