Global outlook 2026: New rules, different economy

Anyone expecting 2026 to be a calm year after the turbulence of 2025 is likely to be disappointed. The notion that everything will “return to normal” overlooks the structural shifts currently underway. The rules-based global order, which for decades underpinned international trade and investment, continues to erode. While last year was marked by the dismantling of old certainties, 2026 will likely be defined by the emergence of new rules of the game. What those rules will look like remains uncertain, but one thing is clear: the US will continue to leverage its economic, political, and military power to reshape itself – and the world.

When making economic forecasts and market analyses, traditional economic logic is becoming less decisive, while geopolitics is gaining prominence. To understand these risks, one must follow the game Washington is imposing on China, the EU, and other nations. The question is therefore not only which country achieves the highest growth or the lowest inflation, but which country holds the strongest cards – and how willing it is to play them.

America’s Grand Strategy

In 2025, the US demonstrated its willingness to embed economic statecraft deep into the fabric of policy. When viewed through a strategic lens, the torrent of headlines on tariffs (see figure 1), subsidies, mandated investments, and military actions reveals not a set of isolated measures, but an integrated strategy. We previously referred to this as a Grand Macro Strategy, aimed at ensuring the US retains its position as the world’s leading power in an environment where China is gaining influence.

This strategy operates on multiple layers. Within its own continent, Washington is shaping the USMCA to its advantage and pressuring Canada and Mexico to align with its anti-China agenda. At the same time, it is reasserting influence – akin to a renewed Monroe Doctrine – over countries such as Argentina and Venezuela to block external powers from gaining a foothold in the Americas. Added to this are import tariffs designed to bolster domestic production, investments in AI, quantum technologies, and defense, as well as an aggressive export policy for LNG, agricultural products, and weapons. Gas exports serve as a lever of pressure on Europe, while the Federal Reserve faces political pressure to keep the economy running amid heightened uncertainty.

Perhaps most striking is the so-called “Reverse Marshall Plan”: allies such as Europe, Japan, South Korea, and the UAE have pledged to invest hundreds of billions in US industry over the coming years – from shipyards to semiconductor plants (see figure 2). Whether this “geopolitical contract” will be honored remains to be seen, but what is clear is that access to the US market is being granted in exchange for capital and loyalty.

Strong cards, weak spots

The US market is indeed one of America’s most powerful cards. The US boasts the largest consumer market and the deepest, most liquid financial markets in the world. Yet the same markets also raise concerns. Confidence among consumers and businesses in the US economy is waning. The Federal Reserve’s independence is under pressure, there is no plan to reduce the fiscal deficit, trade policy shifts from week to week, and the new stablecoin regulation appears to be deployed as a geopolitical lever. The White House accepts these caveats. After all, America First means the market no longer comes first.

As a result, the dollar is no longer untouchable for many foreign players. Investors are diversifying currencies where possible and hedging dollar positions more frequently than before. Implied EUR/USD volatility has now declined, but the risk reversal (see figure 3) shows that call options on EUR/USD (betting on a stronger euro) have been more expensive than puts since Liberation Day. In bond markets, the term premium on 10-year Treasuries has risen to 70 basis points, increasing Washington’s financing costs and feeding through to mortgages and corporate loans (see figure 4). This indicates that the world is only willing to finance the US at higher interest rates – suggesting that the market doubts the idea of US exceptionalism.

European ambition clashes with reality

Europe does not automatically benefit from these developments. EUR long-term interest rates also see higher term premiums. A stronger euro is welcome for keeping inflation in check, but it adds headwinds for capital goods exporters and an already faltering industrial sector.

Meanwhile, Brussels continues to work toward “strategic autonomy,” using the Draghi report as its guiding framework. The goal is to make Europe less dependent on external powers, thereby gaining more control over its own economic resilience. Yet this ambition runs up against political reality. Autonomy at the EU level means less national sovereignty – a prospect that traditionally meets resistance from member states. Add today’s populism to the mix, and the picture becomes even more complex.

Economically, the strategy requires massive investments: 5% of GDP per year, roughly EUR 750bn. These funds must be directed toward defense, infrastructure, innovation, and the green transition. However, the structural balance leaves little room for additional spending (see figure 5), and implementation is progressing slowly (see figure 6). As a result, Europe continues to act reactively, while the US moves swiftly and proactively.

China: ability to withstand pressure and technological dominance

China is playing the same game as the US, but with different cards. President Xi believes that an autocracy has a greater ability to withstand pressure than a democracy and can therefore endure economic pain for longer. This makes Chinese retaliation relatively predictable: every US or European tariff hike and export ban is met with a tit-for-tat response.

At the same time, Beijing is doubling down on technological self-sufficiency and dominance in critical production chains – think rare earths, batteries, AI, robotics, and clean tech. For those who need these resources, bypassing China is hardly an option. As a result, China’s guiding principle remains: production over consumption. The outcome is a structural surplus that is spread across global markets (see figures 7 and 8), creating dependency relationships that China continues to leverage geopolitically. Conversely, this also makes China dependent on the willingness of other blocs (the US and EU) and the rest of the world to keep buying its products in the future.

Buckle up!

It is tempting to look at our forecasts for 2026 and conclude that it will be business as usual. The numbers point to moderate growth, relatively low inflation, falling energy prices, stable exchange rates and bond yields, and a Fed delivering a few rate cuts while the ECB keeps policy unchanged. But these figures sit atop a reality that could trigger major disruptions. Understanding this structural volatility is crucial when mapping the risks businesses and investors face. Our message is therefore clear: buckle up!

Broadly speaking, our forecast for the global economy looks slightly better than in previous quarters. Recent strong performance suggests greater adaptability to supply shocks than previously estimated. However, the latest data in many countries indicate that some cooling will occur in the short term before the global economy returns to a higher growth path.

Forecasts

Eurozone: Resilience amid challenges

The eurozone economy performed better than expected in 2025, supported by resilient consumption driven by real wage growth and a tight labor market. Front-loaded trade flows due to tariffs and a rebound in investment also contributed. Yet signs of fatigue are emerging: The labor market is cooling, although tightness remains historically high (see figure 9). This will slow real wage growth and, in turn, consumption in the coming quarters. We also expect some reversal of front-loaded trade flows. Ireland is a good example: It benefited from exceptionally strong pharmaceutical exports to the US, but a reverse trend has yet to materialize despite US inventory build-up.

At the same time, the eurozone faces structural challenges. Energy costs remain high compared to the US and China, despite currently lower oil and gas prices, undermining industrial competitiveness. Low R&D spending (see figure 11) and limited innovation weigh on productivity growth, while demographic trends – rapid aging and declining population growth – pose risks to labor supply and demand. The trade agreement with the US offers short-term stability but remains a source of uncertainty: Washington could still pull the plug.

The growth-dampening effects of US import tariffs have not been fully absorbed. European firms are increasingly investing in the US to maintain market access, which may dampen domestic investment.

Fiscal space is also constrained. Nine EU countries are under excessive deficit procedures, and efforts to reduce these deficits will weigh on growth. Germany is an exception, with a substantial stimulus package planned for the coming years, although critics argue the measures mainly provide a short-term boost and could be more effective.

More broadly, fiscal space continues to shrink. The war in Ukraine imposes an ever-larger financial burden on Europe, while even a peace agreement could lead to higher defense and reconstruction spending. One message from Washington was clear last year: Europe will have to stand on its own feet in the future.

Growth opportunities remain

There are still growth opportunities. Financing conditions for businesses have improved over the past year: borrowing has become cheaper, and risk premiums on corporate bonds are now closer to US levels. The strong performance of European financial stocks compared to those in the US – despite the AI-driven tech boom there – suggests that investors no longer view Europe as the “problem child,” but rather as a useful diversification in their portfolios.

Supply chain disruptions have gradually eased over the past two years (see figure 11), although recent surveys of purchasing managers and the European Chamber in China point to rising material shortages and longer lead times. Europe also remains heavily dependent on critical raw materials from China, which this year demonstrated its willingness to use them as a geopolitical tool.

Gas and oil prices have fallen sharply, supporting both purchasing power – via lower inflation – and industrial activity. European gas prices are at their lowest level since April 2024. Germany will cut industrial electricity prices to EUR 0.05 per kWh for the next three years (currently around EUR 0.12 to EUR 0.18), offering temporary relief but little for gas-intensive production. Looking ahead, defense spending will become a more important growth driver in 2026–2027, following NATO’s target increase to “3.5% + 1.5%,” to be achieved by 2032–2035.

Growth will therefore lose some momentum in the coming quarters but is expected to pick up again later in 2026, with consumption playing a slightly less prominent role than last year.

Inflation is expected to remain close to the ECB’s target (see figure 12), with a short-term risk of undershooting due to lower energy prices and cheap Chinese imports. However, a stronger rebound in growth in 2026 could quickly restore inflationary pressures, driven primarily by persistent labor market tightness.

US: Stagflationary shock

The import tariffs introduced by the Trump administration, combined with strict migration and deportation policies, are currently causing a stagflationary shock in the US economy. The labor market is faltering. Due to the partial shutdown of the federal government, data are not always clear, but it is evident that job growth has nearly stalled (see figure 13). As a result, unemployment rose to 4.4% in September, up from 4% in January. This marks a clear break in trend after years of tight labor conditions.

Meanwhile, inflation remains above the Federal Reserve’s target. A sharp increase in inflation has been avoided because higher goods prices are partly offset by lower housing costs. Core inflation is therefore moving mostly sideways around 3% (see figure 14), but we expect the full impact of the import tariffs has yet to materialize. Initially, importers bore the brunt, but now exporters and consumers appear to be next in line. This delayed pass-through means that a decline in core inflation is likely only in the second half of 2026.

At the same time, the AI boom is keeping the economy afloat. This positive demand shock has offset the stagflationary impact of trade policy, but the peak in AI investments now appears to have passed. As a result, we expect economic growth to weaken in 2026. This, in turn, increases the risk of a tech-driven correction in US equity markets. Over the longer term, however, AI could deliver a positive supply shock through higher productivity. Even if the hype fades and valuations decline, spillover effects remain significant: new infrastructure, knowledge, and applications will continue to provide fertile ground for innovation and growth for years to come.

Tensions with China remain a risk. A renewed escalation of the trade war is not our base case, but it would push inflation and unemployment higher while weighing on growth. At the same time, Trump may decide to roll back some tariffs ahead of the midterm elections in November. Affordability remains a crucial theme: It cost Biden popularity, blocked Harris’s ambitions, and now weighs on Trump’s approval ratings (see figure 15). The administration appears aware of this: Tariffs on more than 200 imported food products have been reduced. Further easing of import tariffs could follow if political pressure intensifies.

Although inflation is likely to stay above target for now, we expect the Fed to cut rates several times (as does the market, see figure 16). It is clear, however, that policymakers are struggling with the stagflationary impact of tariffs: hawks fear inflation (and inflation expectations) will remain too high, while doves worry about the labor market. The delayed pass-through of tariffs could slow the pace of rate cuts in the first half of 2026. Once the new Fed chair appointed by Trump takes office in June, we expect a shift toward a neutral policy rate – possibly even below that – by the end of 2026. In our forecast, the policy rate falls next year to a range of 2.75% to 3.00%.

China: Stimulus won’t solve structural problems

The trade truce with the US signed in November provides, on paper, an important foundation for economic growth next year. Still, it is a fragile deal: the Trump administration has repeatedly revised or broken agreements in the past. As we noted earlier, however, China holds a strong card: Its grip on rare earths and other critical raw materials, in our view, reduces the likelihood of an early rupture and gives Beijing strategic room to maneuver.

The five-year plan presented in October outlines economic and political priorities. Modernizing traditional industries, promoting emerging sectors such as AI and robotics, and achieving technological self-sufficiency are central themes. The government also promises measures to strengthen domestic consumption. Yet the entire plan remains heavily supply-side oriented: “The modern industrial system is the material and technological foundation of China’s modernization,” according to the plenum.

What stands out is that Beijing has recently acknowledged that the industrial sector faces persistent overcapacity, which creates multiple problems: imbalances, fierce price wars, extremely low margins, and ongoing deflation (see figures 17 and 18). This phenomenon is referred to as “involution.” The recent anti-involution campaign is essentially a repeat of earlier attempts to curb the excesses of state-driven investment.

As in the past, relief for Chinese firms – and their foreign competitors – will likely be short-lived. “Involution” is rooted in the structure of China’s political economy. The central government sets strategic priorities, which local officials then implement on a smaller scale. Beijing evaluates these officials based on their performance relative to peers. As a result, local leaders have strong incentives to curry favor with Beijing by outdoing each other with investments in precisely those strategic sectors designated by the central government. Nationally, however, this leads to distortions and overcapacity.

The government promises additional measures to support domestic consumption. But the protracted real estate crisis weighs on consumer confidence, while low industrial profits lead to job losses, economic uncertainty, and even weaker spending. Add low inflation expectations to the mix, and consumers may postpone purchases. Extra monetary and fiscal stimulus seems inevitable, but it will not resolve all structural issues. The risk remains that growth in 2026 will be driven primarily by government intervention, while private demand lags behind. For European firms, exports to China will therefore remain highly challenging in 2026.

UK: Politics sets the tone

Although the UK government successfully presented its Autumn Budget, political uncertainty will continue to weigh heavily on the economy in 2026. The budget signals a course aimed more at political survival than structural growth. Spending on healthcare and social services is once again being brought forward, while tax increases are only planned from 2028 onward. This “buy now, pay later” approach buys time for the government but does little to restore confidence among households and businesses. We therefore expect economic growth to remain subdued.

Local elections in May threaten to deliver heavy losses for Labour. This shifts attention to Farage’s Reform UK, now leading in the polls, and the rising Greens. A major defeat could trigger a crisis within the party, putting Prime Minister Starmer and Chancellor Reeves under pressure. That would increase the likelihood of new periods of political uncertainty.

Meanwhile, Brexit continues to act as a drag on UK exports and investment. Labour is now speaking more openly about the negative economic consequences, but this is largely for domestic political consumption. A fundamental policy shift before the 2029 elections seems unlikely. First, the EU-UK Reset Agreement must be implemented. Talks on SPS, ETS, and Erasmus are making little progress, while the failure of negotiations on the EU defense fund (SAFE) is a bad sign. The contrast remains stark: Brussels has few incentives to make concessions, while London is searching for wins to deliver on Starmer’s promise to “make Brexit work.”

Unlike the Fed, the ECB appears to have completed its rate-cutting cycle. In recent months, ECB officials have repeatedly emphasized that their policy is fully data-driven: The central bank makes rate decisions based on inflation projections and the surrounding risks. So far, developments have largely unfolded as expected. Even minor deviations will not alter the policy stance. Risks around the outlook are seen as “broadly balanced.”

There is therefore no compelling reason to cut the deposit rate below the current 2%. Unless economic developments force the ECB’s hand, we believe the threshold for further easing remains high. Downside risks, however, persist: Growth will stay weak in the coming quarters, keeping markets focused on the possibility of a rate cut. We therefore expect slightly lower swap rates in the first half of the year. At the same time, we see room for an economic rebound later in 2026, partly driven by European investments in defense and infrastructure. This could shift the debate toward potential rate hikes by late 2026 or early 2027.

The investment agenda also puts upward pressure on long-term yields. Higher debt issuance will be needed to finance these expenditures, while the ECB continues to normalize its balance sheet. Overall, we expect long-term rates (10-year) in the eurozone to edge higher in the second half of the year.

One traditional buyer of long-dated bonds may become less active: Dutch pension funds. Pension system reforms are reducing their hedge ratios, lowering the need to invest in longer maturities. We expect this to steepen the 10s30s spread by 30 to 40 basis points. In our view, only about one third of this has been priced in so far, as the transition will occur in two steps on January 1, 2026, and January 1, 2027.

Fed rate cuts will lead to somewhat lower short-term rates in US capital markets, but long-term yields are expected to remain broadly unchanged, partly due to persistent – or even slightly rising – risk premiums. Possible spillover effects from this are another reason why we expect eurozone capital market rates to be somewhat higher rather than lower.

EUR/USD: Concerns around the Fed and rate cuts

In the first half of this year, concerns about a US recession and inflation driven by Trump’s trade policies led to increased diversification of currency portfolios among foreign investors, causing creditor-country currencies to appreciate. Since then, the economic damage from Trump’s tariffs and fiscal policies has proven less severe than feared around Liberation Day. The US also remains attractive for investment thanks to its dominant and productive tech sector. Despite everything, US equity markets are closing the year with gains of 15% to 20%, which is currently supporting the dollar.

We expect the US economy to enter a cyclical downturn next year. While many G10 central banks have largely completed their rate-cutting cycles, the Fed is likely to continue easing well into 2026. Although many cuts are already priced in, political pressure on the Fed next year could undermine confidence in the dollar. Additional risks for the dollar include a new round of tariffs, persistently high inflation combined with negative real rates, or a sharp correction in AI-related stocks.

We therefore expect EUR/USD to trade within a volatile range in the coming months, with a slight upward bias toward the second half of 2026. Our 12-month forecast for EUR/USD now stands at 1.18.

EUR/GBP: Pound under pressure

Chancellor Reeves’s Autumn Budget proved to be an extremely delicate balancing act but has temporarily calmed the UK gilt market. This has supported the pound. The likelihood of a rate cut by the Bank of England (BoE) at the end of this month is high, and we expect two additional cuts in 2026, bringing the policy rate down to 3.25% as long as inflation continues to decline. In that case, the interest rate differential with the euro will narrow. Despite Prime Minister Starmer’s large majority, his low popularity and rumors of a leadership challenge weigh on market sentiment. Against this backdrop, we foresee a gradual rise in EUR/GBP.