Energy shock from the Middle East conflict reverberates across global markets
West Texas Intermediate crude oil prices surged from around US$60 per barrel to nearly US$100 per barrel—the sharpest spike since Russia invaded Ukraine in 2022. Our base-case outlook, reflecting developments through March 16, assumes oil prices remain elevated through the summer.
As the conflict and related shipping challenges deescalate, we expect prices to fall and global oil balances to return to surplus, bringing average oil prices to about US$70 per barrel in 2026 and US$61 per barrel in 2027. Risks to our forecast are weighted to the downside, reflecting unusually high uncertainty. A prolonged closure of the Strait could have non-linear effects on crude oil prices, with disruptions persisting beyond the end of direct hostilities if extraction and refining infrastructure is damaged.
Tariff uncertainty persists despite limits on emergency powers
Overshadowed by the war in the Middle East, a U.S. Supreme Court ruling against the use of the International Emergency Economic Powers Act (IEEPA) to justify tariffs was another critical development. While the decision leaves in place tariffs under Sections 122 and 301 of the Trade Act of 1974, as well as those under Section 232 of the Trade Expansion Act of 1962, it changes how the U.S. administration can use tariffs.
We continue to expect the U.S. to rely on these and other policy tools to apply tariff pressure across countries and sectors, including steel and aluminium, copper and automotive products. However, the ruling should limit arbitrary adjustments to tariff calculations over our forecast period.
EDC Economics continues to expect U.S. economic momentum to carry through, despite global headwinds. As a net energy exporter, the U.S. is better positioned than many economies to absorb the current shock. Despite continued softness in the labour market, overall consumer spending is holding up, and unemployment remains low by historical standards. Business investment in infrastructure and data centres continues and should be supported by new tax and spending provisions. We expect the U.S. economy to grow by 2.3% in 2026 and 2.2% in 2027.
Monetary policy faces competing growth and inflation pressures
Resilient growth, a weakening labour market and rising inflation risk linked to the Middle East conflict create a difficult backdrop for the U.S. Federal Reserve. We expect the Fed to hold policy steady until the end of 2026, when it’s expected to cut the federal funds rate by 25 basis points. A second 25-basis-point cut is expected in early in 2027.
In Canada, the IEEPA ruling is unlikely to materially change the outlook, as sectoral tariffs have had the larger impact on Canadian exporters. These effects are now showing more clearly in the labour market, with tariff-exposed sectors experiencing more pronounced weakness than the rest of the economy.
Business investment also continues to struggle. While higher global energy prices will support oil producers, higher commodity prices will weigh on consumers and businesses facing rising input costs. Overall, we expect the Canadian economy to grow 1.3% in 2026 and 1.9% in 2027.
Inflationary pressures in Canada should be partially offset by policy changes such as the removal of the carbon tax. As such, we don’t anticipate a change in the Bank of Canada’s policy rate this year or next. Alongside a more accommodative U.S. Fed, energy price fluctuations and risks tied to the review of the Canada-United States-Mexico Agreement (CUSMA), we expect the loonie to average about US$0.74 over the forecast horizon, with considerable intra-period volatility.
The Euro Area faces a more challenging year given its reliance on LNG shipments, which could leave inflationary pressures higher than in North America. The bloc also continues to face a surge in Chinese imports and an uncertain trade relationship with the U.S.
In the runup to France’s 2027 presidential election, legislative gridlock and policy paralysis are expected to weigh on business conditions. In Germany, a shift from austerity toward investment-led fiscal expansion and defence spending, together with greater debt‑brake flexibility, is expected to support the 2027 outlook. For the Eurozone overall, we expect growth of 1.1% in 2026, rising to 1.5% in 2027.
China’s government lowered its growth target to between 4.5% and 5%, reflecting an economy under strain as weak domestic demand continues to be offset by large trade surpluses and rising tensions with trade partners. We forecast overall Chinese growth near the lower end of the target range, at 4.6% in 2026 and 4.5% in 2027.
Global growth outlook hinges on geopolitical stability
We entered 2026 with cautious optimism that a resilient global economy, supported by a stable, if strained, trade backdrop, could move beyond the uncertainty of recent years. A renewed surge in geopolitical volatility is now testing that resilience.
Our base-case forecast calls for global growth of 3.2% in 2026 and 3.3% in 2027. However, risks are clearly tilted to the downside and remain highly sensitive to further disruptions. Under our downside scenario, higher oil and commodity prices would re-accelerate inflation and weaken consumption and investment, with impacts varying by region.
Explore EDC’s Global Economic Outlook and Country Risk Quarterly for strategies to manage risk and navigate global trade uncertainty.
Acknowledgment
This week, a very special thanks to Ross Prusakowski, deputy chief economist and director of our Country & Sector Intelligence team.
As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.
