The global economy is entering a prolonged phase of weaker growth and persistent inflation, as higher energy prices triggered by geopolitical disruptions force a significant reassessment of macroeconomic prospects, according to S&P Global’s May 2026 outlook.
S&P Global now expects global real GDP growth to slow to 2.2% in 2026, a sharp downgrade from 2.9% forecast in February, underscoring the scale of the shift in economic conditions. The downgrade reflects a combination of elevated oil prices, tightening financial conditions and weakening demand across major economies.
At the center of the revision is a sustained energy shock. S&P Global Energy forecasts that Dated Brent crude will remain above $100 per barrel through the remainder of 2026, assuming that disruptions linked to the Middle East—particularly constraints in the Strait of Hormuz—persist in the near term. Even under a base-case scenario where flows begin to recover from June, supply normalization is expected to take months, not weeks.
The shift in oil price assumptions is significant. Compared with pre-conflict expectations in February, average Brent prices for 2026 and 2027 are now projected to be around 100% and 60% higher, respectively. In an adverse scenario involving prolonged disruption, prices could exceed $150 per barrel through 2027, posing further downside risks to growth.
These energy dynamics are feeding directly into inflation. S&P Global has raised its consumer price inflation forecasts across most economies, including for 2027, reflecting both direct and indirect effects of higher commodity prices. The firm’s Materials Price Index (MPI) was 40% higher year-on-year as of mid-May, highlighting the breadth of cost pressures beyond energy alone.
Business survey data reinforce this trend. S&P Global’s Purchasing Managers’ Index (PMI) shows that the global manufacturing input price index surged by nine percentage points over the two months to April, marking the largest back-to-back increase in more than 15 years. This suggests that producer price inflation is likely to intensify further before easing.
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The persistence of inflation is reshaping expectations for monetary policy. Central banks are now expected to maintain tighter conditions for longer than previously anticipated. S&P Global has added additional rate hikes in Western Europe to its baseline, contributing to expectations of quarter-over-quarter GDP contractions in several major economies, including Germany, France, Italy and the United Kingdom.
In the United States, the Federal Reserve is still expected to eventually cut rates, but the timing has been pushed back to mid-2027, reflecting continued inflationary pressures. Financial markets have also shifted, with futures increasingly pricing in the possibility of further tightening rather than easing in the near term.
The impact of tighter policy and higher costs is already visible in growth projections. Several large European economies are now expected to experience short-lived but measurable contractions, while global growth more broadly is losing momentum. S&P Global noted that recent resilience in some data may be misleading, as it has been partly supported by inventory building driven by fears of supply disruptions, rather than underlying demand strength.
The composition of global growth is also becoming more uneven. In the United States, expansion is being heavily supported by strong investment in information processing equipment and software, linked to continued momentum in artificial intelligence. This segment’s share of GDP has risen above its peak during the dotcom era, indicating a high degree of concentration in growth drivers.
However, S&P Global cautions that this narrow base increases vulnerability. Any significant slowdown in consumer spending, particularly as households face pressure from inflation and reduced real incomes, could materially weaken overall growth.
Financial markets, for now, appear relatively resilient. Equity markets have held steady and credit spreads remain tight, suggesting that investors are still pricing in a relatively quick resolution to geopolitical tensions. However, S&P Global warns that this optimism may be misplaced. Should elevated oil prices persist as expected, markets could face increased volatility as economic realities diverge from current expectations.
At the same time, sovereign bond yields have come under renewed upward pressure, reflecting a combination of higher-for-longer inflation, less accommodative monetary policy and rising fiscal costs associated with mitigating the energy shock. These pressures are not confined to any single country, indicating a broad-based tightening in global financial conditions.
Overall, S&P Global’s latest outlook points to a structurally more constrained global economy. The interplay of elevated energy prices, persistent inflation and tighter monetary policy is expected to suppress growth over an extended period, with risks firmly tilted to the downside.
