What's on the Horizon for the Global Economy?

Our view in a nutshell

Japan

• We stick to our view that the BOJ will hike in June and December 2026 and June 2027 given upside risks of prices.
• June will be key for fiscal policy, considering an interim report on a VAT rate cut and a possible resumption of energy subsidies.
• We will assess our BOJ scenario focusing on the Middle East tensions and the above-mentioned fiscal policy events in June.
• We continue to focus on (1) a surge in upstream prices, (2) disruption of the supply chain and (3) demand contraction.

China

• Despite the seemingly robust Q1 GDP, we believe a broad economic recovery is still far-fetched.
• Domestic demand remains weak; Beijing should maintain a proactive fiscal policy and loose monetary policy.
• We pushed back our forecast of RRR/rate cuts to next year, as the PBoC shifts to low-profile monetary easing measures.
• The global energy shock and AI boom further widen the gap between the external and domestic sector.

Rest of Asia

• We expect the tech upcycle to sustain, non-tech exports to remain soft and see a mixed outlook for domestic demand.
• We expect growth to surprise above consensus in Korea, Malaysia, Singapore, Taiwan and India, and lower in Thailand and Philippines.
• Rising energy costs are pushing up headline inflation in most countries, with a likely El Niño another risk to watch.
• As the US-Iran conflict ensues, we see rising risks of policy tightening, and pencil in rate hikes for a number of ASEAN countries.
• Korea: The twin chip-housing supercycle should drive above-trend growth and keep the BOK on hold through end-2026.
• India: Amid the Iran war, growth is steady and core inflation low, but fiscal and current account deficit pressures are likely to build.
• Singapore: Spillovers from the tech boom and strong domestic demand should boost growth and lift core inflation to above 2.0%.
• Australia: We expect the economy to lose momentum following three rates and mild fiscal tightening in the 12 May budget.
• New Zealand: We forecast a first rate hike in December (risk sooner) with inflation concerns dominating weaker growth.

United States

• We expect the Fed to cut in September and December.
• Diminishing near-term political pressure and price pressures from the Iran war poses risk of fewer or later cuts.
• Growth has remained resilient, while inflation has continued to moderate gradually.
• We expect the OBBBA to be modestly stimulative in the near term, given frontloaded incentives and backloaded spending cuts.
• The labor market has stabilized lately, and we expect job gains to accelerate in 2026.

Canada

• We expect the BoC to hold rates through 2026.
• Labor markets have continued to soften, with risks skewed to the downside.
• Slowing domestic demand and falling rents are likely to offset increase in energy prices in coming months.

Euro Area

• We expect GDP growth to be affected by higher energy prices due to the euro area being so heavily reliant on energy imports.
• We expect inflation to print above target in H1 2026, due to the conflict in Iran. Services inflation is sticky but moderating.
• We expect two ECB rate hikes in 2026 (June, July) as the ECB seeks to dampen the likelihood of second-round inflation effects.
• We expect a meaningful fiscal loosening in Germany this year, but there are risks it is offset by fiscal tightening elsewhere.

United Kingdom

• Due to the conflict in Iran we have revised up our forecast and expect inflation rise and peak at 3.6% this year.
• GDP surprised us to the upside in Q1 but we expect a slowdown in Q2 due to the Iran war, energy costs and political uncertainty.
• Downside risks: weaker job market, elevated saving ratio. Upside risks: sticky services inflation, Middle East conflict.
• We expect a BoE hike in July 2026 to serve as a signalling tool over second-round inflation and see two rate cuts in H2 2027.

Scandinavia and Switzerland

• Switzerland: Inflation is near zero, but we expect it to pick up, preventing another policy rate cut from the SNB to a negative rate.
• Sweden: The economy is in a shaky recovery and the jobless rate is high. We think the Riksbank’s will stay on hold this year.
• Norway: Norges Bank raised rates in May to counter sticky inflation, we expect no further rate changes until a cut in H2 2027. 

CEEMEA

• Türkiye: Under the new economic program, inflation continues to decrease despite some delays in meeting interim targets.
• Türkiye: Due to resilient growth and upside risks to inflation, the CBRT maintains its hawkish stance to anchor expectations.

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