Global Economics Quarterly - Tightening tensions

Energy-driven inflation and unsustainable public finances will keep monetary policy tighter even as global growth remains resilient.

• HSBC raised its 2026 global GDP growth forecast from 2.5% to 2.7%, while keeping its 2027 forecast at 2.7%, supported by stronger-than-expected Asian and European growth in the first half of 2026.
• Global inflation is forecast at 3.3% in 2027, up from the previous 3.1% estimate, with the recent increase mainly driven by energy and potential food-price shocks from El Niño expected in 2027.
• The AI investment and export boom, together with widespread fiscal support, has offset weaker consumer spending risks, but higher inflation and interest rates should moderate global growth toward the end of 2026.
• HSBC expects one further 25bp rate increase from both the Federal Reserve and the Bank of Japan, and two from the European Central Bank by early 2027.
• Unless energy prices fall sharply, the Bank of England is expected to raise Bank Rate by 25bp in November and February to 4.25%, before reversing course from August 2027.
• Public debt remains on an unsustainable path in many advanced economies, and even an AI-led productivity surge may not resolve fiscal pressures because government revenues rely heavily on labour-related taxes.

Takeaway: Investors should expect a period of modest monetary tightening, higher inflation and slower growth, with energy prices, the Strait of Hormuz, AI and global elections creating substantial upside and downside risks.