Market outlook 2026

The global economy has brushed off a series of shocks in 2025 and has continued to expand. Our main scenario for 2026 is that the global economy remains resilient, growth continues to develop, and the chance of a global recession is slim. In the US, Bloomberg’s recession probability indicator suggests there is a 30% chance of a recession in the next year, and this has trended lower since the middle of 2025. There is a 20% probability of a recession in the Eurozone, and a 25% chance for the UK.

As we look towards the new year, it is worth reflecting on 2025. Overall, activity has held up well, and the global composite PMI index rose to 52.9 in November, the highest level in 17 months.

This is consistent with a 3% annualized global GDP rate. The growth outlook was supposed to be derailed by President Trump’s tariffs, but they have not yet had a materially negative impact on the global economy.

The question is why has the global economy been so resilient and can this continue? There is no doubt that the global economy has been resilient in the face of a series of shocks in recent years including the Covid pandemic and the ensuing hike in global interest rates. Consumer spending has continued to move forward despite these challenges.

To understand why, we need to take a look at recent history. Since the financial crisis, the global economy has become more flexible, which has given it the capacity to adjust to shocks like reciprocal tariffs that rocked financial markets earlier in 2025.

However, we cannot forget that tariffs are now a reality for the global economy. The current US average tariff rate is 16.8%, this has fallen slightly over the course of the year as the Trump administration has made changes and adjustments to trade levies, according to researchers at Yale University’s The Budget Lab.

This is still the highest rate since 1935. The fear is that the impact of tariffs is delayed, and we are all on a steep learning curve when it comes to the impact of US tariffs on economic growth. For example, part of the reason why growth has held up so well in 2025 is down to front-loaded consumption, particularly in the first half of this year. US imports were running well above average, as you can see below, but they have normalized in recent months.

Chart 1: US goods imports

If consumption has been front-loaded, then it could slow next year, which is a risk for the US economy and global growth. Inflation trends are another risk for the US economy in 2026.

The Tax Foundation estimates that tariffs have raised overall US retail prices by 4.9% compared to the pre-tariff trend. Imported goods price inflation in the US has been rising ahead of domestic goods price inflation, and both are trending higher, as you can see below.

The Tax Foundation notes that while the effects of price increases from tariffs are small compared to the actual size of the levies, this could change in the coming months.

They argue that the inflation impact from tariffs has been moderate so far due to:

• Some firms operate on a contract basis, and may have locked in prices for the year ahead before tariffs came into effect.
• Uncertainty about the tariff regime has meant that more businesses have decided to absorb the impact of tariffs rather than pass price increases onto the consumer, and finally, some firms have been drawing down on existing inventory.

Chart 2: US imported goods prices, vs. US domestic goods prices

This chart clearly shows that US inflation has risen as a result of tariffs. If the US Supreme Court allows tariffs to remain in place, then we should expect more price hikes in the US during the Holiday season and into 2026. The OECD expects the US’s average inflation rate to be 3% in 2026, up from 2.7% this year.

While global inflation rates are expected to normalize in the coming year, we do not expect price growth to return to pre-pandemic norms, and getting US and UK inflation back to central bank target rates could prove to be a long road as headline prices are expected to remain sticky.

Interestingly, while the trend could be for higher prices in the US, tariffs could dampen inflation elsewhere. If US consumption falls in 2026 then this could reduce export demand and put downside pressure on wages and price growth in Asia and Europe, and the future path for inflation will not be uniform across regions and nations.

The US government shutdown is expected to shave 0.8% from Q4 GDP, however, it is not clear if this will have a material impact on overall Q4 GDP figure. The Atlanta Fed’s GDPNow estimate for Q4 GDP growth is 3.9%, which is significantly ahead of consensus. While we think that this estimate is too high, we doubt that growth will fall off a cliff in Q4, and instead the US economy will show the resilience we have become accustomed to.

Growth in Q1 should also remain resilient. In part, rising prices could be a headwind for US households, however, this could be balanced out by the tax cuts that will boost US household incomes. Overall, we believe that the US economic outlook remains bright in 2026.

Growth will benefit from a mechanical rebound following the end of the government shutdown, and the effects of the expected Federal Reserve rate cut at the end of 2025. While US GDP is unlikely to match the 3.8% rate from Q2, we expect growth to remain above 2%, and to average between 2.1% and 2.4% in 2026.

However, there remains big risks to the outlook for the world’s largest economy. Weak hiring trends, AI -related layoffs and K-shaped consumer trends, with low earning consumers remaining fragile, are all risks to the US economic outlook. Other risks include a sharp stock market correction, especially in AI-related stocks, and any sign that huge AI capex investments are not paying off.

Not only would this hurt investment trends in the US economy, but it would also hurt the outlook for middle and high income consumers, as their wealth would take a knock from a stock market crash. It is worth noting that a sharp slowdown in the US economy is not our central scenario for 2026, however, we do see uneven growth in the US next year.

The OECD predicts that US growth will slow in 2026 to 1.7% due to a cooling in employment growth, a sharp reduction in net immigration to the US, the inflationary impact from tariffs and cuts to non-defense government spending.

The OECD also highlights fi scal risks in the US. While they are unlikely to come home to roost in 2026, in the coming years the US will have to face the fact that the US public finances are not on a sustainable path, as persistent fiscal deficits have pushed the debt to GDP ratio to its highest level since the Second World War. Thus, tax cuts may only be a temporary boost for US economic growth.

Overall, we expect the US economy to remain on a relatively similar trajectory in 2026 to 2025; but if it can weather the shutdown of the US Federal government, then it may start the new year on a strong footing. Risks do abound, especially linked to the labour market, but we think that these will be an issue in the second half of 2026, with growth remaining strong in the first months of the year.

Noteworthy risks: The November mid-term elections will be in focus. Traditionally you see the incumbent Presidential party do badly in this election, although a swing to the Democrats from the Republicans in the Senate is a big ask at this stage.

However, we could see the White House switch to more domestically focused, less controversial policies in the run up to the mid-terms. Thus, tariffs could be on the back burner, and measures to reduce the cost of living could be front and centre as we move through 2026. Any relative stability from the US could help global risk appetite.

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