Global Economic Outlook 2026

Major economies enter 2026 aiming for a soft landing after an unpredictable 2025. Forecasts point to moderate growth and cooling inflation across the United States, United Kingdom, Eurozone, China and Japan, with policymakers walking a fine line between supporting recovery and controlling prices. While corporate balance‑sheets and labour markets provide resilience, structural challenges and external risks – from geopolitical tensions to energy constraints – will shape outcomes. Staying alert to wages, core inflation, policy signals and trade trends will help investors and policymakers judge whether this soft‑landing narrative holds.

In the United States, 2025 saw strong consumer spending but confusing policy and trade signals. The baseline for 2026 is growth of around 2 %, ongoing disinflation and gradual rate cuts from the Federal Reserve. Labour markets are expected to cool without breaking, with unemployment rising toward the mid‑4 % range. Core inflation should drift lower but is unlikely to fall quickly below the Fed’s 2 % target, keeping policy somewhat restrictive. The dollar is forecast to weaken modestly, and equities could see cautious gains, driven largely by continued enthusiasm for AI‑related technology, though valuations look stretched. Energy supply constraints and fiscal uncertainty remain swing factors.

The UK enters 2026 under the “better, not booming” banner. After a 2025 defined by disinflation and stagnation, most forecasts put GDP growth around 1.2–1.5 % and inflation near 2.5 % by year‑end. The Bank of England is expected to cut interest rates gradually, bringing Bank Rate toward 3.5 %. Unemployment is seen hovering around 5 %, while fiscal policy stays tight following earlier tax rises. Housing is likely to stabilize rather than surge, banks remain well‑capitalized and energy costs are less of a drag. Sterling may trade in a range, and UK stocks could perform modestly, supported by financials, energy and commodities – though domestic names still depend on a pick‑up in demand.

Across the Eurozone, 2025 was a year of low growth and divergent sectors: services held up while manufacturing lagged, prompting the European Central Bank to cut its deposit rate to 2 %. For 2026, economists expect GDP expansion of roughly 1.1–1.3 %, inflation near the 2 % target and unemployment around 6 %. The ECB is likely to keep rates at about 2 %, providing a broadly neutral stance. Growth should be driven by domestic demand as real wages rise and government spending on infrastructure and defence remains supportive, though structural headwinds such as weak productivity persist. The euro may strengthen slightly versus the dollar, and European equities could deliver mid‑single‑digit returns if disinflation endures and energy prices stay contained.

China heads into 2026 in stabilization mode after a volatile 2025. Last year, exports surged even as domestic consumption languished, inflation hovered near zero and the property sector remained distressed. The consensus now is for GDP growth around 4.4–4.5 %, inflation near 1 % and urban unemployment close to 5 %. Policymakers plan modest rate and reserve‑requirement cuts and a fiscal deficit near 4 % of GDP to sustain growth. The renminbi is expected to trade in a narrow band around seven per US dollar, with capital flows balancing export competitiveness against import costs. Growth will rely on three pillars: continued policy stimulus, resilient but slower exports and a tentative recovery in consumer spending. Structural headwinds from the property slump, an ageing workforce, high debt and potential trade flare‑ups mean real estate and manufacturing remain under pressure, while technology and green sectors stand out as bright spots. Stock markets could see mid‑single‑digit gains if earnings pick up.

Japan ends the picture. Inflation returned in 2025, prompting the Bank of Japan to raise its policy rate to 0.75 %, but growth remained uneven: services and tourism held firm while manufacturing contracted and household spending fell. For 2026, most analysts expect GDP growth of 0.6–1.1 %, inflation near the 2 % target and policy rates rising gradually toward about 1–1.25 %. Unemployment should stay low, around 2.5 %. Exports are forecast to be flat, autos face U.S. tariffs, technology industries benefit from global AI and automation spending, and services continue to provide stability. The yen is expected to trade widely between 140 and 160 per dollar, and the Nikkei 225 may oscillate between 45,000 and 55,000. Key signposts include wage negotiations, core inflation trends, central‑bank guidance, export orders, labour‑force participation and geopolitical developments.

Overall, the 2026 outlook calls for modest but positive growth, ongoing disinflation and cautious policy easing. Risks remain – structural weaknesses, policy missteps and global shocks could still derail the soft‑landing scenario. Close attention to wages, prices, policy moves and external signals will be essential for navigating the year ahead.

US Economic Outlook for 2026 with 2025 Review

The U.S. outlook for 2026 remains cautiously constructive, with most forecasts centered on a soft-landing profile: moderate growth around ~2%, inflation continuing to cool toward target, and mild interest-rate relief. The baseline assumption is that the economy avoids recession while price stability is restored gradually, supported by policy tailwinds (Fed easing and fiscal incentives) that help offset headwinds from past rate hikes and trade frictions.

2025 in brief: a resilient economy, distorted signals, and a late-year soft-landing setup

2025 began with late-2024 momentum, led by consumer strength, but the year quickly became defined by policy uncertainty—especially trade policy—and “front-loading” behavior that complicated how to read demand and inflation in real time.

• Q1: We can see a GDP contraction (annualized) and weaker final domestic sales, but treated it as a signal-vs-noise period heavily distorted by tariff-front-loading and trade/inventory swings rather than a clean demand collapse.
• Q2: Markets experienced a tariff-driven drawdown then a rebound, while GDP improved largely due to an imports swing, implying stronger headline growth than underlying domestic momentum.
• Summer–September: The story shifted toward “cooling without cracking”—labor and consumption showed early softening, services held up better than manufacturing, housing remained affordability-constrained, and the Fed maintained a “pause with optionality.”
• October–December: A major fiscal shock—the U.S. government shutdown (Oct 1–Nov 12, 2025; exactly 43 days)—tightened the margin for error and raised volatility risk, even as the year ended with more durable disinflation signals and a stronger market conviction that policy could shift from “pause” toward “easing.”

Five turning points (2025): inherited consumer-led strength; tariffs/trade as a “hidden variable”; cooling beneath strong top-line prints; labor shifting from tight to gradually cooling; and a year-end setup where disinflation improved enough to open an easing path—while demand looked more fragile.

2026 baseline: growth moderates, disinflation continues, rates drift lower

Most institutional projections point to continued expansion but restrained momentum. The Fed’s projections show real GDP growth around ~2.3% (Q4/Q4) and PCE inflation near ~2.4%, while the IMF outlook cited expects roughly ~2.0% GDP growth and ~2.7% consumer inflation.

Labor markets are expected to cool gradually rather than break: unemployment is projected around ~4.4–4.5% late in 2026, while hiring slows (About ~50k jobs/month).

Inflation is expected to keep easing but not fully normalize quickly: core PCE is cited at ~2.7% in 2026 (still above the Fed’s target), with sticky components (services/housing) keeping core inflation “stubbornly” elevated for much of the year.

On rates, the cited baseline is further easing, with the Fed’s median policy-rate projection around ~3.4% by end-2026, and a reference expectation that the 10-year yield averages ~4.0%. I should also emphasize that pre-2020 rock-bottom rates are unlikely to return and that policymakers keep a “higher bar” for deeper cuts until inflation is clearly tamed.

Policy watches: Fed leadership, the cut path, and fiscal implementation

The Federal Reserve’s communications remain central: I should emphasize monitoring whether the Fed delivers the expected pace of easing and highlights the leadership transition, noting that Chair Jerome Powell’s term expires in May 2026.

Within policy view, the baseline expectation is one cut in the first half of 2026, with further action more likely in the second half (I should specifically note a potential second cut around September), while a third cut is uncertain and policy could be held steady near ~3.00%–3.25% into year-end.

On the fiscal side, the “One Big Beautiful Bill Act” (enacted in 2025) is described as a key variable—potentially supportive via tax cuts/incentives, but also raising longer-end rate risks if deficits and issuance pressure term premia.

Markets: USD softer bias, equities cautiously bullish, and valuation risk

The base case expects a mildly weaker U.S. dollar, with currency performance sensitive to Fed policy and global risk sentiment. It also frames a plausible Dollar Index range around ~97–98 in 2026.

For equities, the tone is cautious optimism: supportive macro conditions (growth holding up, inflation cooling, Fed cuts) underpin risk appetite. We expect the S&P 500 to be up ~14% to ~7,800 by late 2026, with earnings growth ~10–15% supporting the bull case.

 Sector focus: AI-led tech leadership and energy constraint

Technology—especially AI—is positioned as the standout driver of 2026 optimism, with AI-related capex described as a primary growth driver. However, AI-bubble concerns should be taken more seriously, citing a Deutsche Bank poll where 57% ranked a tech bubble burst among the top worries for 2026.

I should also emphasize that AI’s real-world scalability depends on energy capacity (renewable and non-renewable), with the transition potentially creating new geopolitical frictions around resources.

Key indicators to watch in 2026

• Labor: hiring pace, unemployment drift, and how “cooling without cracking” evolves.
• Inflation: CPI/PCE trajectory and whether disinflation remains durable.
• Fed: guidance, the leadership transition, and whether easing pauses or accelerates.
• Fiscal/Politics: implementation of the fiscal package and any yield pressure from deficits.
• Geopolitics/Trade: tariff policy and external shocks that could hit inflation and risk sentiment.

UK Economic Review 2025 and Outlook 2026

The UK enters 2026 with a “better, not booming” baseline: GDP growth around 1.2–1.3%, CPI inflation easing into the 2–3% range (near target by year-end), unemployment broadly steady around 5%, and a cautious easing cycle that leaves Bank Rate near 3.25% by end-2026. This is consistent with a soft landing—disinflation without a deep recession—while growth remains structurally modest.

2025: Disinflation arrived; growth didn’t

The defining feature of 2025 was the gap between cooling inflation and weak momentum. Markets remained sensitive to low trend growth (around ~1% annually) and limited fiscal flexibility. Household demand stayed fragile: late-2024 prints such as November GDP +0.1% m/m and December retail sales -0.3% showed how quickly consumers retrenched when real incomes were under pressure.

Early 2025 data suggested the economy avoided a sharp downturn but lacked lift. Q4 2024 GDP was 0.1% q/q (1.4% y/y) and January 2025 retail sales fell 0.5%. Inflation was down from the 2022 peak, but still uncomfortable: CPI rose to 3.0% in January from 2.5% in December 2024. Fiscal policy leaned credibility-first and restrictive, including a rise in employers’ National Insurance Contributions to 15% from April 2025 (with a lower threshold), reinforcing the view that policy would remain tight even as growth cooled.

Monetary policy began to pivot, but cautiously. In May, the Bank of England cut Bank Rate by 25 bps to 4.25% in a narrow 5–4 vote, signaling incremental, data-dependent easing. Mid-year data then reinforced the “disinflation versus stagnation” tension. June consumer conditions deteriorated sharply, with core retail sales -2.8% m/m (the weakest month in more than two years). Housing signals were mixed but credit tightened, while the labor market softened (unemployment rising toward 4.7% by July).

The BoE cut again in August, taking Bank Rate to 4.0% (again 5–4). But inflation did not decelerate smoothly: headline CPI rose to 3.8% y/y in July and services inflation stayed elevated at 5.0%, limiting the MPC’s ability to accelerate easing. The economy increasingly looked “two-track.” Q2 GDP grew 0.3% q/q (1.2% y/y), supported by services and a construction rebound. Surveys echoed that split: the August flash composite PMI rose to 53.0, driven by services at 53.6, while manufacturing remained in contraction (47.3).

By late 2025, the narrative hardened into “stagnation with disinflation.” Q3 GDP grew only 0.1% q/q (1.3% y/y), monthly GDP fell 0.1%, and PMIs hovered near the 50 line (composite 50.5; services 50.5). In December, disinflation had progressed enough for another narrow cut, taking Bank Rate from 4.00% to 3.75% (5–4), even as the composite PMI held in expansion at 52.1. The UK avoided a clean recession, but ended the year with weaker momentum and a central bank still wary of wage- and services-driven inflation.

2026 baseline: modest growth, cooler inflation, gradual easing

Most forecasts cluster around 1.2–1.5% GDP growth in 2026. Constraints remain: still-restrictive financial conditions, weak productivity, and cautious household spending after a prolonged cost-of-living squeeze. Unemployment, which rose toward ~5.1% by late 2025, is expected to hover around 5.0% through much of 2026 before easing gradually.

Inflation is projected to cool further after falling to ~3.8% by late 2025. Many projections converge around ~2.5% CPI by Q4 2026, moving closer to target later in the year, though the path remains sensitive to domestic cost pressures (especially services prices and wages).

Monetary policy is expected to ease in measured steps. After the December 2025 cut to 3.75%, market pricing and many baselines imply Bank Rate drifting toward ~3.5% in the second half of 2026, with some scenarios around ~3.25% by year-end. The BoE is likely to stay data-dependent: persistent services inflation could slow the pace, while a sharper demand slowdown could pull easing forward.

Fiscal policy remains the main swing factor. The Autumn 2025 budget’s mix of tax rises and spending restraint supports credibility but may be a mild headwind to growth in 2026. The key risk is political: if discipline weakens and policy turns more expansionary, the UK’s reliance on foreign capital could translate quickly into higher yields and renewed pressure on sterling.

Key sectors to watch

Housing: After the mortgage-rate shock of 2023–24 cooled prices and transactions, 2026 is expected to be steadier. As borrowing costs ease, major forecasters anticipate modest house-price growth of roughly +2% to +4% by end-2026—stabilization rather than a boom—with regional divergence and gradual affordability improvement if wage growth outpaces house prices.

Financial services: UK banks enter 2026 from a relatively strong starting point after benefiting from higher rates. Structural hedges can cushion net interest margins as policy rates decline, and capital buffers appear solid. The main risk is late-cycle credit deterioration if unemployment rises or growth disappoints. For the City, post-Brexit competitiveness initiatives remain central, while investment-banking activity improves only if global issuance and M&A recover.

Energy: Household bills are far below 2022 peaks, making less energy because of an inflation headwind, though price-cap resets can still create volatility. The transition agenda—offshore wind, storage, grid upgrades, and nuclear (including SMR progress)—is accelerating, but execution risks (skills, supply chains, financing) remain key.

Markets: GBP and UK equities

Sterling enters 2026 on firmer footing after strengthening through 2025 into the mid-$1.30s. The baseline is range-bound to slightly firmer versus USD but modestly softer versus EUR, with outcomes sensitive to rate differentials, policy credibility, and global risk sentiment.

UK equities start 2026 with improved sentiment after a stronger 2025 and a steadier macro backdrop. The FTSE 100’s sector mix—commodities, energy, banks, and pharma—can remain supportive, while the more domestically sensitive FTSE 250 has greater upside if UK activity improves. Valuation remains a tailwind, with the FTSE All-Share around ~12.5x forward earnings, leaving room for upside if international allocations rebuild.

Bottom line

The best framing for 2026 is gradual normalization: inflation continues to cool, policy rates edge lower, and growth improves modestly from a weak 2025 baseline. Risks remain, especially around fiscal credibility and sticky domestic inflation—but the baseline is a soft landing with slow growth and a measured easing cycle that supports housing, credit, and equity valuations.

Eurozone 2026 Economic Outlook and 2025 Review

The Eurozone enters 2026 with a cautiously optimistic outlook. Output is expected to expand by about 1.1–1.3%, inflation is projected to settle close to the ECB’s 2% target, and unemployment should remain around 6%. This baseline relies on steady policy execution and supportive global conditions. Resilience is still the core narrative, but risks, including stagflation dynamics or an externally driven downturn—could test stability.

For policymakers, the central challenge is balancing monetary and fiscal tools to support the recovery without reigniting inflation. Businesses and investors should continue to monitor leading indicators and stay nimble. The most visible opportunities sit in sectors benefiting from policy support, while structural constraints remain a drag elsewhere. If the Eurozone’s hard-earned resilience holds, 2026 could represent a shift from crisis management toward sustainability though modest—growth.

Euro Area Economic Review 2025

The year 2025 opened with fragile momentum. Confidence improved slightly, but activity remained close to stall speed. Services performed better than manufacturing, and disinflation progressed, though it was not yet fully complete. The ECB began easing policy early in the year and, by December, the deposit facility rate had been reduced to 2.0%. Inflation pressures softened and activity indicators edged higher, but overall growth stayed subdued.

Key Developments

• Early 2025: Modest growth, with the HCOB Composite PMI near 50; headline and core inflation easing but still above target.
• Policy pivot: The ECB cut rates in March and April, adopting a meeting-by-meeting approach and emphasizing data dependence and risk management.
• Mid-year: First-quarter GDP surprised on the upside; PMI readings pointed to a services-led expansion; inflation cooled to roughly 1.9% and the ECB cut again in June.
• Late year: A two-speed economy persisted—services resilient, industry weak—while September and October surveys improved slightly without signaling a breakout.
• Year-end: Inflation was under control, activity was marginally better, and the ECB held rates steady.

2025 Summary

• Disinflation advanced, creating room for policy easing.
• Growth remained weak and leaned heavily on services.
• The deposit rate was cut to 2.0% and then held steady.
• The economy remained two-speed: services stronger; industry and construction weaker.

Eurozone Economic Outlook 2026

Baseline forecasts call for GDP growth of about 1.1–1.3%, inflation around 2%, and unemployment near historically low levels. The ECB is expected to keep rates around 2%. While a soft landing remains the central scenario, risks include stagflation or renewed weakness if energy or geopolitical shocks emerge. These risks are partly offset by upside potential if fiscal support strengthens and global demand improves.

1) Macroeconomic Outlook

• Growth: Domestic demand is expected to drive moderate expansion. Consumption should benefit from real wage gains and low unemployment. Public spending on infrastructure and defense provides fiscal support. Business investment is expected to recover gradually, and exports should improve if global demand rebounds.
• Inflation: Headline and core inflation are projected in the 1.6–1.9% range. Softer energy prices and easing supply bottlenecks support disinflation, while moderating wage growth and subdued demand help anchor prices.
• Employment: Unemployment is expected to hover around 6.2%. The labor market remains tight, but hiring is slowing and wage pressures are easing.
• Policy: The ECB is likely to maintain rates near 2% through 2026. Limited additional cuts are possible if growth disappoints. Long-term yields are expected to remain higher than pre-pandemic levels as quantitative tightening continues.

2) Sectoral Outlooks

• Manufacturing: Output is likely to be flat or modestly higher. Headwinds include elevated costs and trade uncertainty. Support comes from lower energy prices, improving external demand, and investment linked to the green transition.
• Energy: Supply security has improved. Prices are expected to ease modestly but remain above pre-2021 levels. Renewables continue to gain share, though gas still sets marginal power prices.
• Financial Services: Banks remain profitable and well-capitalized. Loan growth should improve modestly, while asset quality remains sound, with continued emphasis on credit quality and efficiency.

3) Currency and Stock Markets

• EUR/USD: The euro is expected to appreciate moderately against the dollar as policy convergence reduces the U.S. yield advantage. Fundamentals and balance-of-payments dynamics support the currency, though risk sentiment remains a key swing factor.
• European equities: The outlook is constructive but measured. Disinflation, steady demand, and lower energy costs support mid-single-digit earnings growth. Valuations remain more attractive than U.S. equities, pointing to potential for modest positive returns if the soft-landing scenario holds.

The Nikkei 225 index enjoyed a 26 per cent surge in 2025, rising to record highs above 52,000. For 2026, strategists are cautiously optimistic yet expect volatility. A common projection sees the index near 55,000 at year‑end, implying that share prices may plateau or give back some early‑year gains. The first half should benefit from solid earnings (supported by a weaker yen and real wage gains) and pro‑growth policies, while the second half could be challenged by tighter global financial conditions, renewed inflationary pressures or faster BoJ tightening. Relative winners are likely in technology, automation and finance; indebted or low‑growth companies may underperform. Overall, investors anticipate the Nikkei trading between 45,000 and 55,000, its trajectory hinging on global trends and domestic policy.

Key Indicators for 2026 

To gauge whether Japan achieves its anticipated soft landing, investors and policymakers should track several key indicators:

1. Wages and Shuntō negotiations: Strong nominal wage growth (around 3 per cent or higher) would show labour shortages translating into purchasing power. Major unions aim for about 5 per cent pay rises in 2026; monthly earnings and bonus data will confirm if real incomes are improving.
2. Core inflation: Watch the BoJ’s preferred measures — CPI excluding fresh food and the narrower “core‑core” excluding both fresh food and energy. If these drift toward 1 per cent, demand‑driven inflation is easing; if they stay nearer 2 per cent, the BoJ may continue tightening. Inflation expectations, measured by surveys and breakeven rates, offer additional clues.
3. BoJ guidance and yield‑curve control: Changes in BoJ communications or yield‑curve‑control settings could move markets. Monitor statements from Governor Ueda and the Outlook Reports scheduled for April, July and October 2026 for hints of faster rate hikes or adjustments to the 10‑year yield cap.
4. Exports and tourism: Keep an eye on export volumes, new export orders and destination‑specific trade data (notably to the U.S. and China). Persistent declines in exports would signal external drag, while inbound tourism figures — exceeding the pre‑pandemic record of roughly 32 million visitors — would be a positive offset.
5. Labour force and demographics: Track participation rates among women (already around 55 per cent) and seniors, as well as any immigration policy changes. Gains in these areas could ease labour shortages and support growth, while population decline without productivity improvements would weigh on the outlook.
6. Global and geopolitical factors: The pace of U.S. Federal Reserve rate cuts, outcomes of the U.S. election and any shifts in tariff policy could materially influence Japan’s currency, exports and monetary stance. One‑off events, such as a Supreme Court decision on tariff legality or a possible Japanese general election, may also sway markets.

China’s Economic Outlook for 2026 & 2025 Review

China enters 2026 on a trajectory of gradual stabilization after avoiding a sharper slowdown in 2025. Strong external demand and targeted policy support kept growth around five percent, but domestic momentum remained weak. Households stayed cautious, the property market remained depressed, and producer prices continued to fall. Together, these dynamics point to a confidence challenge rather than a simple liquidity shortfall. As a result, policymakers appear focused on steadying the economy rather than reflating it, implicitly acknowledging that China’s growth path is settling at a lower—but more sustainable—level.

2025 in Review

The year unfolded in three distinct phases. Early on, exports surged, pushing the trade surplus to fresh records and offsetting weak consumption. Soon after, purchasing managers’ surveys flagged manufacturing contraction and softer services activity, indicating that underlying demand was not keeping pace with output. Inflation remained near zero: consumer prices were broadly flat and producer prices fell through most of the year, reflecting weak pricing power amid persistent excess capacity.

Policy support followed. The People’s Bank of China cut the five-year Loan Prime Rate for the first time since 2023, while local authorities eased housing restrictions, reduced mortgage rates, and relaxed purchase rules across many cities. Developers were encouraged to prioritize project completion and the delivery of pre-sold units. Even so, property sales, prices, and private real-estate investment continued to decline. By late 2025 the economy had stabilized, but there was no clear re-acceleration, leaving confidence fragile.

Outlook for 2026

Growth is expected to slow but remain positive. Most international institutions project GDP expansion of roughly 4.4–4.5%, while some investment banks see upside toward 4.8% if stimulus is front-loaded. Inflation should remain low, rising from near zero to around one percent, which gives the central bank room to sustain an accommodative stance.

Urban unemployment is likely to remain near five percent. Youth joblessness is expected to stay elevated despite targeted hiring programs, while the labour market must absorb a record cohort of university graduates. Policy settings are expected to remain supportive, combining modest rate and reserve-requirement cuts with a fiscal deficit near four percent of GDP to fund infrastructure and consumption incentives.

The renminbi is expected to trade in a narrow range around seven per US dollar, as authorities manage volatility without signalling a preference for rapid depreciation or appreciation. Interest-rate differentials may narrow as the Federal Reserve begins cutting rates. Equity markets may edge higher, but sustained gains depend on an earnings recovery rather than sentiment alone.

Drivers of Growth

China’s 2026 growth profile rests on three pillars: policy support, exports, and a tentative domestic recovery. Fiscal and monetary easing should underpin activity through infrastructure investment, consumption vouchers, tax relief, and pro-growth credit policies. The PBoC remains prepared to cut reserve requirements and lending rates to ensure adequate liquidity, though policymakers are cautious about excessive easing that could trigger capital outflows.

Exports should remain a key engine, even if momentum cools after 2025’s surprise strength. China’s leadership in electric vehicles, batteries, ships, and semiconductors—combined with continued market diversification beyond the United States—should help keep export growth in the mid-single digits, despite weaker global demand and rising protectionism.

Household consumption is expected to improve modestly from a low base as incomes recover and confidence stabilizes. Government initiatives—service vouchers, tax breaks, and subsidies for durable goods—should provide support, but high savings, job uncertainty, and declining housing wealth will limit the upside. Services including tourism, hospitality, and entertainment should continue to recover as post-pandemic norms consolidate.

Fixed-asset investment is likely to remain uneven. Infrastructure spending should stay firm on the back of bond-financed projects. Manufacturing investment could tick higher with policy support for strategic industries. Real-estate investment is expected to contract again as developers’ complete projects and deleverage. Financing conditions should remain accommodative, but weak profit prospects and high corporate debt may restrain private investment.

Structural Headwinds

Persistent structural constraints continue to weigh on the outlook. The property slump remains the single largest drag: defaults, falling prices, and high inventories have eroded household wealth and weakened local government revenues. Policymakers aim to arrest the decline by easing purchase restrictions, cutting mortgage rates, expanding tax deductions, and converting unsold units into public housing—while insisting they will not recreate a speculative boom.

Demographic pressures are intensifying as the population ages and the workforce shrinks. Youth unemployment remains stubbornly high, and 2026 brings another record intake of graduates into the labour market. High debt levels also constrain local governments and state firms, especially after the collapse in land-sale revenues. Greater reliance on special bonds and policy-bank lending to finance projects has increased concerns over hidden liabilities.

External risks remain material. A temporary tariff truce with the United States could lapse in mid-2026, while tensions with other partners persist through anti-dumping measures and technology controls. Geopolitical flashpoints—from Taiwan to semiconductor export bans—could reintroduce volatility and disrupt access to critical technologies.

Sectoral Perspectives

Housing and construction remain the key wild card. Following a year of defaults and price declines, the policy priority is stabilisation rather than revival. Local governments continue to ease purchase rules and consider fresh incentives for first-time and upgrade buyers. Yet high unsold inventory and developers’ cash constraints imply subdued construction activity. Real-estate investment is likely to fall again, though less sharply than the double-digit contraction recorded in 2025. A meaningful upside scenario would require large-scale government purchases of unsold units or broad-based credit easing, neither of which is expected under the current stance.

Manufacturing faces domestic overcapacity, even as it benefits from external demand. Capacity has expanded faster than domestic demand across traditional industries such as steel and cement and newer sectors including EV batteries and solar panels, compressing margins. The government’s anti-involution campaign seeks to reduce destructive competition by curbing price wars and encouraging consolidation. Export performance is expected to remain resilient as China diversifies markets and maintains leadership in key product categories. High-tech manufacturing—such as aerospace, advanced machinery, and renewable-energy equipment—should receive continued policy support, consistent with the new five-year plan’s focus on strategic emerging industries including AI, robotics, new-energy vehicles, biotechnology, and semiconductors.

Technology remains the clear bright spot. The regulatory tightening on internet platforms has eased, and authorities now underscore the digital economy’s role in growth. Analysts have become more constructive on Chinese tech equities, pointing to pro-growth policy signals, the importance of showcasing technological progress, and the search for investment alternatives to property. High-tech manufacturing—semiconductors, EVs, batteries, and telecommunications equipment—continues to attract heavy state investment. China is investing aggressively in domestic chip production, aiming to strengthen capabilities at mature nodes and reduce reliance on foreign suppliers. Electric vehicles were a standout in 2025, with Chinese firms becoming the world’s largest auto exporters, and expansion into Europe and Southeast Asia is expected to sustain momentum. AI is another priority, with investment in large models and applications and growing recognition of AI’s potential to offset ageing-related economic headwinds. Progress remains partly dependent on global conditions: a limited thaw in US–China technology tensions offer some relief, but any flare-up could trigger renewed restrictions.

Financial Markets

In FX markets, the yuan is expected to stay range-bound around seven per dollar. The PBoC is positioned to smooth volatility, intervening to prevent rapid moves while balancing export competitiveness against import costs. Interest-rate differentials will guide direction. If the Fed cuts more than expected while the PBoC eases only modestly, the yuan could strengthen. Conversely, renewed capital outflows, particularly under financial stress, could weaken it.

In equities, baseline expectations cluster around mid-single-digit to low-double-digit returns. Performance depends on earnings growth, policy support, and improved sentiment. Investors are generally advised to prioritize sectors aligned with national priorities, advanced technology, green energy, and higher-quality consumer franchises—as well as high-dividend state firms, while remaining cautious on property-linked exposures. Foreign flows remain a key swing factor: stronger growth and clearer policy signals could attract inflows, whereas geopolitical escalation or a global risk-off environment could drive outflows.

Institutional Forecasts and Conclusion

Major forecasters broadly agree that China’s growth will moderate in 2026. The IMF, World Bank, and OECD cluster around 4.4–4.5%, while some banks see scope for 4.8% if early stimulus is strong. More cautious views warn growth could drift toward four percent without reforms. Policymakers are likely to set an official target near five percent to anchor expectations.

The prevailing consensus is that stimulus and resilient exports should keep growth positive, but domestic constraints—particularly the property downturn and fragile consumption—will cap the pace. More durable expansion ultimately requires deeper structural reforms and a shift toward a more consumption-led model. In that context, 2026 is shaping up as a year of moderate but stable growth, dependent on policymakers’ ability to manage cyclical pressures while addressing longer-run structural challenges and laying the groundwork for more balanced development.

Japan’s Economy in 2025–26: Concise Outlook

Japan approaches 2026 with a cautiously optimistic narrative. After years of deflation and a turbulent pandemic era, the economy is moving through recovery and gradual normalization. Economists expect modest real GDP growth, inflation converging toward the Bank of Japan’s 2% target, and a slow tightening of monetary policy. Core fundamentals—high employment, strong corporate balance sheets, and supportive fiscal measures—provide resilience. However, the outlook remains complicated by demographic headwinds (an ageing population and persistent labour shortages) and external risks linked to trade disputes, uneven global demand, and geopolitical tensions. Close attention to key indicators—wages, core inflation, export orders, and policy signals—will help stakeholders judge whether Japan achieves the soft-landing policymakers have long sought or encounters renewed headwinds.

2025 in Review: Transitions and Tension

The year 2025 marked a pivotal transition for Japan’s economy. Inflation returned after a prolonged deflationary period, prompting the Bank of Japan to raise its policy rate for the first time in 17 years. GDP growth at the end of 2024 was modest, but early-2025 data were mixed. Price pressures increased even as some service costs eased, trade improved, and exports outpaced imports. As fears of U.S. tariffs—especially on automobiles—dominated sentiment, momentum faded. The central bank held rates steady and forecasts were revised down. The first quarter likely recorded a small contraction as investment and net exports weakened, headline inflation stayed in the mid-3% range, and unemployment remained near historic lows. Wage agreements of around 5% reached a multi-decade high but did not fully compensate for cost-of-living pressures.

By mid-year, Japan exhibited a two-speed pattern. Corporate investment and services held up well, while manufacturing slipped back into contraction and core inflation stayed above target. Late-summer data remained uneven—retail sales slowed, factory output fell, and core-core inflation hovered near 3%—while bond yields spiked, testing the BoJ’s resolve. September brought firmer GDP growth, but year-end figures underscored domestic fragility: output contracted again, household spending declined, and confidence stayed subdued. Inflation eased slightly as exports strengthened, and in December the BoJ raised its policy rate to 0.75% to reinforce normalization.

Analysts highlighted five turning points: January’s rate hike signaled the start of normalization; spring tariff fears exposed reliance on exports; mid-year data confirmed a two-track economy; September’s bond volatility sharpened financial stability concerns; and year-end weakness in consumption emphasized domestic vulnerabilities despite stronger trade. In sum, 2025 delivered progress alongside strain—policy normalization advanced and inflation gained traction, but growth remained uneven and sensitive to external shocks.

2026 Macroeconomic Outlook

Consensus expects Japan’s economy to grow only modestly in 2026. Most forecasts cluster around 0.7% real GDP growth, within a range of roughly 0.6–1.1%. Domestic demand—supported by fiscal measures and rising wages—should be the primary driver, while soft global demand and U.S. tariffs could make net exports a mild drag. Inflation is expected to ease back toward the BoJ’s 2% target after running higher in recent years.

Policy rates are projected to rise gradually from 0.75% toward about 1.0–1.25% by year-end, which would keep real rates close to zero if inflation remains near target. Long-term yields may drift higher, but overall financial conditions should stay broadly accommodative. Unemployment is expected to hold around 2.5% amid ongoing labour shortages. Major unions are pursuing wage increases near 5%; whether nominal pay growth can outpace inflation will determine real income performance. Overall, the macro picture implies moderate growth, inflation near target, gradual rate normalization, and a tight labour market.

Sectoral Snapshot

Exports: Export growth is expected to be flat or modest. Late-2025 weakness tied to softer global demand and new U.S. tariffs may persist, although improving orders from Asia and Europe—and a weaker yen—offer some offset. Downside risks include a global slowdown or renewed protectionism.

Automotive: Autos remain central, but U.S. tariffs pressure margins as manufacturers cut prices to protect volumes. Export volumes are soft, though domestic sales and substantial investment in EVs and autonomous driving, supported by generous subsidies—help underpin longer-term prospects.

Technology: High-tech industries remain a bright spot. Producers of semiconductor equipment, precision components, and factory automation benefit from global investment in AI, data centres, and electrification, supported by fiscal incentives. The outlook is constructive but sensitive to swings in the global semiconductor cycle.

Services: Services should provide stability. Tourism has rebounded strongly and could exceed pre-pandemic records if no new restrictions emerge, supporting hospitality and retail. Domestic services face mixed conditions: higher living costs restrain discretionary spending, but real wage gains could unlock pent-up demand. Demographics support healthcare and elder-care services, while labour shortages may cap growth in hospitality.

Currency and Equity Markets

The yen remains a key swing factor. After years of depreciation, it entered 2026 near ¥155 per US dollar. The baseline view is stabilization—or modest strengthening—if the U.S. Federal Reserve cuts rates as inflation cools and the BoJ continues gradual normalization, potentially pushing USD/JPY toward the mid-140s. Contrarian views anticipate renewed weakness toward ¥160 or beyond, arguing the BoJ is reluctant to raise real rates and that Japanese investors continue allocating savings to higher-yielding foreign assets. Japan’s current-account surplus is increasingly driven by overseas investment income, much of which is reinvested abroad, reducing the yen’s traditional safe-haven support. The prevailing expectation is a wide ¥140–160 trading range, with direction determined primarily by central-bank signals and capital flows.