World Growth Holds Up, but Real Interest Rates Rise: Fitch Ratings

World growth is holding up well in the face of the energy price shock, but real interest rates are rising, Fitch Ratings says in its latest Global Economic Outlook. Fitch has raised its forecast for global GDP growth in 2026 by 0.2pp to 2.6%, down only marginally from 2025 and close to the long-run trend.

US forecasts for both 2026 and 2027 have been increased by 0.2pp to 2.1% as consumption growth defies the slowdown in real household income and the AI capex build-out shows no sign of slowing. Eurozone activity has also shown resilience, and forecasts have been edged up, with German GDP expanding by 1% yoy in 2Q26 after three years of stagnation.

Korea has seen a big upward revision as the boom in global IT spend intensifies – also supporting other economies including Mexico and Japan – while growth in India remains very strong. However, China’s forecast has been cut by 0.1pp to 4.5% as falling fixed-asset investment and weak consumer spending dampen domestic demand, contrasting with stellar export growth. Brazil’s economy is slowing as high real interest rates weigh on credit growth and spending.

The global monetary policy outlook has shifted significantly. The new Federal Reserve Chair Kevin Warsh has ushered in a more hawkish regime, the Bank of Japan has accelerated tightening, and the ECB has moved rates into mildly restrictive territory to mitigate the risk of second-round effects from volatility in global energy prices lasting longer than expected.

“We have seen a big shift in the outlook for real policy interest rates over the next couple of years as a more hawkish Chair takes the helm at the Fed and central banks strive to ensure we do not see the sort of second-round effects from input cost shocks that played out after pandemic” said Brian Coulton, Chief Economist.

Fitch expects the Fed to raise rates again in December and hold them at 4.25% next year. This would imply rates at end-2027 a full 125bp higher than in June’s Global Economic Outlook forecast, despite a slight downward revision to our US inflation forecast as wage growth has slowed. We also expect the ECB to raise rates once more, in October, but with a low risk of second-round effects we see this year’s rate rises being reversed next year as oil prices fall to USD70 a barrel in our base case.

The prospect of higher real policy interest rates over the next couple of years has been a key driver of rising global bond yields. But supply and demand factors may also have played a part. The rise in real yields has occurred across the maturity spectrum and some measures of term premia have risen. Sovereigns with weaker public finances have generally underperformed the wider market and rising yields have coincided with a pick-up in US corporate financing activity. This is taking place as the footprint of central banks in bond markets continues to diminish. Higher yields will weigh on US housing.

The AI boom is strongly supporting US growth and with some equity valuation metrics looking elevated there are risks from a correction in equity markets and a pull-back in AI capex.

Rising GDP deflator inflation – as unit profit growth picks up and IT goods prices surge – signals risks of more persistent inflation pressures in the US that could prompt faster Fed hikes, particularly if geopolitical developments keep oil prices high. Meanwhile, China’s growing export competitiveness presents challenges for European growth.