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Bank of America raised its forecasts for global economic growth after the fragile peace deal with Iran, which eased tensions in energy markets.
However, the bank warns that persistent inflation in the US is likely to force the Federal Reserve to resume raising interest rates before the end of the year.
The bank now expects global GDP to grow by 3.2% in 2026, up from its previous forecast, accelerating to 3.5% in 2027 and then slowing to 3.3% in 2028. The global inflation forecast has also been lowered, to 3.0% this year, 2.4% in 2027, and 2.5% in 2028. This reflects expectations that Brent crude will average $72 per barrel in the second half of 2026 and $65 in 2027, provided that tensions in the Middle East do not escalate again.
Despite the improvement in the inflation forecast, BofA noted that a decrease in energy prices alone is not sufficient to ease monetary policy. Instead, the bank now expects the Fed to raise interest rates by a total of 75 basis points this year, starting in September, citing the strength of the labor market and continued inflationary pressures.
According to the bank, the global economy continues to rely on five structural factors: U.S. policies under President Donald Trump, the boom in artificial intelligence investments, China's industrial overproduction, budget imbalances, and high global liquidity. While these factors support growth and financial markets, they also increase vulnerability to asset price corrections in the event of a sharp tightening of financial conditions.
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BofA attributed a significant portion of the upward revision to the export cycle driven by AI development in Asian countries, particularly outside of China. Lower oil prices are expected to provide moderate support to developed markets in 2027. In the United States, cheaper gasoline and ongoing AI investments are expected to drive stronger growth in the second half of 2026, with growth rates remaining above 2%.
The growth forecast for China remained unchanged at 4.5% in both 2026 and 2027. However, the bank noted that the growth structure is becoming increasingly dependent on exports, driven by disappointing domestic demand and economic rebalancing. The export growth forecast for this year has been increased to 15%, driven by investments in AI and strong demand for renewable energy equipment and electric vehicles.
For Europe, BofA acknowledged that lower energy prices have mitigated the economic damage from the Iran conflict, but structural challenges remain. The bank forecasts a 0.5% growth in the eurozone economy in 2026 and 1.3% in 2027, and expects another rate hike by the European Central Bank before the easing cycle begins next year.
Among the key risks for its forecast, the bank identified three: a new escalation of the situation in the Middle East, which could once again drive up energy prices; a sharper-than-expected tightening of global financial conditions due to the Fed's tightening policy; and the possibility that the AI investment boom will eventually be replaced by a decline in asset prices and a slowdown in investment growth.