Global Conditions

National Institute of Economic and Social Research ()

National Institute Economic Outlook, 2026, issue Spring, 5-17

Abstract: The US and Israeli strikes on Iran and Lebanon and the subsequent closure of the Strait of Hormuz by the Iranians, together with their strikes on other gulf states, have had a major effect on the global economy. In our Winter Economic Outlook, we noted how resilient the world economy had been despite the large increase in trade barriers. In addition, it looked like inflation was falling, allowing central banks across the world to reduce interest rates. But this rosy picture has now changed with war in the Middle East leading to a global negative supply shock, which will result in lower growth, and higher inflation and interest rates, over the course of 2026 and 2027. Last year, economies worldwide faced the shock of President Trump's Liberation Day tariffs (and their subsequent frequent revisions). These marked a major change to the post–World War Two international consensus in which discussions on tariff reductions or abolitions were the norm. The frequent amendments to the initially proposed tariff rates, threats of retaliation and diplomatic rounds of trade negotiations created an increase in trade and policy uncertainty. The average effective tariff rate in the United States is estimated to have risen from around two per cent to around 11 per cent by Yale Budget Lab. Despite this shock to the global trading environment, global GDP grew by 3.4 per cent last year, slightly faster than in 2024. The global economy proved to be resilient to the tariff shock. This may have been due to the implemented tariffs being smaller than the headline threats and companies having some time to adjust as well as trade diversion ensuring that exports (and so growth) could be maintained in the face of US tariffs. In addition, financial conditions have been more supportive than expected with stock markets rising, though this could be down to optimism over AI, which could prove to be short–lived, particularly given the high energy requirements of the sector. Annual GDP for both advanced economies and emerging economies grew at rates that were little changed from the previous two years – with emerging economies continuing to grow at almost twice the pace of the advanced economies (figure 1). Within advanced economies, the pace of growth in the United States slowed from 2.9 per cent in 2023 and 2.8 per cent in 2024 to a still relatively rapid 2.1 per cent, but this slowing pace was balanced by faster growth in the Euro Area (up from 0.9 per cent to 1.5 per cent) and Japan (from -0.2 per cent to 1.2 per cent). For emerging economies, China and India, dominate the picture and continued their rapid growth at 5.0 per cent and 7.5 per cent respectively.

Date: 2026
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