Global Economic Outlook: May 2026

Higher-for-longer energy prices mean higher-for-longer inflation and lower-for-longer economic growth and our forecasts have been revised accordingly. At the time of writing, whether an agreement could be reached to end the conflict in the Middle East in the near future remained highly uncertain. Even if a deal is struck soon – and holds, which is also uncertain – S&P Global Energy’s experts expect that it will take months for oil production and supply to start to normalize. What a new normal would look like for shipping security and costs in the Strait of Hormuz is also unclear. 

The price of Dated Brent crude is now expected to be above US$100 per barrel (/b) through the remainder of 2026. S&P Global Energy’s base case is predicated on the Strait of Hormuz remaining effectively closed through May, with flows expected to recover from June.

In line with a later-than-previously-assumed reopening and recovery in oil production, Dated Brent crude is forecast to end this year well above the US$72/b projection in our April forecast round. The elevation of crude prices is now also expected to persist into next year. The result is annual average prices of Dated Brent in 2026 and 2027, respectively, around 100% and 60% higher than we had assumed in our pre-conflict forecast back in February. These changes are moving the macro needle. 

Consistent with higher commodity price assumptions, our inflation forecasts have again been raised across the board, this time including for 2027. S&P Global’s Materials Price Index (MPI) forecasts have also been lifted compared to April. As of mid-May, the MPI was 40% above its level a year earlier, with recent increases in the index not confined to energy.

Indeed, while the upward revisions to our consumer price inflation forecasts primarily reflect the impact of higher energy prices, there have also been further signs of broadening price pressures including in producer price data. May’s national revisions again vary in magnitude due to differences in key near-term inflation drivers, including demand conditions and the fiscal space available to mitigate the impact of higher energy prices. 

S&P Global’s Purchasing Managers Indexes (PMIs®) continue to show soaring input costs. The global manufacturing input price index jumped by nine percentage points over the two months to April, the largest back-to-back increases in over a decade and a half. The PMI data strongly indicate that the recent rises in producer price inflation rates have much further to go.

Experience of prior energy shocks tells us that the direct effects of higher prices on consumer price inflation are felt relatively quickly, but the indirect effects on other prices can take many months to fully filter through. This is likely to elongate the period during which central banks remain on alert for second round effects on inflation. 

The outlook for monetary policy has changed markedly due to the deteriorating inflation outlook. The key changes to our forecasts in May include adding additional rate hikes in Western Europe this year, led by the European Central Bank, contributing to projected quarter-over-quarter real GDP contractions in many of the region’s largest economies.

The base case for the US Federal Reserve is still that the next move in policy rates will be downwards under its new chair, though this has been pushed out to mid-2027. Futures markets have recently moved to discount a higher likelihood of a hike than a cut next year following recent strong US inflation data. Monetary policy prospects in emerging economies remain mixed.  

We now expect real GDP contractions, albeit short-lived and modest in scale, in many of Europe’s largest economies, including Germany, France, Italy and the UK.

Our growth forecasts for 2026 and 2027 have been lowered for most economies, although as in the prior couple of forecast rounds, the national adjustments vary. This reflects differences in some key growth drivers, including sensitivity to oil shocks and expected policy responses. Net energy exporters, including Canada and Russia, fare comparatively well.

Our annual global real GDP growth forecast for 2026 now stands at just 2.2%, down from 2.9% in February. Our forecast remains below consensus, with the negative differential widening. In an alternative adverse scenario run though our Global Link Model, incorporating more protracted disruptions to oil production and supply, Dated Brent remains above US$150/b through to the end of 2027, implying much weaker growth outcomes.

Given relatively strong starts to the year in some economies, annual growth forecasts for 2026 need to be handled with care. In other words, the positive impact of strong data early in 2026 on annual growth forecasts can give a misleadingly positive impression of what lies ahead for some economies.

Some of the recent supports for growth are unlikely to last. For example, the manufacturing PMIs have been benefiting from precautionary inventory building due to concerns about supply disruptions. The next round of “flash” PMI data will be released on May 21. 

While the strength of AI-related spending shows no sign of letting up, global growth is at risk of becoming precariously narrowly-based. In the US, growth in US private fixed investment in information processing equipment and software remains on a tear and its share of GDP is now well above its peak back in 2000 at the height of the dotcom bubble.

Prospects in other areas look less encouraging, however, and any signs of a material weakening of consumer spending amid an escalating squeeze on household real incomes would be a game changer for growth expectations. 

Financial markets still largely appear to be discounting a swift resolution of the Middle East conflict. After a temporary upward spike, emerging market and other riskier debt spreads have recovered to levels tighter than before the start of the conflict. US equity markets have also remained resilient. Positive corporate earnings announcements have contributed, although the divergence between tech stocks and the rest of the S&P 500 remains pronounced.

Our assessment of the oil shock and its impact on the economic outlook appears to be increasingly at odds with the outcomes seemingly discounted by financial markets. Time will tell which is correct, but should our assessment be borne out, more febrile market conditions would likely follow. 

Sovereign bond yields have come under renewed upward pressure, including in the UK. Consistent with higher-for-longer inflation, less accommodative monetary policy and the increasing fiscal cost of mitigating a prolonged energy shock, we have generally revised our yield forecasts upwards in May’s update. While political uncertainty is contributing to the gilt market’s recent underperformance, inflationary and fiscal concerns are not unique to the UK. 

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.