Global Economic Scenarios Q3 2026

Our baseline scenario, “TACOil”, involves a continued de-escalation in the US–Iran conflict, with the Strait of Hormuz gradually reopening over the coming months. We have conditioned on oil prices falling back through the second half of the year, ending 2026 around $70 per barrel.   

The initial energy shock has already pushed headline global inflation higher, and some modest second round effects are likely. Inflation therefore remains somewhat elevated in the near term, weighing on real incomes, but without triggering a broader de-anchoring of expectations.

The drag from higher energy prices is sufficient to slow activity, but not to derail the expansion. Several offsetting forces keep global growth around trend. AI-related capex remains strong in the US, supporting exports in parts of Asia. Fiscal policy is a tailwind in the US, Japan, and Europe. At the same time, the fading of US tariff uncertainty, a broadly resilient Chinese economy, and still-accommodative financial conditions all help underpin demand.   

In this environment, the Federal Reserve (Fed) and Bank of England (BoE) remain on hold this year, with a return to rate cuts next year. The European Central Bank (ECB) does not deliver any further hikes this year, while the Bank of Japan (BoJ) lifts rates twice more in October and January. Overall, we give this scenario a 65% probability.  

Despite the latest diplomatic progress, we continue to assign material probability to scenarios in which the Iran-related energy shock proves more persistent. In “closure risk dominates”, negotiations stall and the strait remains effectively closed, even in the absence of renewed escalation. We have conditioned on oil prices grinding higher, potentially back towards $120. In this scenario, the inflation shock is both larger and more persistent, making it harder for central banks to look through it, with the Fed hiking once this year. We give this scenario a 25% probability.  

A more extreme version of this dynamic is captured in our “stagflation” scenario. Here, a prolonged disruption to flows through the Strait of Hormuz, potentially amid a return to hot conflict, generates acute commodity shortages, pushing oil prices to around $150. The shock propagates through global supply chains, creating a sharp inflationary impulse alongside a contraction in activity. The global economy falls into recession even as inflation rises materially. aberdeeninvestments.com This is a particularly adverse combination for risk assets, given the limited scope for monetary policy support. We think the probability of this outcome has declined in recent weeks, in line with signs of de-escalation, but it remains a key tail risk given the non-linear nature of energy markets. We give it a 10% probability.  

Alongside geopolitics, the other main axis of uncertainty in our scenarios is AI. In “AI and capex collapse”, spending on AI-related investment falls sharply, triggering a reassessment of valuations in the technology sector. Tech equities decline, financial conditions tighten, and private credit defaults increase. This could be because of weaker-than-expected monetisation, a reassessment of competitive moats, regulatory intervention, or investors becoming concerned about exuberance following the recent blockbuster tech IPOs. Ultimately the shock causes a US economic downturn, similar to the dotcom bust, with the Fed easing policy materially. We give this scenario a 15% probability, and it is a key risk given current market pricing.   

At the other end of the spectrum, our “productivity boom” scenario sees AI deliver a meaningful uplift to potential growth, particularly in the US. Firms successfully deploy AI without significant labour market disruption, allowing unit labour costs to fall and profit margins to expand. The result is a combination of stronger growth and lower inflation. This creates space for a larger central bank easing cycle, justified by improved supply-side performance rather than cyclical weakness. Early evidence on the productivity gains from AI is somewhat encouraging, and we increased the probability of this scenario to 25%.   

We also consider a more disruptive downside in “AI eats all the jobs”. In this scenario, the pace and breadth of automation are sufficient to generate a sustained rise in unemployment. The policy response is slow or insufficient, and the hit to household income leads to weaker demand, which in turn causes a rise in cyclical unemployment. Overall, the economy enters a prolonged economic downturn with significantly elevated unemployment. Economic history suggests such outcomes are unlikely absent major policy errors, which is why we assign it a probability of only 5%. But the scenario does highlight the potential for AI to create adverse distributional dynamics even as aggregate productivity rises.  

Away from the energy and AI dimensions, several additional scenarios shape the wider distribution. In “technological decoupling”, a sharper fragmentation between the US and China leads to a more bifurcated global economy, with efficiency losses and upward pressure on costs. We give this a 10% probability.   

In “fiscal expansion”, expansionary fiscal policy across the major economies boosts growth, but also raises inflation and pushes up both policy rates and term premia. We assign a 10% probability to this scenario, as the path to fiscal easing in some countries, the US in particular, has narrowed.  

And in “bond market rout”, a combination of more aggressive balance sheet reduction from the Fed and concerns around fiscal sustainability in the UK and Japan leads to a sharp rise in yields, tightening financial conditions independently of central bank rate moves. We put a 10% probability on this scenario as Kevin Warsh is unlikely to be able to push through aggressive balance sheet reduction in the near term.