Bank of America has raised its global growth forecasts following a fragile Iran peace agreement that has eased energy market concerns, while warning that persistent U.S. inflation is likely to prompt the Federal Reserve to resume interest rate hikes later this year.
The bank now expects global GDP growth of 3.2% in 2026, up from its previous forecast, accelerating to 3.5% in 2027 before easing to 3.3% in 2028. It also lowered its global inflation forecasts to 3.0% this year, 2.4% in 2027 and 2.5% in 2028, reflecting expectations that Brent crude will average $72 per barrel in the second half of 2026 and $65 in 2027, assuming tensions in the Middle East do not escalate again.
Despite the improved inflation outlook, BofA said lower energy prices alone are unlikely to trigger easier monetary policy. Instead, it now expects the Federal Reserve to raise interest rates by 75 basis points this year, beginning in September, citing resilient labor market conditions and persistent inflation pressures.
The bank said the global economy continues to be supported by five structural themes: U.S. policy under President Donald Trump, the artificial intelligence investment boom, China's industrial overcapacity, fiscal imbalances, and abundant global liquidity. While these factors have underpinned growth and financial markets, they also increase vulnerability to a correction in asset prices if financial conditions tighten sharply.
BofA attributed much of its growth upgrade to an AI-driven export cycle across Asia, particularly outside China, while lower oil prices are expected to provide a modest boost to developed markets in 2027. In the U.S., it expects cheaper gasoline and continued AI-related capital spending to support a stronger second half of 2026, with growth remaining above 2%.
China's growth forecast remains unchanged at 4.5% for both 2026 and 2027, although the bank said the composition of growth has become increasingly reliant on exports as domestic demand and economic rebalancing continue to disappoint. Export growth is now forecast to reach 15% this year, supported by AI-related investment and strong demand for renewable energy equipment and electric vehicles.
For Europe, BofA acknowledged that the decline in energy prices has softened the economic damage from the Iran conflict, but maintained that structural challenges persist. It expects euro area growth of 0.5% in 2026 and 1.3% in 2027 while forecasting one additional European Central Bank rate hike before easing begins next year.
Looking ahead, the bank identified three key risks to its outlook: renewed escalation in the Middle East that could reignite energy prices, a sharper-than-expected tightening in global financial conditions led by a hawkish Fed, and the possibility that the AI investment boom could eventually give way to weaker asset prices and slower investment growth.
Source: Investing