The outlook for the global economy in the second half of the year may depend on a single geopolitical variable: whether the ceasefire between the United States and Iran holds.
According to a new report published by Oxford Economics, the stability of the agreement could determine whether the world economy benefits from lower energy prices and easing inflation or faces another oil-driven shock.
Ryan Sweet described the agreement as the “key domino” for the global economy, arguing that its durability will influence whether existing risks are amplified or contained.
Energy prices remain the critical variable
Oxford Economics forecasts annualized global growth of 3.1% during the second half of the year, accelerating from an estimated 1.6% growth rate in the first six months. The primary driver behind this outlook is lower energy prices feeding through to household incomes and consumer spending.
However, the consultancy places the probability of a durable peace agreement at no better than a “coin flip.”
If the ceasefire survives, the firm expects Brent crude prices to average in the low $70 range per barrel, easing inflationary pressures and improving financial conditions across both developed and emerging markets.
If the agreement collapses, Oxford Economics warns that the consequences would extend far beyond energy markets.
Renewed military tensions test market confidence
The report comes amid renewed military exchanges in the Gulf region. U.S. military forces launched attacks against Iranian targets after Washington accused Tehran of striking vessels near the Strait of Hormuz.
Iran subsequently launched strikes targeting Bahrain and Kuwait, increasing concerns that the fragile ceasefire agreement could unravel despite ongoing diplomatic efforts.
Oil markets reacted immediately to the escalation, with Brent crude prices rising more than 3% and trading above $76 per barrel during Wednesday trading.
According to Sweet, a breakdown in negotiations would likely trigger rising oil prices, tighter financial conditions, renewed inflation pressures and additional stress across global technology supply chains.
Diverging forecasts highlight uncertainty
Not all institutions share Oxford Economics’ relatively optimistic outlook for energy markets.
Morgan Stanley forecast in its mid-year outlook that crude oil prices could return to approximately $90 per barrel by the end of the year, representing a gap of around $20 compared with Oxford Economics’ expectations.
Meanwhile, the World Bank projects Brent crude to average around $94 per barrel this year while forecasting global GDP growth to slow to 2.5% in 2026.
Oxford Economics believes shipping activity through the Strait of Hormuz will provide one of the clearest signals regarding the health of the agreement. The peace framework reportedly included commitments to restore maritime traffic through the corridor within 30 days, making mid-July an important milestone for investors and policymakers.
Trade tensions and AI risks add further uncertainty
Beyond geopolitics, global trade policy remains another major risk factor for the world economy.
Oxford Economics expects new U.S. tariffs to replace existing measures scheduled to expire in late July, potentially increasing effective tariff rates and sustaining elevated trade revenues for Washington.
Europe is also adopting a more defensive trade posture, with the European Commission significantly increasing the number of active trade-defense investigations involving Chinese imports.
These developments are becoming increasingly intertwined with the rapid growth of artificial intelligence industries, which remain heavily dependent on semiconductor supply chains concentrated in Northeast and Southeast Asia.
The report also highlighted concerns raised by the Bank for International Settlements regarding financing conditions in the AI sector. According to the institution, lending to AI companies through private credit markets has quadrupled over the last five years.
Officials warned that reliance on non-bank financing could make any correction in AI markets faster and more severe than traditional banking crises.
A technology correction could reshape growth expectations
Oxford Economics modeled a scenario in which U.S. technology stocks decline by 25% over a twelve-month period.
According to Sweet, such a correction would effectively halt U.S. economic momentum and spill over into global investor sentiment and technology-exporting economies.
Under this scenario, global growth next year would be 1.1 percentage points lower than the consultancy’s baseline forecast.
Central banks and elections become the final dominoes
Oxford Economics expects major central banks to adopt more accommodative monetary policies than markets currently anticipate, although any disruption to energy supplies or semiconductor production could quickly alter that outlook.
The upcoming interest rate decision by the U.S. Federal Reserve later this month is expected to be the first major test for markets following softer labor market data released in June.
Political developments, including the U.S. midterm elections, Israel’s upcoming general election and regional elections in Germany, could also influence fiscal and foreign policy decisions with implications for the global economy.
Why it matters
Financial markets are increasingly interconnected through energy prices, artificial intelligence investment cycles, supply chains and geopolitics. Oxford Economics’ analysis suggests that a single geopolitical development — the durability of the Iran ceasefire — could influence inflation, central bank decisions, technology valuations and global growth simultaneously.
The report also serves as a reminder that economic forecasting uncertainty remains unusually high. According to Oxford Economics, the typical margin of error in its forecasts approaches one percentage point, while the range of potential outcomes surrounding the current outlook is considerably wider than normal.
