The global economic landscape in the latter half of 2026 is a delicate dance, with various risks poised to tip the scales. At the heart of it all is the US-Iran peace agreement, a pivotal factor that could either calm or ignite a series of economic dominoes. Chief global economist Ryan Sweet of Oxford Economics emphasizes the deal's significance, likening it to a key domino that will either amplify or dampen other risks.
The consultancy predicts an acceleration in global growth, primarily driven by cheaper oil boosting household incomes. However, the odds of a durable peace agreement are uncertain, with Sweet describing it as a coin toss.
If the truce endures, Brent crude is expected to average in the low $70s per barrel, providing a disinflationary tailwind and easing financial conditions. But if it collapses, the consequences will ripple beyond the oil market.
The recent military exchange between the US and Iran, with strikes on ships in the Strait of Hormuz and retaliatory attacks on Bahrain and Kuwait, highlights the fragility of the interim agreement. Oil prices reacted swiftly, jumping over 3% on Wednesday morning. Sweet warns that a breakdown in the peace deal would not only raise oil prices but also impact AI supply chains in Asia, force central banks to adopt hawkish stances, and potentially influence election outcomes in the US and Israel.
A Divergent Outlook
Not all analysts share Oxford Economics' view. Morgan Stanley's mid-year outlook predicts crude prices climbing back to around $90 a barrel by year-end, a significant difference from Oxford Economics' forecast. The World Bank also forecasts higher Brent crude prices, averaging about $94 a barrel this year, while cautioning that global GDP growth will slow to 2.5% in 2026.
The recent exchange of attacks is a critical test for the truce, with traffic through the Strait of Hormuz serving as a bellwether. Sweet explains that fully restoring traffic within 30 days, as per the deal's commitment, makes mid-July a crucial deadline. A sustained return to 75% or more of pre-war traffic by then would increase the likelihood of the agreement holding.
Another indicator is Iran's potential invocation of the accord's Lebanon clause in response to Israeli strikes.
Trade and AI: Interconnected Risks
Trade tensions are another risk factor. The impending expiration of US Section 122 tariffs on July 24, coupled with the replacement levies under Section 301, could push effective tariff rates higher. Europe, too, is adopting a tougher stance, with the European Commission investigating trade practices with China and planning to unveil an economic security strategy.
These trade issues intersect with the AI boom, with Oxford Economics noting the US AI industry's reliance on hardware from Northeast and Southeast Asia. The Bank for International Settlements (BIS) has warned about the AI sector's reliance on opaque "circular financing" and lightly regulated private credit, suggesting a potential for a sharper and faster correction in an AI downturn.
Sweet modeled a "tech bust" scenario, where US technology stocks fall by 25% over a year, causing the US economy to stall and impacting technology exporters and investor sentiment globally.
Policy and Political Uncertainties
The final set of dominoes involves policy and politics. Oxford Economics expects central banks to be more dovish than anticipated, but they could quickly pivot if traffic through the Strait of Hormuz falters or AI input prices indicate supply issues. The Federal Reserve's rate decision later this month, following a soft jobs report in June, is a critical juncture.
The US midterms in November and Israel's general election in October could influence the Middle East peace process, while German state elections in September may test the coalition behind Germany's fiscal policy, a key eurozone driver.
Oxford Economics also highlights potential upsides, including stronger AI-driven productivity and the EU economy's surprising resilience in the second quarter.
The true test of Europe's resilience, Sweet argues, will be evident in Germany and credit data. A contraction in eurozone bank lending could signal a weaker outlook.
It's worth noting that Oxford Economics' typical forecast miss is nearly a full percentage point, and the range around this particular assessment is wider than usual, leaving room for significant uncertainty.
