What higher energy prices and tariffs mean for the global economy

The second quarter of 2026 unfolded against the backdrop of the war in Iran. The blockage of the Strait of Hormuz cut off roughly one-fifth of the world’s traded energy supplies, driving prices sharply higher, reigniting inflationary pressures and raising fresh concerns about global growth. Yet once again, the global economy proved remarkably resilient.

Despite periodic optimism in financial markets, EDC Economics’ summer Global Economic Outlook (GEO) assumes a return to pre-war transit levels only in 2027. What’s more, International Energy Agency reports of historically low global inventories in May, together with downstream refinery constraints, suggest ongoing supply challenges and energy-related volatility will persist. This points to a more challenging environment for exporters than many anticipated at the start of the year.

How higher energy prices are affecting global growth

At the time of our June 10 GEO update, we expected global energy prices to remain above pre-conflict levels for the rest of the year, with West Texas Intermediate crude oil averaging around US$96 per barrel in 2026 and nearly US$84 per barrel in 2027. While this year’s average will likely be tempered by optimism surrounding the first round of talks between the United States (U.S.) and Iran in June, ongoing uncertainty and efforts to rebuild depleted stocks will keep prices elevated.

Beyond the uncertainty surrounding the war, the global economy continues to contend with renewed tariff threats, adding another layer of pressure on the forecast. In June, the U.S. administration announced tariffs of 12.5% on most countries—or 10% on Canadian and Mexican imports that don’t comply with Canada-United States-Mexico Agreement provisions. On top of that, at the end of July, the administration threatened additional tariffs on a segment of Canadian imports with no exemptions, set to take effect in late August.

As a net-energy exporter, the U.S. is better positioned to absorb these shocks. While inflation-adjusted wage growth has slowed, at times even flirting with contraction, hiring picked up in the last quarter. This continues to support U.S. consumer spending even as confidence remains historically weak. Meanwhile, business investment still benefits from data centre-related infrastructure spending and capital outlays. Overall, we expect the U.S. economy to grow by 2% in 2026 and 2.1% in 2027.

As in other countries, elevated fuel costs have pushed both producer and consumer prices higher, complicating the outlook for the Federal Reserve under its new chair, Kevin Warsh. Earlier expectations for lower interest rates have shifted, and we now expect the Fed to raise rates by 25 basis points before the end of the year. As inflation eases in the second half of 2027, expect the Fed to once again adopt an easing bias, signalling a greater likelihood of future rate cuts.

The Canadian outlook remains more subdued. Despite a slight contraction in the first quarter of the year, we expect Canada’s economy to grow by 1% in 2026, before recovering by 2.1% in 2027, with some downside risk should the new, 50% tariff take effect. Trade uncertainty, tariff exposure and weak business investment continue to weigh on activity. Consumers remain cautious in the face of these challenges, and recent changes to immigration policy have reversed the beneficial impacts of historically high population growth.

While higher global oil prices benefit oil-producing provinces and boost government revenues, soaring energy costs are squeezing purchasing power and weighing on activity elsewhere. Overall, we expect inflation to average 2.9% in 2026, before easing to 2.3% in 2027. Balancing weaker growth against persistent inflation pressures, we expect the Bank of Canada to keep policy steady through most of 2026 and 2027. As a result, the Canadian dollar is expected to average roughly US$0.73 through the end of our forecast horizon, with volatility likely.

The Euro Area faces one of the most challenging near-term outlooks among major advanced economies, given its sensitivity to elevated energy costs and weaker external demand. We expect Euro Area growth of just 0.8% in 2026, rising to 1.3% in 2027.

Germany is expected to underperform, with growth of 0.6% this year and 1.1% next year, supported increasingly by public spending on infrastructure and defence. Weak confidence, soft external demand and higher energy costs continue to constrain private-sector momentum. France is also forecast to expand by 0.6% in 2026 and just 0.9% in 2027. Household spending and business investment remain weak amid inflationary pressures and ongoing political uncertainty ahead of the 2027 presidential elections.

Why exports remain critical to China’s economy

China’s economy, meanwhile, continues to grapple with weak domestic demand and ongoing trade frictions, even as exports continue to boost overall growth. We expect gross domestic product (GDP) growth to be within the government’s slightly lower and more flexible range, hitting 4.7% this year. In 2027, expect growth to slow to 4.4%, still solid by global standards but transitioning to a slower, more sustainable growth path. The country managed the Strait of Hormuz crisis by slashing energy imports and instead relying on domestic stockpiles. This helped companies maintain production for exports, while also easing demand on global supplies.

While the war generally pushed commodity prices higher, gold has been an exception. After reaching repeated record highs in 2024 and 2025, gold prices have entered a consolidation phase, driven by profit-taking, tempered expectations for rate cuts and a pause in safe-haven demand as macroeconomic conditions stabilize. While we expect gold to remain elevated by historical standards, averaging US$4,574 per ounce in 2026 and US$4,700 in 2027, its record-breaking run appears to be over for now.

What the latest global economic outlook means for exporters

The global economy has once again absorbed a major shock, but resilience is showing signs of strain. The disruption in the Strait of Hormuz has pushed energy prices higher, renewed inflation pressures and complicated the policy outlook, while tariff threats continue to cloud the global trade environment.

Growth is expected to slow to 2.8% in 2026, with developed markets growing by just 1.5% and developing markets posting growth of 3.7%. Next year, provided no new shocks derail progress, the global economy should gradually regain momentum. We expect global growth to recover to 3.2%, as developing markets return to a more normal post-pandemic pace of around 4.3% and developed market growth inches up to 1.7%.

This week, a special thanks to Ross Prusakowski, deputy chief economist & director, Country & Sector Intelligence.

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