What's on the Horizon for the Global Economy?

Our view in a nutshell

Japan

• PM Takaichi focuses on “counter-measures against inflation” as well as “national crisis management” and “growth investment”.
• The tension between Japan and China warrants attention from the viewpoint of inbound tourism and the supply chain.
• We continue to expect the BOJ will hike in January 2027 and July 2027 with the policy rate reaching 1.25%.
• The market will continue to focus on fiscal policy, leading to a FY26 initial budget and FY26 tax revision package.

China

• We expect growth to slow sharply to 4.1% y-o-y in H1 2026, as the economy face demand headwinds from multiple fronts.
• By spring 2026, the slowdown will likely have become painful enough to impel Beijing to step up stimulus to arrest the slowdown.
• We expect Beijing to step up fiscal expansion and deliver additional rate (10bp) and RRR (50bp) cuts in Q2 2026.
• We view the great divide of property and export sector unsustainble, but Beijing is not ready to provide a real solution yet.

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.
• Inflation is likely to inch up from current low levels, but disinflationary impulses from China will keep price pressures benign.
• The easing cycle is largely complete, but we expect residual rate cuts in India/Southeast Asia versus North Asia largely on hold.
• Korea: The twin chip-housing supercycle should drive above-trend growth and keep the BOK on hold through end-2026.
• India: Goldilocks conditions are set to sustain, and low inflation means the RBI is likely to cut by 25bp in April (5% terminal rate).
• Singapore: Spillovers from the tech boom and strong domestic demand should boost growth and lift core inflation to above 2.0%.
• Australia: Trend-like growth and lingering inflation pressures suggest rates on hold in 2026, with upside risk.
• New Zealand: With growth recovering but material spare capacity, we forecast rate hikes, most likely commencing in 2027.

United States

• We expect the Fed to pause rate cuts in January 2026, and resume easing in June under a new Chair.
• Less emphasis on inflation risks and a likely shift in Fed leadership in 2026 are likely to lead to 2 cuts in 2026.
• Data released since the June FOMC have shown a sharp deterioration in employment and less inflation pressure than feared.
• We expect the OBBBA to be modestly stimulative in the near term, given frontloaded incentives and backloaded spending cuts.
• The labor market is rapidly losing momentum, and risks remain skewed to the downside.

Canada

• We expect the BoC to hold rates through 2026, with risks skewed modestly towards a hike.
• The November LFS reported solid job gains, likely allaying some of the BoC’s concerns around a steep downturn.
• Slowing domestic demand, lower energy prices, and falling rents are likely to weigh on prices in the coming months.

Euro Area

• While fiscal policy should be growth-positive in the medium term, higher tariffs make the near-term view more challenging.
• HICP inflation is close to target. We see it slow in H1 2026 due to energy base effects. Services inflation is sticky but moderating.
• We believe the ECB has finished its cutting cycle as we expect GDP growth to accelerate and inflation is close to target.
• The ECB began full roll-off of APP portfolio redemptions in July 2023 and PEPP portfolio redemptions in January 2025.

United Kingdom

• GDP growth was strong in H1 but moderated to 0.1% q-o-q in Q3. Underlying private domestic demand remains weak.
• Downside risks: higher yields, weak confidence and a weaker job market. Upside risks: strong wage growth, US trade deal.
• Headline inflation has risen again, partly due to base effects and energy, but we see it returning to target in 2026.
• We expect the Bank of England to cut its policy rate once more this cycle, in April 2026..

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: Economic activity is improving but the jobless rate remains high. We think the Riksbank’s cutting cycle is over.
• Norway: Norges Bank has cut its policy rate twice in 2025. Inflation stays high and we expect a slower pace of cuts going forward.

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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