Global economic insights 2026: key trends and predictions

US economic outlook

We have raised our US gross domestic product (GDP) forecasts to an above-consensus 2.2% in 2026, and 1.9% in 2027. 

US activity is being boosted by the investment spending linked to the artificial intelligence (AI) buildout and the wealth effect from the stock market boom. In fact, we are incorporating into our forecasts an ongoing tailwind from AI capital expenditure in the coming years.

However, elevated equity valuations carry the risk that a bubble bursts. While this is not our baseline scenario, should any AI-fuelled bubble go pop, we would expect the US economy to fall into a recession. 

This would look more like the 2001 recession which followed the bursting of the ‘dotcom bubble’, than the 2008 ‘great recession’ after the collapse of the US housing market. 

We expect fiscal policy to become more of a tailwind for US growth in 2026, as tax reliefs and investment incentives within the One Big Beautiful Bill Act deliver a positive impulse. 

The US labour market has moderated – reflecting a fall in labour supply but an even larger reduction in demand – amid elevated trade uncertainty and tight interest rates. 

With those headwinds easing, we don’t expect the softening to spiral into a larger downturn. But because our US growth forecasts are below trend, unemployment will creep higher.

Tariff uncertainty to fade, price surge temporary 

We expect continued reduction in trade uncertainty, even as the overall US weighted-tariff rate settles at a high 15%. 

But should the Supreme Court rule that President Donald Trump cannot impose tariffs under the International Emergency Economic Powers Act, then trade uncertainty could spike. We think the president will find alternative means to re-build tariff levels. However, there is a risk the loss of tariff revenue triggers broader concerns about the fiscal trajectory. 

The impact of tariffs on prices has not yet peaked, and we expect US inflation, currently 2.7%, to reach 3.4% in the first quarter of 2026. But with underlying inflation pressures contained and inflation-expectations remaining steady, the tariff hit looks like a one-off increase to the price level. So US inflation should ease to 2% by the end of 2026.

Fed’s path depends on leadership change

Federal Reserve (Fed) policymakers are divided about the appropriate monetary-policy path in this environment. We expect successor to current chair, Jay Powell, to make cuts two more times when they take over in May 2026.

An upside scenario is of a dovish, but credible, Fed chair taking policy down towards the reasonable lower end of neutral estimates – leading to stronger nominal growth and risk sentiment.  

However, if the new chair is not credible, this could be the trigger for a bond market rout scenario in which both inflation expectations and term premia – the extra yield for longer-term bond risk – move higher. 

China and Japan economic outlook

The US-China trade easing of tensions removes some of the downside risks to Chinese growth. Admittedly, the average US tariff on China is a still-high 30%, and tensions around tariffs, technology restrictions and critical minerals exports could flare up again. 

But Chinese exports have held up well over this period of trade uncertainty, as trade has been re-routed to Asian and European economies.

We still expect challenges to China’s outlook. The housing market will still weigh on growth next year, while the ‘anti-involution’ campaign to remove excess manufacturing capacity may introduce a new drag on investment. Consumer confidence is subdued, albeit past its low point, helped by the performance of the equity market. 

So, we forecast further Stimulus. But this will remain focused on investing in strategically-important sectors on the supply side, rather than demand side. Therefore, it won’t do much to boost ingrained low inflation.

All told, we have raised our 2026 Chinese GDP forecast to 4.5%. That would still be lower than for this year and we are forecasting a further deceleration in 2027. We’ve also lowered our inflation forecasts for both years.

In Japan, the new government has announced a fiscal package worth 3.4% of GDP, which delivers a 1% boost to the economy. This should support growth. That said, tensions between Japan and China remain a major downside risk to growth. 

Meanwhile, headline inflation remains elevated, but food-price growth should moderate. While wage growth has strengthened, real wage growth – wage growth that accounts for inflation – remains negative. 

Europe economic outlook

In Europe, growth will be supported by easier fiscal policy for the next several years, although this shows up most sharply in our 2027 numbers. 

This support is most striking in Germany, where the budget implies a fiscal impulse of 1.5% of GDP. France will continue to run a large budget deficit, but this reflects a failure to make progress towards the European Commission’s Excessive Deficit Procedure targets. 

Headline inflation will drop below the European Central Bank’s (ECB) target (2%) in early 2026 due to energy base effects, but the ECB is likely to look through this and keep policy on hold given fiscal support. Indeed, we expect the ECB to resume rate hikes by late 2027.

Despite US efforts at a peace deal in the Russia-Ukraine war, our base case is for continued fighting in 2026. That will maintain the impetus behind European re-armament.

The UK budget in November included tax increases to finance higher spending and an increase in the government’s fiscal headroom. As these spending increases are front-loaded and the tax increases backloaded, the budget provides a very modest boost to near-term growth, although any hit to confidence and sentiment may undermine this.

The budget also includes measures that push down inflation, which should speed the progress of inflation, currently 3.2% down to 2%, reinforcing our forecast for Bank Rate, currently 3.75%, to fall to 3% next year.