Key takeaways:
- We believe 2026 is likely to be an environment of high uncertainty, with significant geopolitical risks and economies weighed down by tariffs and other policies
- This is likely to result in slowing global growth: with several key economies at risk of entering recession
In 2026, we expect an era of heightened disruption and policy divergence among major economies, fundamentally altering traditional growth patterns and investment dynamics. Globally, we are entering an environment where domestic priorities increasingly override international coordination.
In our base case, the United States of America’s (US’s) economy slows and falls into a mild recession, as tariffs and other government policies, rising unemployment and other factors weigh upon economic growth. Conversely, the eurozone and Japanese economies are likely to see an upswing, supported by a meaningful increase in fiscal stimulus. Substantial fiscal spending may benefit China, too. Overall, however, its economy will likely undergo either stable or slightly lower expansion, given formidable headwinds, including a still-ailing property sector. We also expect steady to modestly lower growth in the United Kingdom (UK), buoyed by a more dovish Bank of England (BoE), but restricted by some tax increases. Meanwhile, emerging-market countries, especially in Asia, are prone to stronger forecasts, underpinned by a weaker US dollar and region- and country-specific factors.
Below are the key trends we expect to see unfold:
Monetary-policy fragmentation
Central banks now pursue markedly different paths. In the US, the Federal Reserve navigates recessionary pressures, while managing persistently higher inflation, which limits rate cuts. Across the Atlantic, the BoE’s concerns about elevated inflation in the UK will likely be allayed by softening figures, resulting in further monetary easing during 2026. This should help support the economy in the face of the weakening demand we expect to see. And the European Central Bank (ECB) is likely to hold steady on monetary policy but has the flexibility to address any weakness – if it appears – given that inflation is close to target in the eurozone economy. The Bank of Japan (BoJ) is in the process of slowly normalising from an ultra-accommodative policy stance that has been in place for many years.
Globally, central banks’ approaches to managing their balance sheets have diverged, too. The US recently ceased quantitative tightening (QT), while the BoE is scaling it back. Conversely, the ECB continues to add restrictive measures, and the BoJ is conducting both quantitative and qualitative tightening, having sold its bank stocks and planned to sell its equity exchange-traded funds (ETFs) and Japanese real estate investment trusts (REITs). Emerging market central banks chart independent courses — with some fighting inflation, but most likely to ease over the next year — to support domestic growth.
This divergence is creating new capital flow patterns and currency volatility that will help define 2026's investment landscape.
Fiscal sustainability under fire
Developed countries are liable to encounter increasing fiscal pressure, given widening budget deficits, higher debt levels and relatively high costs to service that debt. That could translate into greater political disruption and the rise of extremism as the need for budgetary changes – whether it be government spending cuts or tax hikes – potentially incites negative reactions from some affected groups.
In France, the imperative to reduce the budget deficit has erupted into governmental dysfunction; becoming the Achilles heel of multiple prime ministers. The French 10-year government bond yield rose above 3.5% in late September at the height of the discord. The nation has significant challenges ahead as it attempts to reach consensus on a budget that puts the country on a path towards greater fiscal sustainability.
Other developed economies must withstand similar political stress around fiscal sustainability, including the UK, Korea, Japan and the United States. In 2024, for the first time, the United States spent more money servicing its debt than on its defence budget, raising concerns about whether it can remain a great power (Ferguson’s Law posits that no great power can remain one if it spends more servicing its debt than on defence). In 2025, following Congress’s passage of the One Big Beautiful Bill Act, Moody’s downgraded the US’ credit rating on fiscal sustainability concerns.
Fiscal tension may well increase in 2026, which could result in greater political divisions and instability. Another effect is likely to be increased concerns about fiat currencies; it also could potentially trigger a stronger bout of bond vigilantism.
Rise of the ‘visible hand’
Increasingly, the US government is directly involved in economic activity, including targeted investments in specific companies and sectors. The US appears to be adopting elements of a more directed economic model, making highly unusual investments in companies. Other developed economies have also been using industrial policies to help drive economic growth and, in some cases, promote national security.
This multiyear trend will likely continue in 2026. We could see more protectionist threats and policies, such as export controls on critical materials , technologies and computer chips, as well as subsidies and targeted investments to support areas such as technological innovation. In particular, China’s industrial policy is focused on achieving self-reliance in supply and value chains, as well as leadership in specific advanced technologies.
This trend could weigh on economies and help further the march towards deglobalisation.
Creative destruction, or just destruction?
The artificial intelligence (AI) investment juggernaut has been strong in 2025, but we might see risks to the buildout emerge. The AI capex investment boom might be slowed by limited access to rare earth materials and/or the need for greater energy, as well as greater difficulty obtaining financing for such investment. In addition, AI capex spending could also be curtailed by early results which indicate that companies are not yet realising the expected benefits of AI.
We might see a substantial rise in secular unemployment due to AI adoption. AI could also continue to cause economic concentration, with consumer spending increasingly driven by high income households benefiting from substantial exposure to the stock market. We expect artificial intelligence will likely exacerbate wealth and income inequality, and could lead to greater political instability, especially given the fragile fiscal situation in several countries.
In short, 2026 is likely to be an environment of greater uncertainty and peril, with a wide range of possible outcomes. It is likely to reward diversification and demand nimbleness in order to take advantage of opportunities and avoid risks.
The outlook for key global economies
US GDP as a % of global GDP
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The base case: a modest recession in the US, especially if investment in AI slows.
The United States is a consumer-driven economy, with approximately 68% of GDP attributable to household consumption. Consumers’ ability and willingness to spend is of critical importance. This segment is likely to be under increasing pressure from a variety of forces, notably decreasing affordability and rising unemployment. There are other headwinds as well. One in four US adults under the age of 40 has student loan debt, with the median borrower owing between US $20,000 and US $24,999. The buildout of AI infrastructure has helped drive a rise in utility prices. In fact, household utility costs spiked by 41% between 2020 and 2025 based on prices for electricity, gas and water. Households are also confronting rising health insurance costs due to policy changes and rising property-insurance costs. Not surprisingly, consumer sentiment is at very low levels.
While retail sales have been solid recently, much of the spending is being driven by higher income households, whose fortunes are far more sensitive to stock-market performance than inflation. The economy is currently K-shaped (where different earning segments experience diverse outcomes). According to Moody's Analytics, there is currently a high level of consumption concentration in the US: it is currently attributing 49% of spending to the top 10% of earners. It seems likely that the upper leg of the ‘K’ could thin out as we see more white-collar jobs eliminated by AI, in addition to normal cyclical job losses as the economy slows. In other words, wealth and income inequality may be further exacerbated. And if we were to see a stock market downturn, then consumer spending by high income households would likely deteriorate.
With approximately 17.5% of gross domestic product (GDP) attributable to business investment, it is very important to economic growth – and productivity. AI spending has been a critical part of business investment, so much so, that the US economy in 2025 has seemed like a one-trick pony. According to research by Harvard economics professor Jason Furman, 92% of total GDP growth could be attributed to AI expenditure for the first half of the year. Without the increase in data-centre construction, he calculated that GDP growth would have been minimal. Therefore, continued AI investment is key to an economy that is otherwise muddling along – and to the continued strength of the equity market, since AI stocks have been largely responsible for the rise. If investment was to slow, it could send stocks downward, with concomitant negative ramifications for higher income consumer spending.
University of Michigan Consumer Sentiment figures dip
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Share of household income is growing for the top 5% vs. the bottom 20%
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Source: University of Michigan Survey of Consumers, 9 November 2025; US Census, 9 September 2025 (data as of 31 December 2024).
Government spending accounts for 17.3% of GDP. Its composition has changed, with a greater portion of spending in areas that have historically had lower multiplier effects, such as expanding the ‘estate tax’ cut, at the expense of forms of spending with higher multiplier effects. In particular, the US has cut spending in areas which could negatively impact the healthcare sector (a significant source of job creation) and it is withdrawing money already allocated to states for green energy projects; infrastructure projects typically have high multiplier effects. This in turn worsens the forecast for electricity costs.
Tariffs and immigration policy are likely to be two strong headwinds for the US economy in the next year. Tariffs distort trade and create inefficiencies by losing the benefits of comparative advantage; in short, they slow economic growth. We are already seeing signs that tariffs are hurting American manufacturing. Because nearly half of imports are unfinished goods used by the US manufacturing sector, tariffs are increasing costs and lowering factory output. Companies have been passing on a larger portion of tariffs to their customers, which is adding to the affordability crisis in the US. And because tariffs are a regressive tax on the American people, they also exacerbate wealth inequality.
The US’s immigration policy is impacting both legal and illegal immigrants. The imposition of an US $100,000 fee for new H1B visas is likely to have a negative impact on innovation in the US, as it will deter companies from bringing highly skilled workers to the country; they will likely site them elsewhere. Current US immigration policy has resulted in more than 500,000 deportations and 1.6 million self-deportations thus far this year, according to the US Department of Homeland Security. Current immigration policy is already resulting in labour shortages, increased costs and lower tax revenue and that is likely to grow as immigration enforcement continues.
The US economy is likely to see some monetary policy easing over the next 12 months, given the likely weakening of the US economy as well as the change in leadership at the Federal Reserve. However, that is unlikely to be an adequate tailwind given the significant headwinds facing the economy. There is also the potential that inflation remains persistent, which could curtail easing.
Net exports contribute -4.2% to GDP because of the negative current-account balance. However, the trade gap is likely to decrease modestly in 2026 given high tariffs.
Chinese GDP as a % of global GDP
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The base case: Stable to slightly lower growth (c. 4.7 - 5% p.a.).
Despite significant tariffs, property sector woes and supply-chain diversification away from the country, the Chinese economy has proved resilient in 2025. Targeted stimulus underpinned the economy and acted as a substantial countervailing force to tariffs. That is likely to continue in the coming year.
Household consumption currently represents a comparatively low 40% of Chinese GDP. But consumer confidence has been weak since the start of the pandemic. In addition, property-market weakness means households’ net worths have been lacklustre, since households have more exposure to real-estate assets than stocks, resulting in lower levels of consumer spending given the weaker wealth effect. A social media trend, the ‘consumption downgrade’, has seen households substituting in less expensive items.
China consumer confidence over the longer term
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Source: Organisation for Economic Cooperation and Development, 2025.
However, China has begun providing material stimulus in several different areas. In particular, it has promulgated targeted policies aimed at spurring on more domestic consumption. Chinese President Xi Jinping has already vowed "to make domestic demand the main driving force and stabilising anchor of growth." Consumer sentiment is on a modest upswing, and this may continue in 2026 if the stimulus spigot stays uncorked. Chinese policymakers are also encouraging greater investment in stocks, which could improve the wealth effect impacted by households’ heavy exposure to the property sector.
China consumer confidence over the past year
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Source: Organisation for Economic Cooperation and Development, 2025.
Business investment represents 40% of GDP, and the Chinese economy is likely to benefit from an acceleration in AI investment, just as the US has, given its strength in AI-related technology. For example, in September, Alibaba announced its plans to substantially increase its AI capex spend over the next three years. China is also stimulating investment through its industrial policy. In March, it announced a US $138 billion ‘national venture capital guidance fund’ to support emerging technologies in industries where the government wants to compete, including quantum computing, artificial intelligence, semiconductors and renewable energy. As an aside, China has historically been strategic and focused on specific areas of technology that it believes are important for its national security and long-term economic strength. For example, it has developed AI-assisted humanoid robots that could counter some of the problems created by China’s demographic cliff.
Patent applications filed by country
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Source: World Intellectual Property Organization, March 2025.
Revenue in the computing market, in US $billions, actual and estimated
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Source: Statista Market Insights, as of 3 February 2025.
Government spending is about 17% of GDP. China has ramped up defence spending by more than 5% in 2025, and is likely to further increase spending in 2026. Chinese monetary policy is likely to be supportive in the coming year, which should also be mildly positive for the economy. Net exports represent about 20% of GDP, a figure which could fall given the tariff environment.
Eurozone GDP as a % of global GDP
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The base case: An acceleration in growth.
Eurozone growth has been modest in the past several years, with peripheral economies seeing stronger economic growth than core economies recently. In particular, Germany’s manufacturing sector has experienced headwinds. However, a game-changer occurred earlier this year; European Union (EU) countries agreed to meet a 5% of GDP level for defence and defence-related spending (i.e., infrastructure) by 2035.
Germany, the largest and therefore most consequential economy in the eurozone, which comprises 4.7% of global GDP, has a low debt-to-GDP level with the capacity to take on debt to spend more on defence, and it has already begun to spend. This is likely to be an important driver of economic growth in the coming years, and should be a strong positive for the country’s manufacturing sector. Pro-growth reforms are already underway, with more in the offing.
Defence-related eurozone spending as a % of GDP
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Source: European Defense Agency, September 2025. Eurozone Defence Agency, September 2025.
Defence spending vs. debt service
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Source: defence expenditures for 2024: Stockholm International Peace Research Institute (SIPRI); interest expenditures for 2023: International Monetary Fund (IMF); social expenditures for 2022 source: Our World in Data, sourcing the OECD and the World Bank.
France is met with fiscal challenges from budget deficits and spending adjustments, which may impact consumer confidence and economic growth, though this is unlikely to significantly offset broader eurozone tailwinds. France is experiencing significant political instability, largely around the budget deficit and government spending cuts, which should weigh down consumer confidence. France is likely to provide a drag on the eurozone economy, but not a significant one.
Household consumption accounts for about 52% of GDP in the eurozone; we expect it to modestly grow in the coming year. In this, it is supported by low unemployment (6.2%, which is low by eurozone standards). Household balance sheets are in good shape – debt as a share of disposable income is at its lowest level since 2004. Real wages are improving, as inflation is well contained.
Eurozone investment accounts for about 22% of GDP. The business investment rate has been lower in the last fifteen years than it was before the Global Financial Crisis. However, the investment rate could improve given the EU’s drive to reduce business regulation and achieve other structural reforms. In addition, the eurozone is likely to start to see the benefits of a brain drain from the US, which has already started as the US reduces funding for scientific research. These could spur an increase in innovation and business investment:
- The European Commission announced a €1.25 billion initiative to attract scientists to Europe called ‘Choose Europe for Science’
- The University of Aix-Marseille has launched the ‘Safe Place for Science’ program, creating a €15 million fund to offer research grants to US professors
- The Netherlands has created a short-term ‘Safe Haven Fellowship’ to support scholars, writers, artists and journalists
- The Research Council of Norway announced a US $10 million program to attract experienced international researchers
- The Free University of Brussels in Belgium created a US $2.7 million fund to attract foreign researchers
- Spain’s government established a €45 million fund, aimed to attract US researchers to the country
Eurozone government spending represents about 20% of total GDP. Eurozone countries’ commitment to increasing defence and defence-related spending to 5% of GDP by 2035 will cause an increase in fiscal spending that should be very stimulative.
Net exports are a negative contributor to GDP and the trade gap could increase in 2026, given US tariffs. The ECB is likely to keep rates steady over the coming year; however, it has the flexibility to ease as necessary, given that inflation is now being tamed.
Japanese GDP as a % of global GDP
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The base case: A modest growth increase.
The Japanese economy faced headwinds in 2025, weighed down by tariffs and higher inflation. These contributed to the surprise election outcome in the summer of 2025 and growing public calls for more stimulus.
Now Japan has a new prime minister, Sanae Takaichi, who is ushering in another chapter of Abenomics – but her own brand of it, anointed ‘Sanaeconomics’. She is a strong proponent of fiscal stimulus and appears comfortable with deficit spending to promote economic growth. She also is focused on building out a strong military, turning the page on a recent history of pacifism, which will send significant stimulus into the economy. Her cabinet has already approved a massive US $135 billion stimulus package – the largest since the pandemic. In addition, she will likely draw Japan into a closer relationship with the US, which should help trade.
Household consumption represents about 55% of GDP and so the health of the consumer is extremely important to the economy, especially when US tariffs are having a negative effect on exports. The consumer is under inflationary pressure, but has seen strong wage growth. Our outlook for consumer spending is positive, as it may receive a boost from strong fiscal stimulus over the coming year.
Recent business investment has been relatively strong. This is likely to continue, given that ‘Sanaeconomics’ will probably result in stronger business confidence.
A headwind could come from the BoJ, which seems intent on normalising monetary policy. It is likely to hike rates in 2026, in addition to performing some quantitative and qualitative tightening. Inflation is also a concern; it weighs on consumer and business sentiment. However, the BoJ may have a difficult balancing act, given concerns that aggressive US trade policy could weigh down Japanese exports, necessitating a less hawkish monetary policy.
Another headwind could come from bond holders, who could react negatively to an increase in deficit spending. This could drive up borrowing costs, especially for longer-dated bonds. Finally, heightening Japan-China tensions, if they persist, could put a damper on consumer spending and business investment.
UK GDP as a % of global GDP
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The base case: Stable to slightly lower growth.
Thus far the UK economy has been surprisingly resilient, able to withstand multiple headwinds. That should continue in the coming year.
Household consumption represents about 61% of GDP, so the health of the consumer is key. Fiscal policy should be more positive than expected, with increases in spending in specific areas with higher multiplier effects. However, certain policies implemented in 2025 have resulted in higher unemployment, which should drag on consumer spending.
In terms of business investment, some targeted policies could be supportive for growth, such as infrastructure spending and homebuilding measures.
The UK has been plagued by fiscal sustainability issues in recent years. Before the Autumn Budget was released, there was fear that the country would experience another ‘Truss moment’, with long-dated bonds selling off and yields moving much higher, if the budget did not deliver improved fiscal discipline. It was incumbent on the Chancellor to gain fiscal credibility without hurting the UK economy through major tax increases and/or large government spending cuts.
However, Chancellor Reeves appears to have been able to thread the needle. The budget cobbled together a wide variety of tax increases, in order to deliver adequate revenues for the UK – in fact, revenue was greater than expected. However, the tax increases do not appear to create a significant headwind for UK economic growth. We expect to see monetary-policy easing from the BoE in 2026, which should support economic growth.
The base case: Emerging markets may receive a boost from a weakening US dollar, a trend which is likely to continue in 2026. This could spur more capital inflows into emerging markets.
We find the most attractive area for growth within emerging markets is Asia, which should benefit from substantial foreign direct investment and favorable demographics. While we are likely to see stable to slightly lower growth in China, Indian and southeast Asian economic growth should be buoyed over the next year, despite headwinds from US tariff policy. These countries should continue to benefit from a growing middle class which increases consumption, as well as supply-chain diversification away from China. In addition, tax reforms and supportive monetary policy should provide tailwinds for India.
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