The global economy continues to expand, supported by momentum in the U.S., where investments related to artificial intelligence and spending by wealthier consumers are boosting growth. Constricted oil and gas supplies due to the conflict in Iran have led to modest economic drag, but growth should recover in 2027 to levels seen before the energy shock.
Under its baseline forecast for its Midyear Economic Outlook, Morgan Stanley Research forecasts global GDP of 3.2% for 2026, versus 3.4% in 2025, assuming benchmark oil prices drop to around $90 a barrel by the end of this year and moderate further next year, bringing GDP growth back to 3.4% for 2027.
“We see growth close to potential across most major economies,” says Seth Carpenter, Morgan Stanley’s Chief Global Economist and Head of Macro Strategy. “While energy is a key variable, AI-driven capex, as well as fiscal spending on energy security and defense, provide a firm floor to prolong late-cycle growth.”
AI Investment Is Driving Growth
AI-related spending is the dominant force in the current investment cycle—and critical to the resilient U.S. growth outlook. Business spending in the U.S. should rise 7% in the fourth quarter from a year earlier and 8% in 2027 overall.
Companies’ spending on data center infrastructure continues to exceed investors’ expectations. This dynamic is consistent with an early-stage investment cycle in which scaling capacity is more important than optimizing it.
“AI capex includes data centers, power infrastructure, information-processing equipment and software,” Carpenter says. “Over time, we think this investment momentum will broaden beyond AI into non-AI business investment.”
While the AI investment boom begins as a U.S.-centered phenomenon, it is dependent on global manufacturing and supply chains. Some 20% of U.S. imports are now linked to AI, which has increasingly become a global growth driver. Indeed, manufacturing-focused Asian economies may be poised to enter an industrial super-cycle.
Oil Prices Fuel Inflation
The global trend of slowing consumer prices has been interrupted by the energy supply shock. Headline inflation has increased, though the speed at which this passes through to core inflation, which excludes volatile items such as energy and food, varies significantly from country to country.
In the U.S., higher oil prices are being offset by a lessening in the impact of tariff-related inflation in the second half. By the end of this year, U.S. inflation should begin to get back to the modest downward trend that was seen at the start of 2026.
Europe, by contrast, is more exposed to both higher oil and liquefied natural gas prices from the supply disruption in the Middle East. Headline inflation in Europe may peak with the onset of winter, while core inflation may remain above target through much of 2027.
U.S. Federal Reserve policymakers will be waiting to see whether inflation from higher energy prices or tariffs proves to be temporary. In Morgan Stanley’s baseline forecast, the Fed will cut rates twice in the first half of 2027, by 25 basis points in the meetings of March and June to a final range of 3% to 3.25%, as inflation begins to recede.
In Europe, where energy-related inflation is more troubling, the European Central Bank is likely to tighten in the second half of this year, with two rate increases of 25 basis points, and as inflation and wages increases start to slow in 2027, cut twice again, bringing its base interest rate to 2%.
Energy Is a Wild Card
A key assumption in Morgan Stanley’s baseline forecast is that the conflict with Iran is resolved by mid-June. Less favorable outcomes for the global energy supply are certainly possible and outlined in the report.
In a more extreme outcome, tensions re-escalate and the disruption to energy supplies gets worse. This could lead to shortages, supply-chain disruptions, sharply higher inflation, and damage to consumer and business confidence—and oil prices above $150 a barrel. This outcome yields a global recession.
At the same time, there are factors that could accelerate growth beyond Morgan Stanley’s baseline outlook. One possibility is rooted in stronger U.S. demand, with wealth effects boosting consumption and business spending. In this scenario, labor markets tighten, inflation picks up and the Fed actually raises rates by the end of 2026.
In this instance, global growth benefits from strong U.S. demand. This helps Europe close its output gap faster than expected, and the U.K., China and Japan also benefit.
