The global economy has proved surprisingly resilient in 2025. In the immediate aftermath of Liberation Day, the IMF forecast that the global economy would grow by 2.8% in 2025. It now expects global growth of 3.2% this year.1
The bellwether of economic activity that the market typically relies upon to gauge the current cyclical position of the economy – Purchasing Managers’ Indices (PMI) – points to a recovery in activity that began in early summer and has persisted beyond what could plausibly be attributed to a temporary burst of activity as companies tried to bring forward production and trade to avoid the tariffs. So, we move into 2026 with markets in a much more positive frame of mind about the growth outlook than was the case at the start of April.
The Eurozone economy is likely to accelerate in 2026. The headwind to growth from increased uncertainty over trade policy should fade. Companies are likely to have put capital expenditure on pause back in the spring, but now that there is greater clarity over future trading arrangements, investment should recover. Meanwhile, a new tailwind from fiscal policy should emerge, lifting growth.
The structural shift in the fiscal stance in Germany is the single most important piece of macroeconomic news in Europe this year. The increase in spending on infrastructure and defence should filter through into higher activity next year, lifting the German economy and to some extent the rest of the Eurozone too. The fiscal reset also includes other measures, like a permanently lower VAT rate on restaurant bills and subsidies on energy bills, which might have a more immediate impact on
consumer spending.
But when it comes to prices, we see scope for further disinflation over the next couple of years, where rising global trade frictions could potentially play a meaningful role. The recycling of cheap Chinese exports into European markets could represent a new disinflationary impulse that we suspect has been largely ignored by the consensus. We expect inflation to fall below target in 2027, which will prompt the European Central Bank to deliver a couple more interest rate cuts by the end of 2026 – more than is currently factored into market pricing.
US President Donald Trump’s policy agenda dominates the US macroeconomic outlook. There is room for debate about the quantitative impact of each strand of that policy agenda, but we believe the direction of travel is clear. An increase in tariffs, a looser fiscal stance and tighter immigration policy are all likely to add to inflationary pressure in the economy, even if the net impact on activity is less clear-cut. The Federal Reserve (Fed) is currently talking about a one-off increase in the price level (or what used to be known as transitory inflation), but we believe that inflation is likely to remain persistently above target over the next couple of years.
More importantly, we believe the Fed’s reaction function is evolving. Going forward, we expect the Fed to place more weight on outcomes in the labour market and correspondingly less weight on inflation data. In our view, this shift will lead the Fed to cut a little further over the next couple of years than the market currently expects, against a backdrop of financial conditions that are already easy by historical experience.
We expect China’s pace of economic growth to slow over the coming years, to below 4% by the end of 2027, even with the benefit of additional policy stimulus. We do not expect a bazooka package from the authorities, but we do anticipate front-loading of bond issuance quotas, further policy rate cuts – 10 basis points (bp) per quarter from the fourth quarter (Q4) of 2025 to Q2 2026 – and additional targeted support for strategic sectors.
The reality is that China cannot rely on net exports and property investment to sustain growth at the pace required to meet President Xi Jinping’s target of doubling per capita GDP between 2020 and 2035. We do not share the confidence of most China-watchers that consumption will pick up the slack. Instead, we think officials will continue to rely on an investment-heavy growth strategy, focused on the “new productive forces”, namely advanced manufacturing and technology.
To conclude, the story for 2026 varies from place to place. In Europe, having weathered the storm, the economy looks set to regather momentum. In the United States, there is genuine uncertainty about how the Fed will navigate the economic crosscurrents and political backdrop under new leadership. And in China, the focus will remain on medium-term growth prospects and the extent of any rebalancing away from investment-driven growth.
