New Delhi: The global economy is headed for a slower growth phase over the next two years, with India also expected to lose momentum, as an extended US-Iran conflict threatens to trigger a fresh energy shock, reignite inflation and force central banks into tighter monetary policy, according to Moody’s Analytics.
In its latest global outlook, ‘Running Hot, Running Cold’, Moody’s said the world economy is becoming increasingly divided, with countries and industries benefiting from the artificial intelligence (AI) investment boom outperforming those weighed down by geopolitical tensions, higher commodity prices and trade disruptions.
The report said that the combination of geopolitical uncertainty, persistent inflationary pressures and tight monetary conditions means the balance of risks remains tilted decisively to the downside. “The world economy is unlikely to derail. But uncertainty around the baseline forecast runs high, and it would not take much to tip the trajectory towards a sharper slowdown, or even a recession,” it said.
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The agency expects global GDP growth to slow to 2.5% in 2026 from 2.9% in the previous year, before recovering modestly to 2.8% in 2027, remaining below the global economy’s long-term potential growth rate of over 3%.
For India, the report does not specify numerical forecasts but says the country “will lose a step” alongside the broader global slowdown, reflecting weaker external demand, higher energy costs and tighter global financial conditions.
Already lowered
Already, the Reserve Bank of India (RBI) has lowered India’s real GDP growth projection for the 2026-27 fiscal year to 6.6% from the earlier estimate of 6.9%. This view is shared by the World Bank that has also pegged India’s GDP growth at 6.6% this fiscal year. The Asian Development Bank, which had projected India’s GDP growth at 6.9% this fiscal year in April has also trimmed the projection to 6.6% for the year. Meanwhile, the International Monetary Fund (IMF) has marginally lowered its growth view to 6.4% for FY27, 10 basis points lower from its previous 6.5% estimate.
“The AI boom has prevented a steeper downturn,” Moody’s said, noting that massive investments in data centres, semiconductors and computing infrastructure have created a K-shaped global economy, where technology-driven sectors continue to expand while traditional industries struggle under higher costs and geopolitical uncertainty.
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However, the ratings firm’s economists warned that the resilience offered by AI may not be enough if tensions in West Asia escalate further. A prolonged disruption in West Asia and renewed attacks affecting shipping through the Strait of Hormuz could sharply raise oil prices, spiking inflation worldwide and undermining economic growth, it said.
Although a brief ceasefire had briefly restored shipping through the strategic waterway, Moody’s noted that the situation remains fragile after renewed threats of military action and attacks in the region.
“A fresh flare-up in the Middle East or a new and drawn-out disruption to commodities moving through the Strait of Hormuz would send oil prices well above the baseline, lifting inflation and hurting growth,” the report said.
Sharpening trade-offs
Such a scenario would sharpen the trade-offs facing central banks—cut rates to support the real economy and risk faster inflation, or raise rates to curb inflation and inflict more damage on growth, Moody’s Analytics said. “Rate hikes will not reopen the Strait of Hormuz,” Moody’s said, arguing that tighter monetary policy cannot resolve supply-driven inflation originating from geopolitical disruptions.
Still, it expects several central banks to maintain restrictive policies for longer, with additional tightening likely from institutions such as the European Central Bank and the Bank of Japan later this year.
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The report warns that higher borrowing costs could further weaken business investment and consumer spending, amplifying the slowdown already underway across major economies.
The US is projected to grow by an average of 2% during 2026 and 2027, significantly below its recent pace, while China is expected to slow down from 4.6% in 2026 to 4.2% in 2027 amid weak domestic consumption and continuing property sector stress, Moody’s Analytics said. The euro area is forecast to expand by only 0.8% in 2026 before improving to 1.6% in 2027, while Japan is expected to grow by less than 0.5% annually over the two-year period.
Principal support
Moody’s said the AI investment cycle has become the principal support for global growth, particularly in Asia, where semiconductor production and electronics exports have surged.
Taiwan, South Korea and other technology-intensive economies have benefited disproportionately from booming demand for AI infrastructure, while countries less integrated into global technology supply chains have struggled with weaker growth.
India has also benefited from stronger electronics exports as part of the broader AI supply chain, although the gains are smaller than those seen in semiconductor manufacturing hubs.
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Beyond geopolitical tensions, Moody’s identified several additional factors clouding the outlook, including unresolved US tariff policies, growing trade friction between China and the European Union, restrictions on rare-earth exports and elevated financial market valuations.
For India, whose economy has remained one of the fastest growing among major nations, the report suggests that external headwinds rather than domestic weaknesses are likely to become the principal constraint over the next two years, particularly if higher oil prices widen the import bill, fuel inflation and delay any easing in interest rates.
