Resilient growth, rising risks: Investing through the energy shock

Global growth has not only been resilient this year in the face of a significant energy shock; it has accelerated. Year-on-year nominal growth is running at 5% – 6%, its strongest pace for 20 years. Loose monetary and fiscal policy, as well as a broadening AI investment boom, have underpinned growth and are ingraining higher, more persistent inflation. The outlook for Q4 and early 2027 hinges on two critical factors: the size of the energy shock, including how high and for how long energy prices spike and whether there are second-round effects; and the forcefulness of the policy response. Our team’s base case is that global nominal growth will slow into the fourth quarter and early 2027 but remain at or slightly above trend. At current oil prices, the energy shock is likely to slice around 1.5 – 2 percentage points from growth. Monetary and fiscal policy are tightening at the margin too. But as the policy response is unlikely to be commensurate with the size of the inflation shock, low real rates should continue to support growth and stoke inflation. AI investment growth will remain supportive too. However, the distribution of outcomes is widening and increasingly skewed to the downside. The longer the Iran conflict remains unresolved, the larger the energy shock is likely to be. A more sustained energy shock would risk a more forceful tightening of policy or a sharper repricing of term premia by the market if the response were deemed inadequate. It could also weigh on consumption, which has so far proved resilient despite the squeeze on real incomes. The outlook for AI capex is also critical to the cyclical outlook. The recent debate on safety and regulation is important to monitor in that regard if it leads to a slowdown in investment growth. There are also positive tail risks, notably a resolution to the conflict in the Middle East that pushes down energy prices and/or a significant rise in productivity growth that offsets the negative supply shock from oil. Monitoring these tail risks over the remainder of the year will be crucial given their potentially meaningful impact on yields and risk assets.