History tends to repeat itself in advanced economies. Once again, growth ultimately fell short of expectations by only a small margin in the first half of 2026, despite the conflict in Iran. As early as 2025, the impact of tariffs was less severe than feared. This is a sign that structural factors (notably AI, defence and electrification) are underpinning growth in these countries and are expected to continue to do so in 2027. However, there are significant risks to the economic outlook, primarily of a geopolitical nature, with a significant upside risk to inflation and interest rates. The other instance of history repeating itself concerns a period that those under 20 cannot have experienced: the period leading up to the 2008 crisis, echoes of which can be seen in terms of growth, inflation, the direction of monetary policy, and long-term interest rates.
Advanced economies are experiencing trends similar to those they faced nearly 20 years ago:
- Growth remains resilient in 2025-26 despite shocks, as it did in 2006-07, in the major advanced economies.
- Inflation is above central banks’ targets: as in 2006-07, this calls for a tightening of monetary policy.
- In Europe and the United States, long-term interest rates have returned to their 2006-07 levels (1996 in Japan): a challenging environment for public finances in a context where public debt ratios are significantly higher than those seen 20 years ago.
The global economy in the midst of a growth cycle
We are already well into 2026, and the picture so far is clear: global growth is proving resilient. Following a US tariff shock last year, growth is once again proving, for the time being, to be significantly less affected by the conflict in Iran than had been anticipated when it first broke out. Initially, however, there were fears that this new shock would hit growth even harder. As with the tariff hike in 2025, the impact was measurable, particularly in terms of consumer confidence. But in both 2025 and 2026, growth has also shown a degree of resilience.
Growth is more resilient to shocks than initially anticipatedThe figures for the second quarter bear this out, despite the sharp rise in oil prices, the recessionary impact of which is not yet apparent. According to our forecasts, growth was expected to reach or exceed 1% in 2026 in the four major advanced economies (the Eurozone, Japan, the United Kingdom and the United States, where it exceeds 2%) for the second consecutive year. This had not happened (excluding the post-COVID catch-up period) since 2006-07. Growth figures are more moderate (particularly for demographic reasons), but the private sector is not (at present) showing the same excesses (at that time, the credit boom had preceded the worst crisis since the 1930s); although debt levels have recently risen in the US tech sector.
The driving force behind the current growth cycle is clear: artificial intelligence (AI). It is fuelling global trade and business investment in most countries. This is clearly the case in the United States, where business investment is growing strongly as investment plans in the US tech sector are implemented.
However, the world’s major economies are currently engaged in a broader push to expand their capital goods investment. Alongside the ongoing development of services—particularly digital services—we have seen a rebound in industrial production in most countries since early 2025. The leading sectors are primarily technology equipment, machinery, aeronautics, defence and their essential inputs (energy and metals). This trend is evident everywhere, including in Europe, and is becoming entrenched over the long term, with an improvement in business climate indicators, particularly new export orders. Growth is therefore expected to strengthen further in 2027, particularly in the Eurozone, where German investment plans are set to gather momentum and whose spillover effects will have a greater impact on the economy.
However, not all sectors are experiencing the same momentum. This is particularly true for the sectors that depend on household consumption, which has shown mixed trends. Our observation that consumer spending is more buoyant in the United States than in Europe was confirmed in 2026, and the outlook does not point to a change in this ranking.
While European and US households are experiencing more or less the same energy price shock, inflation remains higher in the United States. But this has not prevented consumer spending from keeping pace, primarily because it is driven by the wealthiest households, who are less sensitive to inflation than to the wealth effect. Furthermore, while the savings rate remains high in the Eurozone, US households have been drawing down their savings. This is also true of British households, which explains why the UK has seen slightly stronger growth since the beginning of the year. In Japan, government spending has partially offset energy inflation (while other countries are doing so to a much lesser extent than in 2022), which has supported consumption growth.
However, these buffers—reduced savings or fiscal support—have their limits when shocks persist. The two major current conflicts (Iran and Ukraine) are far from being resolved, and their impact is continuing. This persistent geopolitical risk and its implications for inflation represent a significant headwind to the growth outlook for 2027.
Growth is expected to pick up in 2027Higher inflation calls for monetary tightening
Inflation is exceeding the target set by three of the four central banks examined in this publication, which is another similarity (albeit with different underlying causes) with the 2006-07 period. Japan is the exception, as government support measures for households are temporarily holding back inflation.
Apart from the Bank of Japan, which is engaged in a long-term normalisation process, no central bank was expected to raise its key rates in 2026. But they are now being prompted to do so for reasons that vary from one region to another. The first is the conflict in Iran and the resulting rise in oil prices, which triggered a rebound in energy inflation from the second quarter onwards. However, since the conflict was not resolved by the memorandum of understanding signed in June, and given that the subsequent drop in oil prices proved short-lived, inflation is expected to rise again. The rise in gas prices is expected to exacerbate the impact, particularly in Europe, where inventories are being replenished ahead of winter. Electricity prices are expected to follow suit in most countries, but at a more moderate pace than in 2022. Indeed, gas is now used less to generate electricity than it was at that time (thanks to the expansion of renewable energy), and to an even lesser extent in France.
There is a significant risk that energy inflation will spread further to other components of inflation in the future, and inflation expectations could eventually reflect this. This is why the European Central Bank has already raised its key interest rate twice (in June and September) and, according to our scenario, will likely do so again in December. For the same reason, we expect the Bank of England to raise its policy rate in November. Although the cap on energy prices was maintained for a long time, it has now been raised. As a result, inflation is expected to rise between now and the end of the year. The aim will then be to prevent second-round effects.
Inflation can also be a sign of (too much) economic strength. In the United States, it has exceeded the 2% target since 2021. The main argument in favour of a new cycle of rate hikes (following the one in 2022-2023) lies in the current resilience of growth and the improving labour market. The Federal Reserve (Fed) must balance two equally important objectives: maximum employment and price stability. However, unlike in the 4thquarter of 2025, when the decline in job creation justified monetary easing (by 75 basis points), the current sharp rebound in job creation completely reverses that analysis. According to our forecasts, the unemployment rate is expected to decrease in the coming months, which pushes back the prospect of a decline in core inflation. This situation persists due to both supply constraints (over which a central bank has no control) and excess demand (which the Fed can, however, mitigate). Consequently, the Fed raised its key rate in September and is expected to implement two further rate hikes between now and January 2027.
In Japan, finally, while headline inflation has been brought down by government support measures, core inflation remains significant. Wage pressures are mounting against a backdrop of labour shortages. The Bank of Japan is therefore being forced to accelerate the pace of its monetary normalisation.
In all these regions, inflation is currently expected to peak in Q4 2026 or Q1 2027. It is against this backdrop of temporary inflation that rate hikes could also come to an end by that time (excluding Japan). However, this assumes that once the energy shock—the course of which remains uncertain—subsides, inflation will fall. The effects of El Niño, which are still difficult to gauge at present, could take over. Inflation would then remain above the central banks’ target for a longer period. Under this scenario, rate hikes would go further than is currently envisaged.
Inflation is expected to remain above the central banks’ target in the coming monthsThe rise in long-term interest rates: a factor that will weigh on public finances
Monetary policies have also to offset the inflationary effects of fiscal policy, particularly in the United States (where the budget deficit is high and shows no signs of shrinking) and in Japan (where the new government is pursuing pro-growth policies). In Europe, fiscal policy is playing a much smaller role than it did in 2022. While the stimulus measures implemented at that time did help reduce the inflation rate in the short term (by nearly 2.5 pp in France, for example), by keeping demand at a high level, they delayed disinflation and increased the scale of the monetary tightening required.
The outbreak of the conflict in Iran acted as a catalyst: it triggered a rise in long-term rates (which had been trending downwards at the start of the year) to levels close to those of 2006-07. This rise is widespread, but its causes vary. Inflation expectations appear to play a more significant role in the Eurozone, whereas the rise in real interest rates seems to be the main factor in the United States and Japan.
Higher inflation and more resilient real growth than feared point in the same direction: stronger than expected nominal growth that is likely to be sustained. However, in the long term, high nominal growth tends to drive up nominal interest rates (as it is a positive sign of more profitable investment projects), in contrast to the problem of secular stagnation raised in the 2010s (which combined low nominal growth with low nominal interest rates).
The other issue is the high level of fiscal deficits (too high for a period of growth), with various situations. In several countries, the public debt-to-GDP ratio continues to rise. In the United States, deficit reduction does not appear to be a priority, to the extent that it is expected to remain above 6% of GDP at the very least until the end of Donald Trump’s term of office (with little hope that the mid-term elections will significantly alter this trend). In the United Kingdom and France, fiscal consolidation has begun, but it is being hampered by the simultaneous increase in certain areas of expenditure (debt servicing, defence and healthcare, due in particular to an ageing population), which is slowing the pace of consolidation. In Germany, the implementation of investment plans is leading to a widening of the deficit. While this does not pose a sustainability problem, it does result in an increase in annual debt issuance. In Japan, the budget deficit is kept in check by interest payments that remain low, as the rise in interest rates is recent and the average maturity of the debt is high (10 years). However, expansionary fiscal policy could pose further problems in terms of debt dynamics if it were to continue through the end of the decade. In Italy and Spain, fiscal consolidation has been sufficient to stabilise the public debt-to-GDP ratio (and even to reduce it in Spain), but the high level of Italy’s debt service it vulnerable to a rise in interest rates.
In all these countries, the fiscal arithmetic is simpler today than it will be in 2030. Indeed, in most cases, only half of the debt was issued after 2022 (that is, after the end of the zero-interest-rate period). The debt service has so far only partially risen, except in the United States, where most of the increase has already occurred due to a shorter average debt maturity (6 years). This means that, for all countries combined, the rate of GDP growth remains higher than the average interest rate paid on public debt (or the effective interest rate).
By 2030, the effective rate will have risen and caught up with GDP growth. As a result, in most cases, the debt service will have returned to the level as a share of GDP seen in the early 2000s. In order to stabilise public debt-to-GDP ratios, primary balances will need to have improved. This will even require the generation of primary surpluses, particularly in Italy (which is already achieving this), France and the United Kingdom. This is a crucial shift that governments will need to introduce as early as the 2027 budget; otherwise, they risk postponing the stabilisation of their public debt-to-GDP ratio once again.
