Introduction to the 2026 Economic Outlook
The global economy proved to be more resilient in 2025 than had been feared, despite severe headwinds that ranged from Donald Trump’s trade war to geopolitical tensions and the conflicts in Ukraine and the Middle East. Entering the new year, the hope is that the worst of the recent inflation shock has passed, as the world’s most powerful central banks lower interest rates. However, the pre-Covid age of rock-bottom borrowing costs is a distant memory, global growth is slowing and conditions remain fragile.
Key Factors Influencing the Economic Outlook
Here are the key factors that will underpin the economic outlook for 2026:
- The potential of artificial intelligence to drive economic growth
- The impact of cooling inflation on interest rates and consumer spending
- The ongoing effects of elevated trade tensions on international trade
- The need to keep bond vigilantes in check to prevent a rise in borrowing costs
- The risk of rising unemployment and its effects on the economy
AI-Driven Economic Growth
After years of hype, the catalytic potential of artificial intelligence will feature heavily for the global economy in 2026. Could companies ploughing vast sums into datacentres, IT and automation kickstart productivity growth? Or could enthusiasm wane amid investor fears of a bubble in the US stock market fuelled by stratospheric valuations for AI companies? Polling by Deutsche Bank of its institutional clients revealed that a tech bubble bursting topped the ranking of the 15 largest risks for the year ahead, with 57% of respondents placing it among their three biggest risks.
Cooling Inflation but Risks Remain
Households have faced a severe cost-of-living squeeze from inflation sticking at elevated levels, but the hopes are for a marked slowdown in the rate of consumer price growth in 2026. Economists are predicting a “normalisation” of inflation across rich countries, paving the way for central banks to end their cycle of interest rate cuts – in effect lifting a restriction on the economy from higher borrowing costs. In the US, the term of the Federal Reserve chair, Jerome Powell, ends in May. The focus will be on whether Powell’s replacement will oversee deeper rate cuts amid political pressure from Trump.
Navigating Elevated Trade Tensions
After the initial shock of Trump’s “liberation day” announcement last April, international trade tensions have subsided. But, while the worst-case scenarios have not immediately materialised, US tariff rates are significantly higher than before Trump’s return to the White House, and trade policy uncertainty remains elevated. Economists reckon simmering geopolitical tensions more broadly will probably lead to further trade fragmentation, forcing companies to accelerate their supply chain diversification and near-shoring efforts.
Keeping Bond Vigilantes in Check
Governments across advanced economies came under pressure from rising borrowing costs in 2025, particularly for countries with already high levels of debt and weak growth outlooks. Bond vigilantes had the US, Britain and France in their crosshairs in particular. Donald Trump’s One Big Beautiful Bill Act rattled markets, while speculation over the UK’s budget fuelled a sell-off in its bond markets, and France’s were plunged into crisis as Emmanuel Macron’s government battled to pass a budget.
The Rise of Unemployment
Against a volatile economic backdrop, hiring demand tumbled across rich countries in 2025. Unemployment rates in the US and the UK rose sharply, and economists warn that a further rise in joblessness stands as a big risk for 2026. The impact of tax policies, business uncertainty and AI adoption are expected to weigh on employment. So far there are limited signs of widespread AI-fuelled job displacement. But investment is accelerating, and youth unemployment rates in Britain in particular are causing political alarm.
Conclusion
In conclusion, the economic outlook for 2026 is complex and influenced by multiple factors. While there are hopes that the worst of the inflation shock has passed, the risks of rising unemployment, elevated trade tensions, and bond vigilantes remain. The potential of artificial intelligence to drive economic growth is a significant factor to watch, but it also poses risks of a tech bubble bursting. As the world navigates these challenges, policymakers must be prepared to react to trends and make informed decisions to support economic growth and stability.
