Global economic outlook: Energy disruption, tighter monetary policy and AI-driven resilience pull the global outlook in opposite directions

Overview

HSBC's global outlook examines how Middle East energy disruption, renewed monetary tightening, fiscal strains and the AI investment boom are reshaping growth and inflation through 2028. Its central case combines resilient but moderating activity with elevated near-term inflation risks and uneven country-level outcomes.

Core views

The report argues that the world economy entered late 2026 more resilient than expected, but the resilience should not be mistaken for a stronger underlying outlook. Global GDP growth held up in Q2, including in Europe and energy-importing Asian economies, supported by a temporary June oil-price decline, fiscal measures, and AI-related investment and trade. HSBC raises its 2026 global growth forecast to 2.7% from 2.5%, while retaining a 2.7% forecast for 2027. The improvement primarily reflects stronger first-half outcomes, not a more favourable path ahead: higher energy prices, higher borrowing costs and weaker real incomes are expected to slow consumer spending toward year-end. Fiscal support, including US tax rebates and European defence and infrastructure spending, was central to 2026 resilience, but the fiscal impulse is expected to turn negative in the US, eurozone and many other economies in 2027. Energy disruption is the central near-term inflation and growth risk. The Middle East conflict has disrupted Strait of Hormuz traffic, while attacks and repairs affecting regional routes have added supply-chain, freight and insurance costs. Brent was around USD100 per barrel as the report was published, roughly USD30 per barrel above three months earlier. Global inventory drawdowns and lower Chinese oil imports cushioned the shock initially, but HSBC's oil analysts see short-term price risks skewed upward as inventories fall and Chinese import demand may recover. European gas storage is low and wholesale gas prices are around 150% above their pre-war February level, though still less than half the 2022 peak. Higher retail fuel, diesel, utility and freight costs reduce household purchasing power and threaten a more material late-2026 slowdown if the escalation persists. HSBC sees inflation as still mainly an energy story, rather than evidence of broad second-round effects in advanced economies. Core pressures have remained relatively contained where wage growth has slowed, and US core CPI excluding shelter ran at a 1.9% annualised rate over the five months since February despite an August upside surprise. US wage growth slowed to 3.1% year-on-year in September, while unit labour-cost growth was 1.3% in the first half of 2026, versus more than 5% at its 2022 peak. However, the report expects food inflation to become more important in 2027 as earlier rises in fertiliser and diesel costs, lower agricultural yields and possible El Niño effects feed through with a lag. It therefore lifts its 2027 global inflation forecast to 3.3% from 3.1%. Eurozone headline HICP is forecast to reach 3.8% year-on-year in September and peak around 4.1% near the turn of the year. Central banks are tightening principally to preserve credibility and keep inflation expectations anchored, even though monetary policy cannot directly resolve externally generated supply shocks. HSBC now projects rate increases for 17 of the 28 central banks it covers, including seven where it previously expected rates to remain unchanged in late 2026 and 2027. Its central scenario calls for one further 25bp hike each from the Fed and Bank of Japan, and two further hikes from the ECB and RBA by early 2027. The Bank of England is expected to raise Bank Rate by 25bp in November and February to 4.25%, then begin quarterly 25bp reductions from August 2027 toward 3.25%, conditional on energy prices not falling sharply. A durable ceasefire that restores Strait of Hormuz flows to 70-80% of pre-war levels could create a meaningful oil surplus and allow current tightening to be reversed; if flows remain near 30% of pre-war levels, inflation risks and further rate increases would remain more likely. The report identifies fiscal policy as a parallel source of tension. Governments face rising interest costs, high debt stocks, ageing-related spending, defence needs, energy-transition costs and political resistance to fiscal consolidation. HSBC argues that many advanced-economy public finances remain on an unsustainable path, and that markets may ultimately impose adjustment. In the US, the fiscal impulse is expected to turn negative in 2027 after 2026 tax rebates, while Congress is expected to address the USD41.1trn debt limit earlier in 2027. The report doubts that a prospective AI-driven productivity surge alone can resolve debt dynamics because labour-related taxes constitute much of government revenue. The US Congressional Budget Office added an average 0.1 percentage point to annual total-factor-productivity growth over the next decade from generative AI, while the UK's OBR central estimate is a 0.2 percentage-point annual productivity boost; HSBC stresses that employment and wage outcomes will determine whether such gains strengthen revenues. AI remains the major upside counterweight to the energy shock. HSBC expects the AI capex buildout to remain very strong in 2027-28 because commitments are multi-year and the sector is constrained by supply rather than demand. This should continue supporting investment, trade and some employment in the US, Korea, Taiwan and mainland China; it should also support Asian exports and commodity prices in Latin America. Taiwan's consensus 2026 GDP expectation has risen from 5% at the start of the year to above 11%, led by AI-related exports. The report notes that US business-investment expectations have doubled from 3.2% early in the year, while the US hosts roughly three quarters of global AI computing capacity. Growth in data-centre, grid and power investment is expected to broaden beyond the US and Asia, although Europe remains behind: one estimate cited suggests European AI compute capacity could grow ninefold from 2026 to 2031 but only lift its global share from 5% to 6%. AI's gains are uneven and uncertain. Taiwan, Korea and the US show strong AI-linked production and headline growth without commensurate improvement in broad consumer confidence; mainland China's high-tech exports remain strong while domestic retail sales and investment lag. The report expects AI's economic effect over the next several years to fall between a modest scenario resembling the internet's gradual contribution and a more substantial scenario where productivity improves as adoption deepens. It cites business-survey estimates of roughly 1.4% annual productivity improvement, but stresses that reported AI use is not the same as deep operational integration, especially among smaller firms. It sees limited evidence of broad AI-related job losses so far, but expects labour-market effects to become more material as adoption rises. Cybersecurity expenditure, estimated by external sources at USD200bn-500bn globally in 2026, could offset part of AI's productivity benefit. The report also highlights the downside from an AI-related asset-price reversal. If expectations of returns on AI investment are sharply cut, weaker equity values could constrain consumption among wealthier households and undermine the AI investment impulse. HSBC estimates that US growth could be mechanically about 0.5-0.6 percentage points lower if the AI investment uplift disappeared, with weaker global investment and reduced exports from Taiwan, Korea and mainland China. Such a shock could also reverse gains in AI-related equities and commodities such as copper. Conversely, a durable energy ceasefire, lower trade barriers and stronger productivity could lower inflation below target and improve real incomes, though the eventual policy-rate response would depend on demand and labour-market conditions.

Analysis framework

HSBC starts with recent growth and energy-market developments, then traces their effects through household incomes, inflation, monetary policy, fiscal policy and country-level forecasts. It compares central and alternative energy-flow scenarios, assesses AI through investment, productivity, labour-market and financial-market channels, and uses country forecasts for GDP, inflation, rates, currencies and fiscal balances through 2028.

Methodology notes

• Industry AnalysisSupply-demand framework

  Energy supply disruptions, inventories, transport flows and demand adjustments

  The report assesses oil and gas prices through disrupted supply routes, inventory drawdowns, Chinese imports and potential restoration of Strait of Hormuz flows.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Energy and input-cost pass-through

  HSBC follows how oil, gas, diesel, fertiliser and freight costs pass from producers into margins, consumer prices, food inflation and real incomes.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  Scenario analysis around geopolitical conflict, energy flows and an AI asset-price reversal

  The report contrasts its central outlook with a durable ceasefire scenario and downside cases involving persistent disruption or a collapse in AI-related asset prices.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global government bonds

  Higher inflation, policy rates and fiscal borrowing needs are identified as pressures on yields.

  Strengths

  A durable reopening of Strait of Hormuz could reduce energy prices and permit reversal of policy tightening.

  Weaknesses

  Persistent energy inflation and large fiscal deficits can keep yields elevated.

  Comparison

  Japanese repatriation risk is presented as particularly relevant for US Treasuries, JGBs and the yen carry trade.

  Risks

  A loss of monetary credibility, fiscal slippage or a faster return of Japanese capital could amplify market volatility.

• AI-related equities and supply-chain assets

  AI capex supports technology investment, Asian exports, related commodities and equity valuations.

  Strengths

  Multi-year commitments and supply bottlenecks are expected to sustain high spending through 2027-28.

  Weaknesses

  Benefits are concentrated and have not consistently lifted broad domestic demand or confidence.

  Comparison

  Taiwan, Korea and the US are highlighted as major beneficiaries; Europe is a relative laggard in AI investment and export exposure.

  Risks

  A reassessment of AI monetisation, prolonged rate tightening or broader resistance to AI deployment could weaken investment and asset prices.

• Oil and refined products

  Energy prices are the report's main near-term global inflation and growth transmission channel.

  Strengths

  A durable ceasefire and restored Strait of Hormuz flows could create a meaningful oil-market surplus.

  Weaknesses

  Inventory drawdowns, disrupted shipping and possible demand recovery leave near-term risks skewed upward.

  Comparison

  European gas and US diesel prices are at their highest levels since late February.

  Risks

  Further disruption to energy flows, low storage and policy restrictions on diesel exports could intensify price pressures.

Key data

• Global GDP growth forecast2.7% in 2026; 2.7% in 2027; 2.7% in 2028The 2026 forecast was raised from 2.5%; the 2027 forecast was unchanged.
• Global inflation forecast3.8% in 2026; 3.3% in 2027; 2.6% in 2028The 2027 forecast was raised from 3.1%, mainly reflecting energy and prospective food-price effects.
• Brent crude benchmarkAround USD100 per barrelAbout USD30 per barrel higher than three months earlier.
• Eurozone headline HICP forecast3.8% year-on-year in September; around 4.1% peak near year-endDriven by renewed energy-price pressures.
• US unit labour-cost growth1.3% year-on-year in H1 2026Compared with a peak above 5% in 2022.
• AI productivity estimateApproximately 1.4% per yearBusiness-survey estimate cited for coming years; actual outcomes remain uncertain.
• AI-related downside to US growthApproximately 0.5-0.6 percentage pointsMechanical reduction if the expected AI investment uplift disappeared.

Impact & implications

HSBC expects the next phase of the cycle to be shaped by whether energy costs persist long enough to erode real incomes and broaden inflation, forcing central banks to maintain tighter policy. AI investment provides a meaningful offset through trade and capital spending, but its concentration raises divergence across countries and sectors and leaves global activity exposed to a reversal in investment or asset-price expectations.

Risks

• A prolonged Middle East conflict and continued disruption to Strait of Hormuz flows could keep energy prices high, slow global growth and raise inflation.
• Energy, food and shipping costs could produce broader second-round inflation effects and require more monetary tightening than HSBC's baseline assumes.
• Large public deficits, rising debt-servicing costs and delayed fiscal adjustment could raise long-term yields and destabilise confidence.
• An AI investment or equity-market bubble could burst, reducing investment, exports, wealth-sensitive consumption and global growth.
• AI adoption could generate weaker employment outcomes than expected, while cybersecurity costs and safety concerns could offset productivity gains.

What to watch

• The level of traffic through the Strait of Hormuz and whether flows recover toward 70-80% of pre-war levels.
• Oil, gas, diesel, freight and food-price pass-through into headline and core inflation.
• Central-bank decisions, especially further hikes by the Fed, ECB, BoJ, RBA and Bank of England.
• The scale and composition of fiscal support in 2027, debt-limit negotiations and long-term government borrowing costs.
• AI hyperscaler capex, supply-chain bottlenecks, data-centre construction, productivity adoption and labour-market effects.
• Signs that AI-related financial valuations or investment expectations are weakening.