What's next for the global economy in 2026? — Full-Year Outlook

[00:00:00] Speaker 1: Welcome everybody to our 2026 outlook podcast where I'm once again joined by the team to take you through both the macroeconomic and the market view of the world in the coming year. Now as always this is a two-part podcast the first one is going to be about the economic outlook and then the second podcast which you please do tune into has been looking specifically at the financial markets and what they could have in store for all of us. So I'm going to start off with turning to Charlotta on the global outlook. We had remarkable policy initiatives coming out of the United States, we had tariffs the highest for about a hundred years so there was a lot going on. Surely 2026 is going to be a smooth run relative to 2025. Yeah let's hope it's going to be slightly less exciting [00:00:50] Charlotta: than the last year was. When we look forward we see growth holding up trend-like which is pretty good in an economy that's really facing quite strong headwinds from from the tariffs. Compared to the past what is really kind of emerging as a new growth driver at least looking backwards over the past past decade or so is investment and that is really helping to support growth globally and it's an encouraging sign. It's a year when we don't actually see much downside on the inflation side. Inflation has already come down moving sideways maybe edging a bit lower in some regions and it's also a year when we contrast to last year we don't see those kind of rate large rate cuts that we saw last year. A bit more policies in to come but not not really the key driver of growth. So for 2026 I would really watch investment. I think that would be the key driver of resilience in the global economy. [00:01:46] Speaker 1: I mean I was going to say it always sounds a bit dull. Trend-like growth globally, inflation coming down a little bit, interest rates at the margin coming down as well. What is your [00:01:56] Charlotta: biggest worry for 2026? It's probably inflation. There's a lot of spending on, we know all about it, on tech, on AI. There are supply constraints in that field and inflation is still a little bit too high to for central banks to be really comfortable. So we're very clear what the base case is. Inflation should be contained so we don't expect a re-acceleration in inflation and I think that's good enough actually for 2026. And of course my key risk is probably to watch inflation if we see any kind of [00:02:29] Speaker 1: re-acceleration there. And any upside, any upside risks that you could say well actually I mean you mentioned technology. I mean some of the numbers that we've seen bandied around in 2025 have been mind-boggling. Are we going to get more of the same in 2026 and what does that mean from a growth [00:02:45] Charlotta: dynamic, a global growth dynamic? Yeah definitely I think it's investment and in combination with fiscal spending that could really create a stronger growth environment where you could even see growth rising above trend. That's not the base case. There are still constraints in the economy. Interest rates are still high. The consumer sector is still quite weak. So I think it's really the investment side. I would expect to see more of that. Importantly I mean the whole AI sector it has grown at a very very rapid pace and I think now the size of that sector is still small but it's becoming big enough to make a difference at a national and even global level. Now you mentioned that maybe interest rates [00:03:27] Speaker 1: don't come down very much more although that's still probably the direction of travel. But what about the fiscal side? Because I know you've been touching on this in the past and saying actually 26 could be the year where certainly in the first half there is a fiscal impulse and could that change [00:03:40] Charlotta: the outlook for the year? I think that's already well known. It's quite clear. We know about the US, we know about Europe so I think the fiscal piece is inside that number. Yeah. Okay so that's not a bad [00:03:51] Speaker 1: starting point. Let me turn to you Puneet because you know she also mentioned that the growth dynamic is going to be trend-like. When we look at what's happened so far in 2025 you know financial markets have been up, interest rates have been coming down. What does that mean for financial conditions more broadly and how do you see that affecting the global growth dynamic in the coming year? [00:04:11] Puneet: I think financial conditions are easing and actually we complain about credit spreads being extremely tight from an investor perspective but what it does to the global economy is it actually provides a lot of fuel. It's not only tight credit spreads but it's also the abundance of credit availability to large issuers. I mean take Meta as an example. It wanted to place a 30 billion deal. It got 125 billion of orders on a day where its stock was down 14%. So I think it is actually shows you the abundance that we have in the credit markets and that is really good because banks are still not that easy in terms of their lending criteria and lending standards. So it does provide fuel if there is investments coming from AI spending or M&A which we are seeing pick up as well. The financial conditions with tight credit spreads abundance of credit availability is actually fueling global growth. Are you worried that it's [00:05:07] Speaker 1: almost too loose some of these standards? Is this a potential problem for some of the credit that's [00:05:13] Puneet: being issued? Are standards a bit too lax potentially? I think by and large I would still be comfortable with the issues which are coming. So for example like Meta I mean that's that's a big issue with a very strong balance sheet and you know large operating cash flows but over time there is the risk that you know as more and more debt comes to the market which is basically supporting the AI investment you could have risks emerging and particularly in complex structures where the transparency is less or where you have data to back debt which is you know not as diversified as one of the large tech behemoths. But from your side [00:05:51] Speaker 1: financial conditions getting easier that's supportive of the global growth dynamic? Yes absolutely. Very good. Now let's turn to you Tom because of course the United States is the the biggest economy in the world. It's the one that's been in the headlines the most in the last 12 months. How do you see this developing? We had a Trump administration who was very keen to get things done prior to the midterms at coming up but kind of what's your best case for for the U.S. economy in the coming year? Look first [00:06:19] Speaker 4: of all we have to definitely acknowledge that the U.S. economy has been much more resilient in the face of the highest tariffs in in more than a century and I would expect that trend to continue well into 2026. Some key topics that we will observe or that will drive growth are clearly substantial fiscal stimulus. A continuation of robust consumer spending thanks to still very healthy household balance sheets. Then a continuation of AI capex spending and finally fed easing monetary policy further on. [00:06:50] Speaker 1: So when we think about the the tech dynamic we've heard from Shalossa and Punita about that's being a primary if not the the driver of of growth coming through into 2026. How do you how do you see that? Is it too concentrated? Are we too dependent on this kind of tech investment to push growth? [00:07:10] Speaker 4: Look we definitely have to make a difference between what what is driving markets and what is driving the economy. As Charlotte already mentioned AI capex spending is is quite substantial. It's big but it's still relatively modest if you look at it relative to the U.S. economy. What is still more important I would argue for the U.S. economy is still a continuation of of consumer spending because that is the single biggest growth driver in the U.S. But of course we also need some support from from business investment and there within investment it will be AI and AI related investment in in well semiconductors data center energy grids everything connected to that. So that definitely is also needed to see [00:07:50] Speaker 1: a continuation of robust growth in the U.S. Now I mentioned the midterm elections coming up in 2026. How significant will that be for domestic policy? Will that change the narrative of the current administration? Will they back off or will they be pushing as hard as ever to get changes happening? [00:08:09] Speaker 4: Well first of all they probably will try to push through as much change before well the midterm election or at least before the new parliament then is taking place in in early 2027. It probably won't change as much as you might think with first of all well it will depend on whether it's the whole congress switching or whether it's only the house or the senate. Currently forecasts tend to to tell us that it probably will be the house of representatives that will switch but not necessarily the senate. So that means that Trump probably has less of a support in congress but he can still try to rule via executive orders. That's to a large degree what he has done already. So that probably wouldn't change too much and also if the republicans keep the senate that also means that the nomination process won't be changed. So all in all it probably won't change too much and also maybe looking at the market it wasn't actually a bad environment for [00:09:07] Speaker 1: financial markets to have split government. Now you mentioned about the consumer it's still the biggest part of the U.S. economy as you mentioned. Now you read a lot nowadays about the k-shaped economy which I think I understand is that you know there's a large part of the society in the United States the wealthier part they're doing very well thank you very much and continue to do so and then there's the other side where there seems to be more struggling going on when you look at some of the corporate results it seems that there's a large part of the U.S. that is still finding the current macro environment challenging. Any change in that and could that be a disruptor for 2026? It clearly will have an impact [00:09:46] Speaker 4: on the political outcome of the election quite clearly because when I mentioned robust consumption and healthy household balance sheet that clearly refers to the upper half or upper third of households because they benefit from higher house prices they benefit more from higher stock markets while it's clearly the case that lower income households they suffer they even suffer before the tariffs but now the tariffs which do add quite a little a little bit of price pressure to everyday shopping clearly have further undermined the purchasing power of lower income households and actually that's also something that we we increasingly see this in in polls in in in in in in in sentiment in indicators there is I wouldn't call it an affordability crisis but clearly people are aware that they're worse off to some degree and that that mainly affects lower income households very good and then maybe [00:10:43] Speaker 1: finally you know she also mentioned about the you know fairly optimistic view around inflation uh you speak about trend growth in the united states in the coming year uh i read a lot about the fed going to cut rates more inflation is still well above their target growth is still trend-like why do they need to cut rates [00:11:00] Speaker 4: more are you expecting rate cuts in 26? uh well first of all yes we do expect further rate cuts in 2026 i think it's more for risk management purpose and quite honestly also we do see weakness in the labor market that clearly has been the case over the past few months and probably will continue uh in 2026 while inflation is expected to to to fade further however you're right and i think charlotte also mentioned that one of the crucial risks particularly also for for the us is a potential reacceleration in inflation rates and crucially that's not driven by tariffs because you can already see that tariffs of course have an impact on inflation but the the main driver recently of of stubbornly elevated inflation have been service prices while it's not our base case that is clearly a risk for 2026 and that could undermine the case for further monetary using by the fed so almost if you see a [00:11:52] Speaker 1: better growth dynamic the risk is that could postpone delay even cancel further rate cuts for the fed we have to wait and see and of course we will have a new fed chair by the time that we get into our uh mid year uh outlook now i want to turn to to you ross because thinking back to our last mid-year outlook last summer it seemed that prospects for europe were finally beginning to realize and improve we had the one trillion uh euros of commitment coming through germany was getting it there was going to be all sorts of spending coming through um i get the feeling from your recent commentary and work that that's [00:12:26] Speaker 5: faded somewhat is that is that true how do you see it i think that it's unfortunately a correct uh assessment now i don't like don't get me wrong on the the kind of over-egging of negativity here i think there still are some fundamental positives exactly what you just said related primarily to germany's historic commitment to spending likely over one trillion euros so we have that coming through that will be coming through and that will be coming through quite quickly next year there are some concerns at the margin now as you said in the comments there about this the the nature the constitution of that spending composition of that spending which is gearing slightly more towards tax cuts some subsidies rather than the big infrastructure spending that we'd really like to see but from a growth perspective certainly when we're just forecasting for next year it's going to be positive the other thing as well is is european growth has actually held up to a reasonable degree forecasts for you for next year actually quite similar to to this year and this year was actually relatively okay as well we've had strong performance from other areas france sorry i mean spain has been a notable out performer whereas france and italy perhaps less so as well unemployment still extremely low in europe i might add although it is ticking up but i think your assessment is correct that at the margin the data has been a little bit more disappointing on the forward-looking story uh even around germany and in terms of that forward-looking [00:13:44] Speaker 1: story and around germany we're already seeing some change in how this trillion euros is going to be spent is that a concern because on the one hand it looked like it was going to be an infrastructure it was going to be in many things that actually had a multiplier effect on the real economy we know about the defense side now it looks like it's more kind of slipping towards consumption which is maybe [00:14:05] Speaker 5: not such high quality use of funds how would you say yes i think that's exactly uh right so basically the fundamental changes were essentially twofold there was the ability to go the creation of a 500 billion euro infrastructure special vehicle and the exemption of defense spending in excess of one percent of gdp and we know now they have a 3.5 percent of gdp target for the nato target for defense spending all of which particularly the infrastructure was going to be very very positive and is still positive the problem is is that the ambition of this government appears to be now slightly geared less towards additional infrastructure spending and just using this vehicle to fund almost kind of pre-planned already existing infrastructure funds which of course is positive but it means that really the the fiscal leeway that germany has given itself is exactly as you say put more towards things like vat cuts uh on on restaurants so some increase in pension uh spending some subsidies to the energy grid and things like uh and some subsidies to commuting costs uh as well obviously all these things are iteratively positive but the big question and i think the big concern is is that they are just less likely to have a kind of permanent fiscal multiplier that you think the infrastructure will be associated [00:15:19] Speaker 1: now we always tend to focus on germany is the biggest economy is a very influential one um but we've seen certainly in the last 12 18 24 months that spain greece portugal italy to some extent as well are doing very much better is that going to continue is this a structural shift we're seeing in these economies [00:15:40] Speaker 5: or is this just a slick cyclical blip so i think there is going to be a continuation of this convergence uh next year with particular i think growth in spain is going to slow down somewhat but be can be still consistently a lot higher than the rest of the eurozone is overall even numbers like for greece and portugal they are better uh overall as well italy is a little bit more complex because even though their labor market has been quite good um the actual growth numbers initially have still been slightly disappointing uh as well but the point is is this you've seen unemployment come down in in what we you know call the periphery particularly the large markets italy and and spain you've seen it rise slightly in germany and france and even countries like the netherlands one thing about this is yes there is relation to the structural reforms that have happened before undoubtedly but these economies have also been massively supported by the covid recovery funds next generation that's going to run out well it will still continue at least for next year so we'll be talking about it in the the annual outlook next year maybe slightly more concerned on that front but now what's very notable [00:16:41] Speaker 1: is you mentioned the f word there very quickly france i mean france has been in the spotlight sadly for not the right reasons this time we've seen obviously spreads moving up i'm sure you'll be speaking about that in our uh podcast on the financial markets but how do you see france right now how worried are you about the developments on the political side and what are the implications for the [00:17:02] Speaker 5: economy in that basis so the french political situation i think is is the most clear known unknown the known risk within within europe right now we can clearly see this unstable equilibrium that exists in the political front is by the time we're recording this you know we are still having debates in the french parliament about the budget for next year uh it's possible it gets it gets passed but we've just seen an enormous vote against the first bill there's a lot of complexity going on here and this is all at the same time as france is running a considerable deficit in excess of five percent of gdp and has rising debt uh still i think unfortunately the risks are skewed towards this situation still continuing to get worse and impact the economy further we're seeing tax rises coming through spending cuts coming through as well it's weighing on confidence in the economy from a consumer perspective but also from a corporate perspective more generally and you're seeing it come through in the sentiment uh as well and look for next year we think it's clearly going to impact negatively so our forecast for france are more downbeat than than for the rest of the large eurozone area thank you ross speaking about downbeat ha and i don't [00:18:07] Speaker 1: mean you personally china china to me is a kind of perennial disappointment and i mean that in a way that it has so much potential we spoke last year we spoke at the mid-year about them appearing to tackle structural issues with a kind of a cyclical remedy in terms of giving stimulus that's quite short and quite focused tell me about china i mean their growth rate they may well get to the round five percent that they were targeting this year um it's a year of the horse i believe uh next year i don't know if there's any significance in the growth rate but what does growth look like in china in the year of the horse in [00:18:43] Speaker 6: 2026 yeah so probably you mentioned that i think we expect a slowdown china further in 2026 but before that we really dive into the headline growth number i want to take a step back so there's a lot of debate around china people thinking about whether china is in depression or china will leading the new world so the useful way for me to think about china as economy is that china is being run with two engines at the same time and the engine that you talk about really is the old engines we know that the poverty sector and the key issues of that is all other sectors within the economy is very very highly linked to this property sector we're talking about local government balance sheet we talk about household wealth we're talking about banking system so definitely as we stand right now the house prices in china is still falling and that's definitely not a healthy environment for growth in china but why haven't they put a line [00:19:41] Speaker 1: under that why haven't they you know put a ring fence and said look it's a fundamental issue that we've [00:19:45] Speaker 6: got housing this has to stop yeah i think you you got it there because basically they are tackling the structure issues with some of the cyclical measures and that is a key issue and so far it's not like they have done nothing since september 2024 they wrote out quite a big package to try to put the floor on the the housing market the housing market the problem is it's not enough because it's managed to stabilize a price of the first quarter of 2025 but now pricing falling again just simply because there are way too many unsold homes in china i think the package that wrote out probably cover one-third of the unsold inventory and how can you put the floor on a market that's still flooded with uh unsold inventory yeah now china [00:20:32] Speaker 1: looked the u.s in the eye when it came to tariffs they realized they had a symbiotic relationship they were too intertwined interdependencies uh to have 100 140 percent tariffs china seems to have done quite well despite the tariffs coming through because of course tariffs are still in place it is a [00:20:48] Speaker 6: headwind how do you see that evolving i think so just take a step back 2025 why china still can manage to get five percent or around five percent target growth because exports were exceptionally strong especially in the context of tariff 145 you mentioned and eventually now is down to 30 simply because china has such a strong position in the whole global supply chain we're not talking about say consumer goods like mobile phones being exported to the us but we're talking about intermediate goods everything that's fit into the final product a lot of that coming from china and we saw that during the covid uh disruption when china closed down the whole world suffer from this supply disruption so simply i think china know its strength and uh putting a tariff from from the u.s have learned that the hard way that they can cause major disruption within their economy and also global supply changes by you know racking up to 145 that is definitely not sustainable yeah now you mentioned the two engines [00:21:50] Speaker 1: the second engine is around the tech side i guess i mean this focus on really trying to become independent being cutting edge lead to to breakthroughs in there how confident are you that in 26 we're going to see a major breakthrough coming from from china and how does that impact their their position in [00:22:08] Speaker 6: the global stage do you think i think it's it's hard to uh forecast a breakthrough but we know that there's not going on in china at the moment uh for example i just recently i just like pull out the chart showing that half of the uh industrial robots are installed in china half the world industrial robots so you can see like that the speed of change in china is very rapid and he's i mean when we talk about technology we focus a lot about ai but in china is the whole complex from advanced manufacturing from materials we talk about battery uh technology for example we talk about um materials like you know railroads we all know that so definitely i don't know when is the next breakthrough can be 26 27 20 30 but definitely the speed of change is amazing and china with the hope that this second engine which will be able to replace the first engine that kind of breaking down at the moment so we are still in that process because of course it's very hard to fly with a baggage on your back and the baggage is the old engine yeah and of course it's also fit into the whole geopolitical rivalry with the us it's just fit very nicely because china not seeing technology as the growth driver but also seeing it as a way to strengthen its position in a geopolitical landscape globally so one word the risk to your outlook for [00:23:29] Speaker 1: china higher or lower i think it's balanced that was nearly one word balance good good pragmatic answer now while i've got you on the hot spot japan now i remember when everybody was going to become japanese inflation was falling growth was falling demographics were getting older many parts of the world now japan has become like the rest of the world we've got higher inflation we've got nominal growth that's picking up what's going on we've even got the new prime minister there how do you see japan is this going to be revolutionary for japan in terms of the policy the kind of the abonomics once again or how do you see [00:24:08] Speaker 6: that so japan is very interesting story of course as you mentioned is an uninspiring story for so long we have deflation we have shrinking population all of that but suddenly japan received something very interesting during a coveted when they imported inflation and inflation first appear like something transitory but eventually after four years now inflation above the target we start to see it change the behavior of corporates it changes the behavior of consumers so finally consumers start to spend even though they're under pressures of inflation but definitely thinking about price will go to the roof next year for example right price is up to like at one point ninety percent year on year of course they start to spend and that is a quite healthy dynamics for growth to go forward of course japan continue to face the fundamental issues of demographics i'm talking about the new prime minister she stepped into basically in the political landscape at the time when japan been through quite a bit of instability in terms of political with different prime minister and so on and she brought back this abenomics style of course now we have inflation we don't have deflation during the abenomics i think if she balance it well without basically intervening too much into a boj uh operation or basically create the problem in the bond market and for the first time i see japan have that urge to invest invest in ai invest in defense spending and things like that and especially with the economy that seeing shrinking population that needs to be done and i'm quite hopeful from that point of view very good now listen i'm going [00:25:46] Speaker 1: to come back and grill you on the bond market move in our next podcast which is coming up very shortly for our viewing audience here so stay with us uh for that but i want to turn to the other part of the world we've got gustavo with us thank you gustavo for joining in person uh from from chile i can't believe you left the spring for the the gloom of a november day here in zurich but hopefully uh the skies will brighten are the skies brightening in latin america there's so much going on in the political front uh whether it be in argentina coming up of course in in chile itself how do you see the [00:26:20] Speaker 7: region how do you see that outlook for this coming year on that perspective perspective i think this is a positive outlook for for the region as you mentioned the elections we have recently midterm elections in argentina quite a volatile backdrop going to the elections but in the end the result was quite positive for the markets for for the government and increase the governability going into the second half of mila's mandate was a key driver there and the markets were expecting this reassurance from the population to carry out the dependent reforms that still needs argentina and that is a good place to begin this second part of the government and then moving to chile even though the election presidential election still we don't have the result we are going to the second run runoff in december all probabilities pointed out that the right wing shift will be seen in chile that would be a huge achievement going if you take into account that chile has faced a lot of volatility that was not typical for a country that used to be solar stability so going forward the expectation is that regain that stability that was so characterized for for the country like chile we've got a situation in brazil where [00:27:36] Speaker 1: not uh imminent but we've also got elections coming up there um interesting how you see uh the situation with lula but i also want to ask you about brazil because we've often in our work spoken about brazil from their for their focus on the inflation the central bank bringing inflation down from very high levels we saw of course that pick back up again they've been pretty brutal in terms of cranking interest rates up massively over that period will we get rate cuts now progressively starting early on in the coming year [00:28:09] Speaker 7: definitely that is our base case that's what we've seen really we are coming from a really high level inflation but this given this really cautious and hawkish central bank that surprised the market that the market wasn't expected data discipline central bank that proved to be correct in terms of inflection expectation how have been coming out quite dramatically so going forward i think there is a room for the central bank to being in rate cuts after this record high levels potentially in the first queue we can see the [00:28:42] Speaker 1: first rate cut for the central bank in brazil now i mentioned the politics because we spoke about other countries where um the tariffs from the u.s have been reduced significantly 15 percentage kind of by and large now brazil still got 50 percent and it seems a lot of that to do with politics do you see any sign of that changing um and if not how problematic is that really for the brazilian economy with very high [00:29:07] Speaker 7: interest rates and extremely high tariff rates yeah well on that front eventually when the first tariffs war that came out in the liberation date the region was quite immune for that but then it escalated the conflict between brazil and the u.s of course right now is a country that's facing the highest tariffs within that but given that brazil is not that dependent on exports and in particular to the u.s was contained and gradually there is seems that there has been progress in terms of negotiation between president lula and president trump so going forward on that front we can see an improvement for next year [00:29:46] Speaker 1: very good maybe to conclude charlotte just rounding off with you we've heard from our colleagues from around the world in-depth analysis and i encourage all our viewers and listeners to to look at the full report as always it goes into considerable detail it's a reference document that you can delve into to get the the team's views and your your favorite region your favorite topic but how would you kind of conclude how how do you sum up the prospect kind of uh in a few words for for 2026 well i think i come back to [00:30:16] Charlotta: what i said before it's listening to everyone here the message is quite positive maybe with a few exceptions but i think it is a positive backdrop and despite these tariffs because let's not forget about these tariffs are a headwind for the global economy and it's a headwind for productivity they are they are in many ways inefficient for the global economy but we have that investment piece we have technology we have china helping to push that those developments and of course u.s trying to also retain its position so i think it's a i think it's a positive upbeat story but there are risks clearly one of them is around [00:30:50] Speaker 1: inflation great so thank you all for listening and watching i don't want to tempt fate here but it sounds like it's still a reasonable uh upbeat uh outlook we've got for 2026 again trend like growth largely across the world it seems uh we've got inflation still uh in a decent decent shape some central bank cuts coming through easier financial conditions we've spoken about as well so please do reach out to us with any questions you've got uh for anything around that please also do listen to our next podcast remember to to uh look like subscribe um and look at the document on our home page as well we'll be back with you again very soon