What's on the Horizon for the Global Economy?

Our view in a nutshell

Japan

• We changed our BOJ call, now expecting rate hikes in October 2026 and March and July 2027.
• Near-term rate hike(s) will be driven by risks rather than the BOJ’s main scenario of the economy and prices
• The government has decided to cut the VAT rate for food from 8% to 1% for two years starting in April 2027.
• The lingering Middle East tensions and the Kumamoto earthquake could dim Japan’s economy in Q3 2026.

China

• The current status of the economy could be best described as a big divergence and domestic weakness.
• We expect Beijing to initiate a new round of supportive measures. However, in our view, the scale of such measures might be limited.
• Considering ample market liquidity and falling CGB yields, we maintain our forecast for no RRR and rate cuts until Q2 next year.
• We expect the ongoing AI boom to widen both demographic and geographic inequality, which could further dent demand.

Rest of Asia

• Sustained AI-demand and a gradual normalization of the energy supply chain bodes well for Asia’s economic outlook.
• We expect Taiwan, Malaysia and Singapore to outperform, and we remain cautious on Indonesia and Thailand.
• A sustained moderation in oil prices will be a positive for inflation, but El Niño is a risk to food prices.
• Lower oil prices will reduce hawkish pressure marginally, but divergences across Asia’s monetary policy paths remain.
• Korea: We expect three 25bp rate hikes as the BOK expects strong growth and demand-side inflation (terminal rate: 3.25%).
• India: Policy measures to boost capital inflows and lower oil prices should ease BOP pressures and keep the RBI on hold. 
• Singapore: Spillovers from the tech boom and strong domestic demand should boost growth and lift core inflation to above 2.0%. 
• Australia: We expect sub-trend growth, with the economy weighed down by rate hikes, budget changes and oil uncertainty.
• New Zealand: We forecast two further 25bp rate hikes, commencing in September and December, to return monetary policy settings to neutral. 

United States

• We continue to expect the Fed to remain on hold indefinitely.
• That said, the risk of the Fed reacting hawkishly to signs of stalled disinflation is increasing.
• Our base case is that inflation peaks this year, in which case hikes are likely to be avoided.
• Growth is likely to remain strong due robust fixed investment and steady personal consumption.
• The labor market has stabilized, and we expect the unemployment rate to decline.

Canada

• The BoC to hold rates through 2026.
• Labor markets have shown some signs of stabilization, but risks remain skewed to the downside.
• Falling rents and slowing wage growth are likely to offset elevated energy prices, keeping underlying price pressures contained.

Euro Area

• Growth was resilient in H1 2026, though headwinds from the Iran war remain for H2 2026. We see growth improving into 2027.
• We expect inflation to print above target in the quarterly profile until early 2027, due to the conflict in Iran. 
• We expect one more ECB rate hike in September, lifting the depo rate by 25bp to 2.50%, after the June 25bp increase. 
• 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 around 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 to leave rates unchanged for the rest of 2026, and to see two rate cuts in H2 2027.

Scandinavia and Switzerland

• Switzerland: Inflation has accelerated, but core inflation remains low. We see no change in rates for the foreseeable future. 
• 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 another 25bp rise this year and 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.

For more information read our weekly report here.