Bank of America: The Global Economy has Partially Overcome the Shock of War, but Damage has Already Occurred

SadaNews - Analysts at "Bank of America" believe that the fragile peace agreement related to the war in Iran has provided some relief to the global economy by lowering energy price and inflation expectations, but it will not completely erase the impact of the inflation shock that struck the markets since the outbreak of the war.

The bank has raised its forecast for global economic growth to 3.2% this year and 3.5% in 2027, compared to its previous estimates of 3.1% and 3.4%, respectively, driven by the robust cycle of Asian exports linked to artificial intelligence, and some expected improvement in advanced economies as energy prices decline.

However, the improvement in growth and inflation figures does not mean a return to the economic landscape as it was before the war. The bank's analysts wrote in a mid-year report that "the damage has already occurred," adding that a decline in energy prices to pre-war levels will not be enough to fully reverse the shock's impact.

The bank's commodities team has reduced its forecast for the average price of Brent crude to $72 per barrel in the second half of 2026 and $65 in 2027, absent any new escalation. This contributed to the bank lowering its forecast for global inflation to 3% this year, followed by 2.4% in 2027 and 2.5% in 2028.

However, according to the report, the decline in general inflation will not be sufficient to trigger a new monetary easing cycle. "Bank of America" now expects the U.S. Federal Reserve to raise interest rates by 75 basis points this year, starting in September, as the dynamics of inflation in the United States deteriorate and labor market risks decline.

"Two and a Half Tests" Facing the Global Economy

The bank sees that the global economy now faces "two and a half tests." The first test is the stability of the energy system in the Middle East, as the agreement is inherently temporary and fragile, while the markets appear to have priced in a near full return of energy flows to normal. Any sudden escalation, along with declining oil inventories, could accelerate prices again and renew supply chain disruptions.

The second test is the possibility of a faster or more turbulent global financial tightening than expected, driven by a more aggressive policy from the Fed amidst a strong U.S. economy and inflation that remains high despite falling energy prices. The report warned that markets supported by easy liquidity and the AI boom could turn into a point of weakness if asset prices undergo a sharp correction.

As for the "half test," it relates to China and the technology boom in Asia. The Chinese economy has shown a clear ability to absorb energy and trade shocks, but domestic demand remains weak, while China heavily relies on exporting its surplus production capacity. The question, according to the bank, is how much the world can absorb this surplus without new trade and geopolitical tensions.

Emerging Asia remains the bank's key strength in its forecasts, thanks to exports linked to artificial intelligence, semiconductors, and technology. In contrast, Europe remains the weakest link after bearing the brunt of the energy shock, although falling oil and gas prices have made the expected losses less severe than previously feared.

In the United States, the bank expects growth in the low 2% range, supported by falling gasoline prices and continued capital spending associated with artificial intelligence. However, it sees that the strength of the labor market and persistent inflation pressures make raising interest rates, rather than lowering them, the most likely path for the remainder of the year.