Global Economic Outlook: Q&A with Dr Matthew Peter

Under pressure, but not over a barrel.

 

The global economy has held up through geopolitical shocks, oil price volatility and stubborn inflation, but the outlook remains finely balanced.

In QIC’s latest Global Economic Outlook, Chief Economist Dr Matthew Peter explores why growth is easing, why inflation is likely to be slow to fall and what this means for interest rates globally and in Australia.

 

The global picture.

How is the global economy faring?

The global economy has slowed, but it has not collapsed. The Middle East conflict and subsequent spike in oil prices have taken the edge off activity, and we expect global growth to ease from 3.5% in 2025 to a below-trend 2.9% in 2026. With oil prices having retreated from their peak, we expect to see a modest recovery to 3.3% in 2027.

 

Will the world avoid a recession?

In our base case, yes – although renewed conflict is a reminder that the path will not be smooth. We expect further occasional flare-ups, but not another sustained disruption to oil flows through the Strait of Hormuz.

Provided inflation expectations remain anchored and energy prices ease through the second half of the year, the global economy should avoid a recession. A worse outcome can’t be ruled out if the energy shock intensifies.

 

When will inflation come back down?

Headline inflation has likely peaked now that energy prices are easing. But core inflation will only come down gradually, and we don’t expect it to return to central banks’ targets until 2028.

 

What does that mean for central banks?

The US Federal Reserve and the Bank of England are likely to stay on hold for an extended period, although stronger-than-expected inflation could prompt a near-term hike. We expect the European Central Bank to raise rates once more in September, and the Bank of Japan to hike again in December. 

 

Where are the stronger areas of global growth?

The US is expected to outperform other advanced economies, powered by its AI investment boom. That same boom is fuelling strong growth among the semiconductor exporters across Asia.

 

The Australian outlook.

How is the Australian economy tracking?

There are signs that the RBA’s rate hikes have slowed the economy, achieving their desired impact. We expect growth to slow from 2.0% in 2025 to 1.7% in both 2026 and 2027, before recovering towards trend at 2.3% in 2028.

 

What is keeping the economy from stalling?

Several supports are helping. Household spending is being supported by healthy savings buffers, modest tax cuts, a resilient labour market and ongoing population growth. Business investment is also holding up, though it is narrowly focused on AI, data centres and renewable energy.

 

Why is inflation still high and when will it return to target?

Inflation remains elevated due to strong demand through 2025, weak productivity and the pass-through of higher fuel and other commodity prices. While headline inflation eased from 4.6% in March to 4.0% in May following the fuel excise cut, underlying inflation continued to rise to 3.6%.

We expect underlying inflation to remain above the RBA's 2-3% target band through 2026, and not return to the mid-point of the band until 2028.

 

What's the outlook for interest rates?

The RBA has lifted the cash rate by 75 basis points this year, to a restrictive 4.35%. Persistent inflation means we can’t rule out one final hike, but with the economy already slowing, we think that is less likely. The more probable path is an extended period on hold, with cuts towards neutral not starting until the second half of 2027. 

 

What are the key risks to watch?

The biggest is the energy shock re-intensifying and inflation remaining elevated. This could lead to a sharper than expected tightening of monetary policy and a more substantive hit to growth. This applies to Australia too, where domestic pressures mean the RBA can't tolerate further shocks to inflation.