Why does global growth appear stable while risks are tilted to the downside?

  • Goldman Sachs believes that since 2026, growth globally and in the G3 economies has been broadly consistent with its estimates of potential GDP growth: the positive effects of fiscal easing and the AI boom have offset the drag from the Iran war and higher US tariffs.
  • The bank's baseline forecast calls for a similar growth pattern in 2027, provided energy prices fall, offsetting the weakening impetus from fiscal policy and AI. But concerns about renewed escalation in the Middle East have pushed up energy prices. Gasoline, diesel, jet fuel and natural gas prices in Europe and Asia are near or above their 3–April highs, potentially weighing on consumers and energy-importing economies.

How could rising long-term interest rates weigh on growth?

  • Goldman Sachs notes that large fiscal deficits, AI-related borrowing and central bank rate hikes are being reflected more clearly in long-term interest rates. Since the start of 2026, the average yield curve across advanced economies has risen by about 100 basis points.
  • If this increase persists, Goldman Sachs estimates that weaker housing, durable goods consumption and business investment will cumulatively reduce GDP by 0.6%. The bank's existing forecast includes only part of this drag because it expects fewer central bank rate hikes than markets have priced in and a corresponding decline in bond yields.

AI investment is still growing, so why would its economic boost weaken?

  • Goldman Sachs expects AI investment to continue rising rapidly, but the increase in its share of GDP to slow over the coming year. Combined with the fading boost from the US increase in depreciation deductions last year, this will weigh on capital spending growth, particularly in the US.
  • AI also boosts consumption through the wealth effect. Goldman Sachs estimates that this effect raised US consumer spending growth by 0.4 percentage points over the past year, equivalent to about 0.25% of GDP; if AI-related stocks continue to fall, the boost could fade faster over the coming year.
  • Goldman Sachs's baseline view remains that AI investment will ultimately raise productivity and economy-wide profits, but labor market adjustment could have negative effects in the short term. In the US non-manufacturing sector, the share of firms using AI in daily operations is significantly negatively correlated with employment growth and significantly positively correlated with the unemployment rate.

How do inflation and financial stress affect the path of central banks?

  • Goldman Sachs expects the Federal Reserve to hold rates on 28 October, but, with inflation still high, it is very likely to raise rates by another 25 basis points to 4%–4.25% on 9 December. The bank expects a weakening boost from tariffs, energy and AI-related prices to bring substantial disinflation next year; if inflation is higher, especially if energy prices continue to rise, another rate hike is possible in March.
  • Goldman Sachs expects the European Central Bank to make its final rate hike in December, taking rates to 2.75%, but turbulence in the French bond market has increased downside risks to this view. The turmoil has already tightened financial conditions and is expected to lower annualized growth by 0.25–0.5 percentage points over the next few quarters; if it intensifies, a rate hike could trigger market concerns about financial fragmentation in the euro area.
  • The bank's most distinctive global call is that central banks will raise rates fewer times than markets currently price in.

What constraints lie behind the upward revision to China's growth forecast?

  • Third-quarter growth was slightly stronger than expected, prompting Goldman Sachs to raise its forecast for China's 2026 GDP growth to 4.6%; however, real estate activity and fixed-asset investment continued to contract year over year.
  • Year-on-year growth in nominal retail sales recovered to 1.1% in September, yet larger retailers, for which sales statistics are relatively more comprehensive, still recorded a marked year-on-year decline. Goldman Sachs believes domestic demand is growing slowly at best, and that the trade surplus would need to continue expanding substantially to sustain the official GDP growth target of 4.5%–5%.
  • The surplus is already equivalent to 1% of global GDP; further expansion would squeeze overseas output and employment more noticeably. Trading partners could therefore raise trade barriers, in turn affecting China's exports and GDP.