Global growth to slow in 2026 amidst rising economic uncertainty

Key Takeaways

• Real global GDP growth is projected to slow from 3.3 percent in 2025 to 3.0 percent in 2026 before picking up to 3.1 percent in 2027.
• US real GDP growth is projected to slow from 2.1 percent last year to 2.0 percent in 2026 and 1.9 percent in 2027.
• Energy prices remain 30 to 40 percent above pre-war levels even after a two-week ceasefire; markets are highly sensitive to any re-escalation.
• If oil reaches $150 per barrel, global growth could be 0.4 percentage points lower than projected above.
• US inflation—as measured by the personal consumption expenditures price index (PCE)—is projected to rise to 3.2 percent in the fourth quarter of 2026 compared with the same period of 2025.
• US core inflation, which excludes volatile food and energy prices, is projected to reach 3.1 percent in the fourth quarter of 2026.
• Overall US inflation is expected to cool in 2027 to 2.2 percent, while core inflation declines more gradually to 2.8 percent

Washington, DC—The global economy continues to expand, supported by the artificial intelligence (AI) boom, even as high energy prices, trade tensions, policy uncertainty, and structural challenges weigh on activity. Real global GDP is projected to slow from 3.3 percent in 2025 to 3.0 percent in 2026 before picking up to 3.1 percent in 2027, according to an analysis presented by Karen Dynan at the Peterson Institute for International Economics Spring 2026 Global Economic Prospects event.

War's economic toll clouds global outlook

The global economy entered the year on a reasonably solid footing, though with important differences across countries reflecting varying exposure to energy prices, trade tensions, policy shifts, and structural headwinds. The war in the Middle East introduced a new and significant shock. Roughly one quarter of the world’s oil is shipped through the Strait of Hormuz, as are substantial volumes of natural gas, fertilizer, helium, and other raw materials. A two-week ceasefire announced earlier this week has brought energy prices down from their recent peaks, but they remain roughly 30 to 40 percent above pre-war levels. Markets remain highly sensitive to developments, and the durability of the pause in fighting is uncertain. In a scenario where tensions re-escalate and oil prices rise to a high of $150 per barrel before receding, global growth could be roughly 0.4 percentage point lower than projected.

United States and monetary policy

In the United States, economic growth continues to be supported by the artificial intelligence (AI) boom, which is boosting investment and, through wealth effects, consumption. The labor market is cooler than in the early 2020s but remains close to full employment, and household financial distress appears limited. Fiscal policy is also modestly increasing demand this year. At the same time, the sharp drop in immigration is constraining labor supply and weighing on potential output, offsetting some of the productivity gains from AI. As a result, the expansion is expected to moderate slightly toward a more sustainable pace as earlier tailwinds fade and policy uncertainty weighs on private decision-making. US real GDP growth is projected to slow from 2.1 percent last year to 2.0 percent in 2026 and 1.9 percent in 2027.

The Federal Reserve faces a difficult balancing act: Inflation remains above its 2 percent target and will likely rise in coming quarters due to the energy shock, eroding real incomes and softening demand. Although the most likely outcome is that the Fed eases interest rates later this year after the energy shock passes through, the path of monetary policy is particularly uncertain, and policymakers are expected to remain highly data dependent.

All told, US inflation—as measured by the personal consumption expenditures price index (PCE)—is projected to rise to 3.2 percent in the fourth quarter of 2026 compared with the same period of 2025. Core inflation, which excludes volatile food and energy prices, is projected to reach 3.1 percent. Overall inflation is expected to cool in 2027 to 2.2 percent, with core inflation declining more gradually to 2.8 percent.

Growth diverges as different forces take hold

Advanced economies in Europe and Japan face the heaviest near-term drag from higher energy costs, with growth expected to weaken in 2026 before picking up modestly in 2027. The United Kingdom is expected to see growth drop this year, as energy prices compound the effects of fiscal restraint and soft domestic demand. Among emerging markets, China’s growth is expected to slow this year and next as it faces headwinds from its property downturn. India remains one of the faster growing large economies, though growth will be dampened by its dependence on imported energy sources. Brazil faces slowing growth amid policy uncertainty and higher input costs. Russia’s economy is likely to soften this year and pick up next year due to higher energy revenues.

US labor market

Jed Kolko spoke about the US labor market, which is sending signals pointing in all directions. Unemployment is low, but job growth has slowed dramatically, and hiring is at its lowest rate in years. Kolko assessed the importance of immigration, AI, and the pandemic’s lingering effects.

China growth

Tianlei Huang discussed how China’s property slump continues to weigh on the world’s second largest economy. He highlighted how elevated real interest rates and weakening household expectations are depressing housing activity.

Huang examined the fiscal implications of the downturn, noting that the housing bust has eroded one of the government’s most important revenue sources and contributed to a decline in government spending, exacerbating deflationary pressures. Huang argued that stronger fiscal support is needed to combat deflation and that China’s relatively strong general government balance sheet provides room for a stronger fiscal response.

He also said China’s financial system remains broadly resilient, partly due to proactive policy support, including recapitalization and the rapid disposal of bad assets. But it faces growing pressures from deteriorating asset quality and declining profitability, which constrain new credit growth. Finally, Huang noted that the housing bust has been a key driver of China’s widening saving-investment imbalance, contributing to the recent expansion of its current account surplus.

Media Contact

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