Key Takeaways:
The U.S.-Iran conflict has slashed global growth prospects as Fitch Ratings cuts its 2026 forecast to 2.4%, the lowest since the pandemic-era slowdown.
Fitch Ratings lowered its global growth forecast to 2.4% for 2026, down 0.2 percentage points from its prior projection, as the oil shock triggered by the U.S.-Iran war damages economic prospects across advanced and emerging economies alike. The ratings firm raised its average Brent crude forecast to $87 a barrel from $70, reflecting the prolonged closure of the Strait of Hormuz — a chokepoint handling about 21% of global oil trade — which has now lasted 14 weeks with no reopening expected before July.
"Forecast cuts have been widespread as higher inflation squeezes real wages, dampens consumption and raises companies' input costs," said Brian Coulton, chief economist at Fitch Ratings. The inflationary impact of the oil shock is shifting the outlook for global monetary policy as well, with central banks facing a more difficult trade-off between containing price pressures and supporting growth.
The downgrade adds to a growing list of warnings from international organizations, including the OECD, as the conflict enters its fourth month. Fitch cut its U.S. growth forecast by 0.3 percentage points to 1.9% and its eurozone projection by 0.4 points to 0.9%. Emerging markets excluding China were lowered to 3.2%. In a more adverse scenario — with oil averaging $100 a barrel, equity prices falling 10% and credit conditions tightening — U.S. growth could slow to 0.8% over the next 12 months, with the eurozone at 0.3% and China at 3.4%.
Still, Fitch said its base case remains considerably less severe than the oil crises of the 1970s, when real oil prices spiked to $170 a barrel. Oil consumption as a share of global economic output has roughly halved since 1980, reducing the overall impact of rising energy prices. Policy rates are also much higher than in 2021, labor market conditions are softer, and fiscal policy is far less expansionary, the agency noted.
China and AI spending offer a partial offset
One factor cushioning the drag from the conflict is the surge in artificial intelligence investment, particularly in Asia. The world is in the midst of "a very pronounced boom in global spending on IT," Coulton said, which is helping offset the impact on activity in the near term. U.S. IT investment rose 18% year over year in the first quarter of 2026, while global semiconductor sales surged 80% in March.
That tailwind helped lift China's growth forecast to 4.6% after a stronger-than-expected first quarter and resilient export performance. South Korea's outlook was also raised as demand for technology products and semiconductor exports continues to rise. Fitch estimates that increased defense spending could add 0.8% cumulatively to Germany's gross domestic product over the next three years.
Central banks face a stagflationary bind
The inflationary impact of higher energy costs is complicating the outlook for global monetary policy. Fitch now expects the Federal Reserve and the Bank of England to hold interest rates unchanged through 2026 before resuming cuts in 2027. The European Central Bank is expected to raise rates by 25 basis points in June, though Fitch believes that increase could be reversed next year.
The last time oil prices sustained a shock of this magnitude was in early 2022 following Russia's invasion of Ukraine, when Brent briefly topped $130 a barrel and central banks globally accelerated tightening cycles. This time, however, the backdrop is different: inflation was already retreating from multi-decade highs before the current conflict, and the AI-driven tech boom is providing a demand-side buffer that did not exist three years ago. The risk, Fitch warned, is that a material slowdown in global growth could halt that momentum in its tracks.
This article is for informational purposes only and does not constitute investment advice.
