Outlook 2026: The world right now

The US economy has weathered the tariff storm with 2% full year growth looking achievable, just as we forecast 12 months ago. Nonetheless, this masks huge swings in inventories and trade.

In terms of domestic demand, the K-shaped narrative continues to dominate both the household and the corporate sectors. Consumer spending growth is overwhelmingly led by higher-income households who have been bolstered by strong asset price gains. Middle and lower-income households are in a more stressed financial position. Business investment tied to tech and AI is soaring while non-tech-related investment has contracted for three consecutive quarters.

The government shutdown has disrupted the economy and could depress 4Q GDP by upwards of 1pp, but much should be recovered in the 1Q GDP report now that workers and benefit recipients are receiving the money that is owed and activity is back to normal levels. Third-party data sources suggest employment growth is stalling and may be turning negative.

The eurozone managed positive GDP growth in every quarter of 2025, delivering a better-than-expected 1.4% for the year. Industrial weakness persists, but lower energy costs offer relief. A Ukraine ceasefire could lift confidence, while delayed German fiscal stimulus, mainly infrastructure and some defence spending, should support growth in late 2026. Risks remain from fragile public finances, especially in France.

A greater number of work days will lift 2026 GDP; we forecast 1.2% growth. Inflation disappointed at 2.2% in November, with core at 2.4%, but is likely to dip below 2% soon. Still, modest growth and sticky prices mean the ECB sees its 2% deposit rate as “a good place” for now.

Economic momentum slowed through the autumn, not helped by prolonged uncertainty ahead of the Autumn Budget. Employee numbers have continued to fall, including now in the public sector, where hiring had until recently helped offset prolonged weakness in the private sector. This is a theme we expect to continue into 2026. Unemployment is on the rise.

The flip side of that is that the inflation outlook is continuing to improve. Private-sector wage growth is running at 2.4% on a three-month annualised basis.

The Autumn Budget was less damaging to near-term growth than headlines implied. While tax hikes worth 0.7% of GDP are planned by 2029, almost none take effect next year. Fiscal policy will still weigh on activity due to the ongoing freeze on income tax thresholds. The deficit is projected to fall from 4.5% this year to 3.5% in 2026.

China’s economy outperformed expectations in 2025, meeting its “around 5%” growth target despite trade tensions with the US. External demand remained the key driver, while domestic firms advanced in tech innovation and self-sufficiency.

However, growth slowed sharply in the second half. Property markets are weakening, fixed asset investment is contracting, and retail sales have cooled as trade-in stimulus fades. With external demand uncertain amid ongoing tensions, policymakers must strengthen domestic demand and restore household and corporate confidence.

Overall, Asia’s GDP growth exceeded expectations in 2025, supported by strong tech demand, front-loaded exports, and government spending. Investment held up well, with Taiwan and Malaysia benefiting from tech-related capex, though surveys show growing caution amid slowing global trade. Inflation stayed subdued across most of Asia, except Australia, thanks to overcapacity in China and easing food and fuel costs, enabling rate cuts. Typhoons may lift food prices temporarily, but improved rainfall and softer oil prices in 2026 should keep inflation benign.

Asian currencies had a mixed year: low-yielders outperformed high-yielders like the Indian rupee, the Indonesian rupiah, and the Philippine peso, amid growth and tariff concerns. Looking ahead, a weaker dollar could help Asia FX, but tariff risks and uneven growth mean local differentiation will drive performance in 2026.

Central and Eastern Europe should return to “normal” in 2026. Poland and the Czech Republic are set to confirm this year’s recovery, with household consumption driving growth while industry should remain muted. Hungary and Romania should also rebound after stagnation, though weaker German growth and limited fiscal stimulus remain key risks. Inflation is largely under control in the Czech Republic and Poland and should stay contained, with some volatility. Hungary and Romania will see easing but remain above central bank targets. External risks lean to the downside, and weaker growth could accelerate disinflation.

Rate-cutting cycles have ended in the Czech Republic and should conclude in Poland by mid-2026. Hungary and Romania are expected to resume cuts in the second half of 2026, continuing into 2027. If downside risks materialise, central banks may have more room to ease than currently anticipated.

The dollar ends the year down about 10%, still weighed by 'Liberation Day' losses. In retrospect, those losses seem to have resulted from an under-hedged buyside raising its FX hedge ratios on its US asset holdings. Those FX hedge ratios now appear more balanced.

EUR/USD has slipped from September highs above 1.19. Bears argue Fed easing is fully priced and eurozone growth will again lag US exceptionalism. Bulls, including us, see lower US hedging costs, stronger eurozone fiscal stimulus, and cheaper energy supporting the euro.

FX volatility is closing at its lowest since mid-2024, with expectations for continued calm into 2026 and sustained interest in carry trades.

We think we’ll hit mythical normal levels for rates through 2026. Even Japanese rates are moving in that direction. In fact, we are practically there in the eurozone. Currently, we have the 10yr Euribor rate at 2.7%. For 2026, our call is for this to head to the 3% area. The add-on of heavier issuance (defence spending) should lift government yields by more than the rise in the ESTR 10yr, thereby widening the Bund swap spread.

In the US, the Fed's rate-cutting agenda is set to be completed in the early months of 2026 (to the 3%-3.25% range). The 10yr swap rate, now at 3.65%, looks low against a backdrop where US inflation is at 3%, and prone to some rising. We see 10yr SOFR edging up to the 3.75% to 4% area. That pitches the 10yr Treasury yield in the 4.25% -4.5% area, assuming some deficit-impacted re-widening in the swap spread.

Oil prices fell in 2025 despite geopolitical tensions and supply risks. OPEC+ shifted strategy to defend market share, boosting supply, while global demand growth remained modest and structural factors capped gains.

The market enters 2026 expecting a large surplus, though Russian supply faces risks from sanctions and Ukrainian attacks. European gas prices also dropped on weaker Asian LNG demand and relaxed EU storage rules.

Despite lower prices, EU storage is below last year and the five-year average heading into winter. Looking ahead, significant new LNG supply should keep global and European gas markets well stocked.

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