From $70 to $87! Fitch aggressively raises its oil price forecast: Global economic growth may evaporate by 0.2%.
2026-06-05 13:42:40
Fitch Ratings warned that the oil shock triggered by the US-Iran conflict has damaged the global economic outlook. The rating agency lowered its 2026 global economic growth forecast by 0.2 percentage points to 2.4%, citing inflationary pressures from rising energy costs and continued supply disruptions.
"Downward forecasts have become commonplace as rising inflation squeezes real wages, dampens consumption, and drives up business input costs," Fitch economists said in a report.
Fitch Ratings has significantly raised its 2026 Brent crude oil average price forecast to $87 per barrel from $70, an increase of 24%, to reflect the impact of the prolonged closure of the Strait of Hormuz, a key global oil shipping route. The strait has been closed for 14 weeks to date, marking the longest shipping disruption in the region since the Iran-Iraq War.
The Strait of Hormuz is the world's most critical chokepoint for oil transportation, with approximately 20% of global oil consumption passing through it daily. If closed, alternative routes would have limited capacity and be prohibitively expensive, directly driving up global energy prices. Fitch points out that current oil prices already incorporate a "geopolitical risk premium" of approximately $15-20 per barrel, a premium that did not exist before the conflict.
Fitch stated that despite the fragile ceasefire agreement reached between the US and Iran, negotiations remain difficult, and it seems unlikely that the Strait of Hormuz will be reopened before July. Iran insists on unfreezing overseas funds at the beginning of negotiations, while the US demands that Iran take substantive action first on the nuclear issue and the right of passage through the Strait. These core differences are unlikely to be bridged in the short term, meaning that the tight supply situation in the energy market may persist at least into the third quarter.
However, the agency points out that its baseline forecast scenario is still far less severe than the oil crisis of the 1970s. During the 1973 Arab oil embargo and the 1979 Iranian Islamic Revolution, real oil prices soared to the equivalent of $170 per barrel (adjusted for current inflation). In contrast, the current forecast of $87 per barrel remains within a manageable range.
Fitch also emphasized that since 1980, the share of oil consumption in global economic output has decreased by about half—from around 7% to around 3.5% currently. This means that the global economy is significantly less sensitive to oil shocks, and the drag on GDP from the same oil price increase is far less than it was 40 years ago. This is one of Fitch's core arguments that the current crisis will not repeat the "stagflation" scenario of the 1970s.
In a more adverse scenario, Fitch simulated the impact of oil prices averaging $100 per barrel, a 10% drop in the stock market, and tightening credit conditions. Under this scenario, US economic growth could fall to just 0.8% over the next 12 months, while growth in the Eurozone and major Asian countries could slow to 0.3% and 3.4%, respectively.
In its baseline forecast, Fitch expects the US economy to grow by 1.9% and the Eurozone by 0.9%, both lower than previous forecasts. However, due to stronger-than-expected first-quarter economic performance and resilient exports, Fitch has revised its economic growth forecast for China upward to 4.6%.
In its report, Fitch noted that the current global macroeconomic policy environment is quite different from that at the beginning of inflation in 2021, which provides room for central banks to remain on the sidelines.
First, current policy rates are significantly higher than in 2021. For example, the Federal Reserve's target range for the federal funds rate remains at 3.50%-3.75%, while it was close to zero at the beginning of 2021. This means that central banks do not need to raise rates as urgently as they did two years ago, because most of the tightening cycle has already been completed.
Secondly, the labor market is easing. The job vacancy rate has fallen from its peak, the voluntary turnover rate has dropped to its lowest level since the pandemic, and companies are slowing their hiring pace. Wage pressures have consequently eased, with the year-on-year growth rate of average hourly wages falling from over 5% in 2022 to around 3.5% currently. The labor market is no longer a contributing factor to inflation.
Third, the expansionary nature of fiscal policy has significantly weakened. The massive fiscal stimulus following the 2021 pandemic has long since ended. While the US federal deficit remains high, the marginal demand-pull effect of new fiscal spending has decreased substantially. Fitch stated that fiscal policy is no longer "opposing" monetary policy as it was in 2021, which has reduced pressure on the central bank to tighten monetary policy.
Based on the above assessment, Fitch expects the Federal Reserve and the Bank of England to keep interest rates unchanged this year, before resuming rate cuts in 2027. The firm believes that inflation will gradually decline, albeit at a slower pace than previously anticipated, but by early 2027, major central banks will have sufficient room to cut rates.
Fitch expects the European Central Bank (ECB) to raise interest rates by 25 basis points in June to address inflationary pressures from the energy shock. However, with the Eurozone's economic growth already slowing to 0.1%, far weaker than the US, the ECB will be forced to reverse its stance next year and turn to rate cuts to support the economy.
A key factor helping to offset the drag from the US-Iran conflict is the surge in AI activity, particularly in Asia. This wave of technology investment, fueled by generative AI, is unexpectedly providing a buffer for the global economy.
Fitch Ratings Chief Economist Brian Colton stated that the world is experiencing a “very evident boom in global IT spending, which is buffering the impact on economic activity in the short term, particularly in Asia.” He pointed out that large technology companies are investing heavily in building AI data centers, purchasing high-performance chips, and deploying computing infrastructure. This year, major technology companies have already spent over $700 billion on AI-related equipment, a scale unimaginable in the past few years.
AI-related infrastructure development has spurred sustained strong demand for chips and related products, providing a favorable boost to technology-exporting economies like South Korea. South Korea's memory chip exports have maintained double-digit growth for several consecutive months. Export data, manufacturing PMIs, and stock market performance in both regions are significantly better than other Asian economies reliant on traditional manufacturing.
While the AI investment boom is driving record stock market gains, boosting corporate profits, and supporting the broader economy, Fitch warns that this momentum could come to an abrupt halt if global economic growth experiences a substantial slowdown.
The surge in AI-related spending is essentially a pro-cyclical force—when the economy is booming, companies are willing to invest heavily; but when the growth outlook deteriorates, capital expenditures are often among the first to be cut. Fitch's chief economist, Colton, points out that the current high level of activity in AI development largely depends on companies' optimistic expectations for future demand, and these expectations are inherently fragile.
If the US-Iran conflict escalates further, causing oil prices to surpass $100, or global trade slows significantly due to supply chain disruptions, companies may quickly reassess their capital expenditure plans. At that point, the investment boom in AI, seen as a "growth engine," could cool rapidly, instead amplifying downward economic pressures.
Furthermore, Fitch cautioned investors to be aware of the "expectation gap" risk. The market currently has extremely high expectations for the profit growth of AI-related companies, and stock prices incorporate numerous optimistic assumptions. If macroeconomic signals weaken, these overvalued stocks will face a double blow: firstly, actual corporate profits may fall short of expectations; secondly, a reversal in market sentiment could lead to valuation contraction.
In other words, the AI boom could be a "buffer" for the current economy, but it could also be an "amplifier" for future recessions. While investors chase the rise in tech stocks, they also need to remain vigilant about the global growth outlook.
"Downward forecasts have become commonplace as rising inflation squeezes real wages, dampens consumption, and drives up business input costs," Fitch economists said in a report.
Oil price forecast raised: Strait of Hormuz to remain closed indefinitely.
Fitch Ratings has significantly raised its 2026 Brent crude oil average price forecast to $87 per barrel from $70, an increase of 24%, to reflect the impact of the prolonged closure of the Strait of Hormuz, a key global oil shipping route. The strait has been closed for 14 weeks to date, marking the longest shipping disruption in the region since the Iran-Iraq War.
The Strait of Hormuz is the world's most critical chokepoint for oil transportation, with approximately 20% of global oil consumption passing through it daily. If closed, alternative routes would have limited capacity and be prohibitively expensive, directly driving up global energy prices. Fitch points out that current oil prices already incorporate a "geopolitical risk premium" of approximately $15-20 per barrel, a premium that did not exist before the conflict.
Fitch stated that despite the fragile ceasefire agreement reached between the US and Iran, negotiations remain difficult, and it seems unlikely that the Strait of Hormuz will be reopened before July. Iran insists on unfreezing overseas funds at the beginning of negotiations, while the US demands that Iran take substantive action first on the nuclear issue and the right of passage through the Strait. These core differences are unlikely to be bridged in the short term, meaning that the tight supply situation in the energy market may persist at least into the third quarter.
However, the agency points out that its baseline forecast scenario is still far less severe than the oil crisis of the 1970s. During the 1973 Arab oil embargo and the 1979 Iranian Islamic Revolution, real oil prices soared to the equivalent of $170 per barrel (adjusted for current inflation). In contrast, the current forecast of $87 per barrel remains within a manageable range.
Fitch also emphasized that since 1980, the share of oil consumption in global economic output has decreased by about half—from around 7% to around 3.5% currently. This means that the global economy is significantly less sensitive to oil shocks, and the drag on GDP from the same oil price increase is far less than it was 40 years ago. This is one of Fitch's core arguments that the current crisis will not repeat the "stagflation" scenario of the 1970s.
Scenario Analysis: The Impact of Oil Prices Reaching $100
In a more adverse scenario, Fitch simulated the impact of oil prices averaging $100 per barrel, a 10% drop in the stock market, and tightening credit conditions. Under this scenario, US economic growth could fall to just 0.8% over the next 12 months, while growth in the Eurozone and major Asian countries could slow to 0.3% and 3.4%, respectively.
In its baseline forecast, Fitch expects the US economy to grow by 1.9% and the Eurozone by 0.9%, both lower than previous forecasts. However, due to stronger-than-expected first-quarter economic performance and resilient exports, Fitch has revised its economic growth forecast for China upward to 4.6%.
Policy Outlook: Major Central Banks Hold Rates Steady
In its report, Fitch noted that the current global macroeconomic policy environment is quite different from that at the beginning of inflation in 2021, which provides room for central banks to remain on the sidelines.
First, current policy rates are significantly higher than in 2021. For example, the Federal Reserve's target range for the federal funds rate remains at 3.50%-3.75%, while it was close to zero at the beginning of 2021. This means that central banks do not need to raise rates as urgently as they did two years ago, because most of the tightening cycle has already been completed.
Secondly, the labor market is easing. The job vacancy rate has fallen from its peak, the voluntary turnover rate has dropped to its lowest level since the pandemic, and companies are slowing their hiring pace. Wage pressures have consequently eased, with the year-on-year growth rate of average hourly wages falling from over 5% in 2022 to around 3.5% currently. The labor market is no longer a contributing factor to inflation.
Third, the expansionary nature of fiscal policy has significantly weakened. The massive fiscal stimulus following the 2021 pandemic has long since ended. While the US federal deficit remains high, the marginal demand-pull effect of new fiscal spending has decreased substantially. Fitch stated that fiscal policy is no longer "opposing" monetary policy as it was in 2021, which has reduced pressure on the central bank to tighten monetary policy.
Based on the above assessment, Fitch expects the Federal Reserve and the Bank of England to keep interest rates unchanged this year, before resuming rate cuts in 2027. The firm believes that inflation will gradually decline, albeit at a slower pace than previously anticipated, but by early 2027, major central banks will have sufficient room to cut rates.
Fitch expects the European Central Bank (ECB) to raise interest rates by 25 basis points in June to address inflationary pressures from the energy shock. However, with the Eurozone's economic growth already slowing to 0.1%, far weaker than the US, the ECB will be forced to reverse its stance next year and turn to rate cuts to support the economy.
Buffer Factors: AI Investment Boom Supports Asian Economy
A key factor helping to offset the drag from the US-Iran conflict is the surge in AI activity, particularly in Asia. This wave of technology investment, fueled by generative AI, is unexpectedly providing a buffer for the global economy.
Fitch Ratings Chief Economist Brian Colton stated that the world is experiencing a “very evident boom in global IT spending, which is buffering the impact on economic activity in the short term, particularly in Asia.” He pointed out that large technology companies are investing heavily in building AI data centers, purchasing high-performance chips, and deploying computing infrastructure. This year, major technology companies have already spent over $700 billion on AI-related equipment, a scale unimaginable in the past few years.
AI-related infrastructure development has spurred sustained strong demand for chips and related products, providing a favorable boost to technology-exporting economies like South Korea. South Korea's memory chip exports have maintained double-digit growth for several consecutive months. Export data, manufacturing PMIs, and stock market performance in both regions are significantly better than other Asian economies reliant on traditional manufacturing.
Risk warning: Slower growth may bring the AI boom to an abrupt end.
While the AI investment boom is driving record stock market gains, boosting corporate profits, and supporting the broader economy, Fitch warns that this momentum could come to an abrupt halt if global economic growth experiences a substantial slowdown.
The surge in AI-related spending is essentially a pro-cyclical force—when the economy is booming, companies are willing to invest heavily; but when the growth outlook deteriorates, capital expenditures are often among the first to be cut. Fitch's chief economist, Colton, points out that the current high level of activity in AI development largely depends on companies' optimistic expectations for future demand, and these expectations are inherently fragile.
If the US-Iran conflict escalates further, causing oil prices to surpass $100, or global trade slows significantly due to supply chain disruptions, companies may quickly reassess their capital expenditure plans. At that point, the investment boom in AI, seen as a "growth engine," could cool rapidly, instead amplifying downward economic pressures.
Furthermore, Fitch cautioned investors to be aware of the "expectation gap" risk. The market currently has extremely high expectations for the profit growth of AI-related companies, and stock prices incorporate numerous optimistic assumptions. If macroeconomic signals weaken, these overvalued stocks will face a double blow: firstly, actual corporate profits may fall short of expectations; secondly, a reversal in market sentiment could lead to valuation contraction.
In other words, the AI boom could be a "buffer" for the current economy, but it could also be an "amplifier" for future recessions. While investors chase the rise in tech stocks, they also need to remain vigilant about the global growth outlook.
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