Insights
Global Economic OutlookGlobal Economic Outlook: the cycle rolls on - for now
Will AI-driven growth keep global markets rolling, or are new risks on the horizon? Discover key forecasts for the US, China, Europe and Japan in our latest economic outlook.
Author
Global Macro Research
Duration: 5 Mins
Date: Dec 02, 2025
The US economy will modestly accelerate next year, as the tariff shock fades and the AI buildout continues. Interest rates will be cut further under a new Federal Reserve chair. Chinese growth will slow, but it won’t be as bad as we had previously thought. Despite the anti-involution campaign, inflation in China will remain soft. Elsewhere, Europe’s prospects are supported by coming fiscal expansion, so we think the next European Central Bank rate move is more likely to be a hike than a cut.
US activity is being boosted by the investment spending linked to the artificial intelligence (AI) buildout and the wealth effect from the stock market boom. In fact, we are incorporating into our forecasts an ongoing tailwind from AI capital expenditure in the coming years.
However, elevated equity valuations carry the risk that a bubble bursts. While this is not our baseline scenario, should any AI-fuelled bubble go pop, we would expect the US economy to fall into a recession.
This would look more like the 2001 recession which followed the bursting of the ‘dotcom bubble’, than the 2008 ‘great recession’ after the collapse of the US housing market.
We expect fiscal policy to become more of a tailwind for US growth in 2026, as tax reliefs and investment incentives within the One Big Beautiful Bill Act deliver a positive impulse.
The US labour market has moderated – reflecting a fall in labour supply but an even larger reduction in demand – amid elevated trade uncertainty and tight interest rates.
With those headwinds weakening, we don’t expect the softening to spiral into a larger downturn. But because our US growth forecasts are below trend, unemployment will creep higher.
But should the Supreme Court rule that President Donald Trump cannot impose tariffs under the International Emergency Economic Powers Act, then trade uncertainty could spike. We think the president will find alternative means to re-build tariff levels. However, there is a risk the loss of tariff revenue triggers broader concerns about the fiscal trajectory.
The impact of tariffs on prices has not yet peaked, and we expect US inflation to reach 3.4% in the first quarter of 2026. But with underlying inflation pressures contained and inflation-expectations anchored, the tariff hit looks like a one-off increase to the price level. So US inflation should ease to 2% by the end of 2026.
An upside scenario is of a dovish, but credible, Fed chair taking policy down towards the reasonable lower end of neutral estimates – leading to stronger nominal growth and risk sentiment.
However, if the new chair is not credible, this could be the trigger for a bond market rout scenario in which both inflation expectations and term premia – the extra yield for longer-term bond risk – move higher.
But Chinese exports have held up well over this period of trade uncertainty, as trade has been re-routed to Asian and European economies.
We still expect challenges to China’s outlook. The housing market will still weigh on growth next year, while the ‘anti-involution’ campaign to remove excess manufacturing capacity may introduce a new drag on investment. Consumer confidence is subdued, albeit past its trough, helped by the performance of the equity market.
So, we forecast further stimulus. But this will remain focused on investing in strategically-important sectors on the supply side, rather than demand side. Therefore, it won’t do much to boost ingrained low inflation.
All told, we have raised our 2026 Chinese GDP forecast to 4.5%. That would still be lower than for this year and we are forecasting a further deceleration in 2027. We’ve also lowered our inflation forecasts for both years.
This support is most striking in Germany, where the budget implies a fiscal impulse of 1.5% of GDP. France will continue to run a large budget deficit, but this reflects a failure to make progress towards the European Commission’s Excessive Deficit Procedure targets.
Headline inflation will drop below the European Central Bank’s (ECB) target in early 2026 due to energy base effects, but the ECB is likely to look through this and keep policy on hold given fiscal support. Indeed, we expect the ECB to resume rate hikes by late 2027.
Despite US efforts at a peace deal in the Russia-Ukraine war, our base case is for continued fighting in 2026. That will maintain the impetus behind European re-armament.
The UK budget included tax increases to finance higher spending and an increase in the government’s fiscal headroom. As these spending increases are front-loaded and the tax increases backloaded, the budget provides a very modest boost to near-term growth, although any hit to confidence and sentiment may undermine this.
The budget also includes measures that push down inflation, which should speed the progress of inflation down to 2%, reinforcing our forecast for Bank Rate to fall to 3% next year.
Meanwhile, headline inflation remains elevated, but food-price growth should moderate. While wage growth has strengthened, real wage growth – wage growth that accounts for inflation – remains negative.
With Japanese government bond yields rising and the yen depreciating, the Bank of Japan is likely to continue with its very gradual hiking cycle, with the next rate increase likely to occur this month.
Figure 1: Global forecast summary
AI investment drives US growth, but risks loom
We have raised our US gross domestic product (GDP) forecasts to an above-consensus 2.2% in 2026, and 1.9% in 2027.US activity is being boosted by the investment spending linked to the artificial intelligence (AI) buildout and the wealth effect from the stock market boom. In fact, we are incorporating into our forecasts an ongoing tailwind from AI capital expenditure in the coming years.
However, elevated equity valuations carry the risk that a bubble bursts. While this is not our baseline scenario, should any AI-fuelled bubble go pop, we would expect the US economy to fall into a recession.
This would look more like the 2001 recession which followed the bursting of the ‘dotcom bubble’, than the 2008 ‘great recession’ after the collapse of the US housing market.
We expect fiscal policy to become more of a tailwind for US growth in 2026, as tax reliefs and investment incentives within the One Big Beautiful Bill Act deliver a positive impulse.
The US labour market has moderated – reflecting a fall in labour supply but an even larger reduction in demand – amid elevated trade uncertainty and tight interest rates.
With those headwinds weakening, we don’t expect the softening to spiral into a larger downturn. But because our US growth forecasts are below trend, unemployment will creep higher.
Tariff uncertainty to fade, price surge temporary
We expect continued reduction in trade uncertainty, even as the overall US weighted-tariff rate settles at a high 15%.But should the Supreme Court rule that President Donald Trump cannot impose tariffs under the International Emergency Economic Powers Act, then trade uncertainty could spike. We think the president will find alternative means to re-build tariff levels. However, there is a risk the loss of tariff revenue triggers broader concerns about the fiscal trajectory.
The impact of tariffs on prices has not yet peaked, and we expect US inflation to reach 3.4% in the first quarter of 2026. But with underlying inflation pressures contained and inflation-expectations anchored, the tariff hit looks like a one-off increase to the price level. So US inflation should ease to 2% by the end of 2026.
Fed’s path depends on leadership change
Federal Reserve (Fed) policymakers are divided about the appropriate monetary-policy path in this environment. We expect the Fed to deliver one more rate cut under current chair, Jay Powell, most likely this month, before his successor takes over in May 2026 and cuts two more times.An upside scenario is of a dovish, but credible, Fed chair taking policy down towards the reasonable lower end of neutral estimates – leading to stronger nominal growth and risk sentiment.
However, if the new chair is not credible, this could be the trigger for a bond market rout scenario in which both inflation expectations and term premia – the extra yield for longer-term bond risk – move higher.
Trade truce offers relief for China, but structural challenges persist
The US-China trade détente removes some of the downside risks to Chinese growth. Admittedly, the average US tariff on China is a still-high 30%, and tensions around tariffs, technology restrictions and critical minerals exports could flare up again.But Chinese exports have held up well over this period of trade uncertainty, as trade has been re-routed to Asian and European economies.
We still expect challenges to China’s outlook. The housing market will still weigh on growth next year, while the ‘anti-involution’ campaign to remove excess manufacturing capacity may introduce a new drag on investment. Consumer confidence is subdued, albeit past its trough, helped by the performance of the equity market.
So, we forecast further stimulus. But this will remain focused on investing in strategically-important sectors on the supply side, rather than demand side. Therefore, it won’t do much to boost ingrained low inflation.
All told, we have raised our 2026 Chinese GDP forecast to 4.5%. That would still be lower than for this year and we are forecasting a further deceleration in 2027. We’ve also lowered our inflation forecasts for both years.
Fiscal support, easing inflation to shape Europe’s outlook
In Europe, growth will be supported by easier fiscal policy for the next several years, although this shows up most sharply in our 2027 numbers.This support is most striking in Germany, where the budget implies a fiscal impulse of 1.5% of GDP. France will continue to run a large budget deficit, but this reflects a failure to make progress towards the European Commission’s Excessive Deficit Procedure targets.
Headline inflation will drop below the European Central Bank’s (ECB) target in early 2026 due to energy base effects, but the ECB is likely to look through this and keep policy on hold given fiscal support. Indeed, we expect the ECB to resume rate hikes by late 2027.
Despite US efforts at a peace deal in the Russia-Ukraine war, our base case is for continued fighting in 2026. That will maintain the impetus behind European re-armament.
The UK budget included tax increases to finance higher spending and an increase in the government’s fiscal headroom. As these spending increases are front-loaded and the tax increases backloaded, the budget provides a very modest boost to near-term growth, although any hit to confidence and sentiment may undermine this.
The budget also includes measures that push down inflation, which should speed the progress of inflation down to 2%, reinforcing our forecast for Bank Rate to fall to 3% next year.
Japan’s growth lifted by stimulus
In Japan, the new government has announced a fiscal package worth 3.4% of GDP, which delivers a 1%-fiscal impulse. This should support growth. That said, tensions between Japan and China remain a major downside risk to growth.Meanwhile, headline inflation remains elevated, but food-price growth should moderate. While wage growth has strengthened, real wage growth – wage growth that accounts for inflation – remains negative.
With Japanese government bond yields rising and the yen depreciating, the Bank of Japan is likely to continue with its very gradual hiking cycle, with the next rate increase likely to occur this month.
