Uncertainty has resurfaced, but the global economy remains resilient
AI summary card
Uncertainty has resurfaced, but the global economy remains resilient
Citi believes that oil price shocks and upward inflation revisions have made the global policy environment tighter, but AI investment, lower energy dependence, and ample inventories still support global growth near 2.5% in 2026.
- The base case still expects oil prices to decline; if shipping through the Strait of Hormuz resumes, oil prices could return to around $70/bbl, but prolonged tensions could also keep oil above $100/bbl.
- U.S. AI investment rose from less than $300 billion last year to $430 billion in the first quarter, and full-year industry estimates may reach $600 billion, also benefiting economies such as China, Taiwan, South Korea, Japan, and Singapore.
- Citi has raised its global headline inflation forecast by 0.75 percentage points versus February, reflecting the direct impact of oil prices, supply chain disruptions, transportation costs, and second-round effects.
- Among 27 major central banks, Citi expects 12 to hike rates this year, 7 to stay on hold, and 8 to cut rates, with the overall policy path less accommodative than before the conflict.
Report interpretation
Overview
This report focuses on how the global economy is performing amid oil price shocks, geopolitical uncertainty, and the AI investment wave. Citi believes that the Iran conflict and the closure of the Strait of Hormuz significantly pushed up oil prices and weighed on some economic performance, but the drag on the global economy is currently manageable, with the full-year growth forecast still close to 2.5%. Economic resilience comes from lower energy intensity, still-ample crude and refined product inventories, and support from AI-related capital expenditure for the U.S. and tech-intensive Asian economies.
Core views
The core views are: first, the oil price path remains the biggest macro uncertainty, with resumed negotiations supporting lower oil prices while a prolonged conflict could bring oil above $100/bbl; second, AI investment is becoming an important positive force for global growth in 2026, especially benefiting tech-intensive economies such as the U.S., Taiwan, South Korea, and Singapore; third, inflation forecasts have been revised upward, with the oil shock transmitting through energy, supply chains, transportation costs, and second-round effects; fourth, the policy stance of major central banks has shifted tighter, with both markets and central bank communication reflecting less room for easing; fifth, despite the shock, the global economy still shows strong adaptability.
Analysis framework
The report uses a global macro forecasting framework, combining oil price scenarios, PMI trends, AI investment estimates, revisions to growth and inflation forecasts, central bank policy rate paths, and regional economic discussions to assess the relative impact on different economies and asset classes.
Methodology notes
forecast revision comparison
By comparing the differences between current forecasts and those before the conflict or in February, the report assesses the marginal impact of oil price shocks, AI demand, and policy changes on growth and inflation across economies.
Strait of Hormuz and Iran conflict scenarios
Using resumed negotiations, restored shipping, and continued conflict as the main scenarios, the report evaluates the macro impact of oil prices falling back to $70/bbl or rising above $100/bbl.
distribution of hikes, holds, and cuts
Through the expected policy direction of 27 major central banks, the report measures the shift in global monetary policy from an easing cycle toward a tighter or more cautious path.
linkages among growth, inflation, interest rates, oil prices, and exchange rates
The report maps oil prices, inflation, central bank responses, and AI capital expenditure to asset classes such as equities, rates, commodities, and foreign exchange.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- global equitiesAI investment and economic resilience provide growth support, but high valuations and tighter policy weigh on risk appetite.
- Strengths
- Strong AI capital expenditure, services PMI back in expansion territory, and upward growth revisions for tech-intensive economies.
- Weaknesses
- Oil price shocks, upward inflation revisions, and more hawkish central banks may weaken valuation expansion.
- Comparison
- Tech-intensive markets benefit more than non-AI oil-importing economies.
- Risks
- Slower AI investment growth, valuation correction, and oil prices breaking above $100/bbl again.
- developed market ratesUpward inflation revisions and central bank credibility constraints make the overall rates path tighter.
- Strengths
- If oil prices fall and the labor market weakens, the U.S. still has room to cut rates.
- Weaknesses
- The ECB and BOJ face stronger pressure to hike or normalize policy.
- Comparison
- The ECB path is more hawkish than the Fed's, while the case for faster BOJ tightening has strengthened.
- Risks
- Second-round inflation effects, central banks overlearning the lessons of the previous inflation cycle, and market repricing toward hikes.
- commodities and crude oilOil prices are the core transmission variable in this round of macro uncertainty.
- Strengths
- Geopolitical conflict and disruptions in the Strait of Hormuz support the risk premium.
- Weaknesses
- If negotiations resume and shipping normalizes, oil prices may fall back to $70/bbl.
- Comparison
- Compared with past decades, the global economy is less dependent on oil and inventories are more ample.
- Risks
- A prolonged conflict could push oil above $100/bbl and lift global inflation.
- foreign exchangeRate differentials, energy shocks, and shifts in central bank policy paths will drive major currency performance.
- Strengths
- Tighter policy by some central banks may support their currencies, while Hungary gains more room for easing because of currency appreciation.
- Weaknesses
- Energy-importing economies and those with greater inflation pressure may face exchange-rate stress.
- Comparison
- The yen is near historical lows, and Japan's policy normalization may become a key variable.
- Risks
- Geopolitical shocks, oil price volatility, and central bank policy surprises.
Key data
- Global growth forecastabout 2.5%Citi says this year's global growth forecast remains close to 2.5%, only a few tenths of a percentage point below the start of the year.
- Oil price scenarios$70/bbl, above $90/bbl, above $100/bblIf shipping recovers, oil prices may return to $70/bbl; Brent recently rose above $90/bbl; if tensions persist, prices may exceed $100/bbl.
- U.S. AI investmentfrom less than $300 billion to $430 billion, possibly reaching $600 billion for the full yearIt was less than $300 billion last year, about 1% of GDP; it rose to $430 billion in the first quarter, and the 2026 full-year industry estimate is close to 2% of GDP.
- Global inflation forecast revisionup 0.75 percentage points versus FebruaryReflecting oil prices, supply chains, transportation costs, and second-round effects.
- Central bank policy distribution12 hikes, 7 holds, 8 cutsThe sample covers 27 major central banks; among the 8 cutting, 6 are expected to cut by no more than 50 basis points.
- U.S. policy rate base case2.75%-3.00%The U.S. economics team expects rate cuts in October, December, and January of the following year, bringing the policy rate down to 2.75%-3.00%.
- Euro area inflation3.2% in May, 2.8% in JuneStill above the ECB's 2% target, and Citi believes a further rate hike is more likely in September.
Impact & implications
For investors, the report implies that the global macro environment is not a typical recession scenario, but rather a mix of resilient growth and inflation pressure. AI capital expenditure supports the tech chain and related economies, but high valuations and slowing investment growth pose downside risks; oil prices and geopolitics determine inflation tail risks; tighter central bank policy means rate-sensitive assets and valuation-sensitive assets need greater attention to policy repricing.
Risks
- Continued Iran conflict and disruptions in the Strait of Hormuz keep oil prices above $100/bbl for an extended period.
- Oil prices further push up inflation through supply chains, transportation costs, and second-round effects.
- Central banks over-tighten to preserve inflation targets, weighing on growth and risk asset valuations.
- AI investment growth slows, reverses in the short term, or high valuations correct, weakening support for growth.
- A weakening labor market coexisting with sticky inflation makes the Fed's policy path harder to judge.
What to watch
- Whether U.S.-Iran negotiations resume and whether shipping through the Strait of Hormuz normalizes.
- Whether Brent can fall back to $70/bbl or rise again above $100/bbl.
- The sustainability of global PMI, electronics PMI, and AI-related capital expenditure.
- U.S. core PCE, core CPI, and labor market data, especially the unemployment rate and wage growth.
- Whether the ECB hikes again and whether the BOJ accelerates policy normalization.
- Changes in the camps of hikes, holds, and cuts among the 27 major central banks.