Bank of America analysts believe that the fragile peace agreement linked to the war on Iran has given the global economy some relief by lowering energy price and inflation expectations, but it will not fully erase the inflationary shock that hit markets since the war broke out.
The bank raised its global economic growth forecasts to 3.2% this year and 3.5% in 2027, compared with its previous estimates of 3.1% and 3.4% respectively, driven by the strength of Asia's AI-linked export cycle and some expected improvement in advanced economies as energy prices ease.
However, the improvement in growth and inflation figures does not mean the economic landscape has returned to its pre-war state. The bank's analysts wrote in their mid-year report that "the damage has already been done," adding that a decline in energy prices to pre-war levels would not be sufficient to fully reverse the impact of the shock.
The bank's commodities team cut its forecast for the average Brent crude price to $72 per barrel in the second half of 2026 and $65 in 2027, in the absence of fresh escalation. This contributed to the bank lowering its global inflation forecasts to 3% this year, then 2.4% in 2027 and 2.5% in 2028.
Yet the report argues that easing headline inflation will not be sufficient to trigger a new monetary easing cycle. Bank of America now expects the US Federal Reserve to raise interest rates by 75 basis points this year, beginning in September, as US inflation dynamics deteriorate and labour market risks recede.
The bank sees the global economy now facing "two and a half tests." The first is the stability of the Middle East's energy infrastructure, as the agreement is by nature temporary and fragile, while markets appear to have almost fully priced in a return to normal energy flows. Any sudden escalation, against a backdrop of low oil inventories, could re-accelerate prices and renew supply chain disruption.
The second test is the possibility of a faster or more disorderly global fiscal tightening than expected, driven by a more hawkish Federal Reserve amid a strong US economy and inflation that remains elevated despite lower energy prices. The report warned that markets supported by accommodative liquidity and the AI boom could become a vulnerability if asset prices undergo a sharp correction.
The "half test" concerns China and Asia's technology boom. The Chinese economy has shown a clear ability to absorb energy and trade shocks, but domestic demand remains weak, while China relies heavily on exporting its excess productive capacity. The question, according to the bank, is how much of this surplus the world can absorb without triggering new trade and geopolitical tensions.
Emerging Asia remains the primary bright spot in the bank's outlook, driven by AI-linked exports, semiconductors, and technology. Europe, by contrast, remains the weakest link having borne the brunt of the energy shock, although lower oil and gas prices have made the projected losses less severe than previously feared.
In the United States, the bank forecasts growth in a low range above 2%, supported by lower petrol prices and continued AI-related capital expenditure. However, it notes that labour market strength and persistent inflationary pressures make a rate hike, rather than a cut, the most likely path for the remainder of the year.