The Global Economy Is Forecast to Grow 2.8% in 2027 as Oil Prices Decline

Summary

• Goldman Sachs Research anticipates a continued drag on European growth from energy prices due to delayed cost pass-through to consumers.
• Lower energy prices are expected to outweigh tighter financial conditions and a smaller fiscal impulse to support GDP expansion in 2027.
• The Financial Conditions Index implies a moderate drag on growth over the next few quarters.
• Meaningful fiscal consolidation is not expected in 2027, though recent large fiscal expansions are fading.
• Japan is forecast to see GDP growth boosted by 0.7 percentage point from consumption tax cuts, increased defense spending, & government investment plans.
• Modestly positive fiscal impulses are expected in Germany & the US, with potential reversals of 2025 spending cuts following the US election.
• A continued fiscal drag is projected for the UK, leaving the fiscal impulse in developed markets only slightly positive.
• Nominal global AI investment is forecast to rise to $1.8 trillion in 2027 from $1.1 trillion this year, driven by over $500 billion in US hardware spending.
• The AI investment surge is projected to be frontloaded, with the year-over-year change in investment as a share of GDP peaking in the first half of 2027.
• AI investment is estimated to boost global GDP growth by 0.4 percentage point in 2027.
• AI investment is projected to give a 0.6-percentage-point boost to "true" GDP growth in the US after accounting for undercounted semiconductor investment & chip-related intellectual property exports.
• The AI-enabled economy transition involves two phases: an initial investment boom with limited productivity gains, followed by a phase with less hardware investment but more business reorganization & substantial productivity gains.
• AI adoption is expected to have only a small effect on the labor market in 2027, with more notable effects forecast for 2028-2029.
• China's GDP is forecast to grow 4.5% in 2027, reflecting robust export expectations & an increase in the trade surplus.
• Domestic demand growth in China is predicted to remain weak due to property sector drags & weak consumer spending.
• China's economic outlook is expected to result in a 0.1 percentage point headwind to the rest of the world's GDP growth, with larger drags on Germany (0.3 percentage point) & Central Europe (0.2 percentage point).
• Inflation is expected to slow in 2027 under forecasts for a steady decline in energy prices.
• Core PCE inflation in the US is expected to slow to 2.4% at the end of 2027 from 3.2% at the end of 2026 as tariff effects fade.
• The Bank of England is expected to hike rates to 4.25% in February before holding rates for the remainder of 2027.
• The Bank of England is forecast to normalize rates to a 3.25% terminal rate in 2028.
• The Bank of Japan is expected to hike rates by 25 basis points in December, with additional hikes in March & June for a terminal rate of 2%.
• Core CPI in Japan is likely to rise above 3.5% through next summer.