Despite severe headwinds ranging from Donald Trump’s trade war to geopolitical tensions and conflicts in Ukraine and the Middle East, the global economy proved more resilient in 2025 than feared.
Entering the new year, the hope is that the worst of the recent inflation shock has passed, as the world’s most powerful central banks have lowered interest rates. However, the pre-Covid era of extremely low borrowing costs is a distant memory, global growth is slowing and conditions remain fragile.
Here are five key charts outlining the economic outlook for 2026.
AI-powered economic growth?
After years of hype, the catalytic potential of artificial intelligence will be of great importance to the global economy in 2026. Can companies begin to drive productivity growth by investing heavily in datacenters, IT, and automation? Or could stratospheric valuations for AI companies dampen investor enthusiasm amid fears of a US stock market bubble?
A survey by Deutsche Bank of its institutional clients revealed that the bursting of the tech bubble topped the ranking of the 15 biggest risks for the coming year, with 57% of respondents placing it among their three biggest risks.
Jim Reed, the bank’s global head of macro research, said: “We haven’t seen a single risk score rise yet as we enter the new year, making this clearly a major concern for 2026.”
Despite potential AI tailwinds, global GDP growth is projected to moderate in 2026 amid the impact on international trade from Trump’s tariff policies. Consumer demand – remains under pressure due to elevated inflation and borrowing costs over the years.
Growth in China is expected to slow as Beijing faces increasing challenges in boosting activity. It is estimated that the US will lead the G7 growth league table, followed by Canada and Britain.
inflation cool But the risk remains
Households have faced severe cost-of-living reductions as inflation remains high, but consumer price growth is expected to slow significantly in 2026.
Economists are predicting a “normalization” of inflation in rich countries, which would pave the way for central banks to end the cycle of interest rate cuts – effectively removing the constraints on the economy from high borrowing costs.
The tenure of Federal Reserve Chairman Jerome Powell in the US ends in May. The focus will be on whether a deeper interest rate cut will follow Powell’s replacement amid political pressure from Trump. Fears of Washington’s intervention are also likely to impact financial markets.
Britain risks falling behind into deflation. In the autumn, the International Monetary Fund estimates Britain will face the highest inflation rate in the G7. However, that was ahead of Rachel Reeves’ budget, which the Bank of England expects could get the headline rate closer to its 2% target by the summer.
As for the European Central Bank, inflation in the single-currency bloc is already hovering close to its 2% target, prompting it to expect to take action in 2026.
Still, economists are cautious that inflation could be at risk of rekindling in rich countries – limiting scope for further rate cuts.
Jack Meanings, chief UK economist at Barclays, said: “We are living through a period of repeated shocks, and we are coming into a period where there is always the possibility of new shocks to the system.
“But, failing that, the conversation is more of a plus or minus, a small adjustment to the target, rather than these big swings we’ve had recently. So it’s more familiar to life for people who remember things before the big inflation. And it’s a little more common.”
Tackling increased trade tensions
After the initial shock of Trump’s “Liberation Day” proclamation last April, international trade tensions have subsided.
But, while the worst has not immediately materialized, U.S. tariff rates are significantly higher than they were before Trump’s return to the White House, and trade policy uncertainty remains.
Economists believe escalating geopolitical tensions more broadly will likely lead to trade fragmentation, forcing companies to accelerate their supply chain diversification and near-shoring efforts.
“Geopolitically, the world remains a boiling pot of uncertainty,” said Carsten Brzezczyk, global head of macro at ING Bank. “We have still not received a US Supreme Court tariff decision, and rising trade tensions between the US and China and between Europe and Beijing appear to be turning into a new normal.”
In the longer term, the tariff hit will likely reduce trade volumes, raise supply-chain costs and slow economic growth around the world.
to control bonded outposts
In 2025, governments of advanced economies came under pressure from rising borrowing costs, especially for countries with already high levels of debt and weak growth prospects.
The US, Britain and France were particularly the target of bond watchdogs. Donald Trump’s One Big Beautiful Bill Act rattled markets, while speculation over Britain’s budget prompted a selloff in its bond markets, and France plunged into crisis as Emmanuel Macron’s government struggled to pass a budget.
Forecasters have warned that fiscal weaknesses will persist in the coming year, despite hopes that a stable inflation outlook and thawing trade tensions could provide a more supportive backdrop. Highly indebted governments facing pressure to boost growth and increase defense spending will come under the microscope.
In the UK, there are expectations that Reeves’ decision to leave more leeway against his own self-imposed fiscal rule in the autumn budget could reduce the risk of a reaction in the bond market. But the focus is turning to the tough May local elections and whether Keir Starmer can survive a leadership challenge.
increase in unemployment
In the unstable economic backdrop, demand for recruitment in rich countries declined in 2025. Unemployment rates rose sharply in the US and UK, and economists have warned that further increases in unemployment are a major risk for 2026.
Tax policies, trade uncertainty and AI adoption are expected to impact employment. So far there are limited signs of widespread AI-fueled job displacement. But investment is slowing, and youth unemployment rates, particularly in Britain, are causing political concern. Meanwhile, workforce participation remains under pressure due to demographic changes such as population aging and increasing poor health.
In the UK, the unemployment rate has already reached 5.1%, the highest level outside the Covid pandemic in almost a decade, and could rise further in 2026. In the US, the rate hit 4.6%, the highest in four years, amid concerns over the strength of the world’s largest economy.
Despite pressure in the jobs market on both sides of the Atlantic, wage growth is expected to remain resilient, helping workers rebuild fiscal buffers, but with central bankers concerned about inflation risks.
Hannah Slaughter, a senior economist at the Resolution Foundation, said: “UK unemployment is likely to rise into 2026 and there is a risk that pay packets could start to shrink again. Policymakers need to respond to these trends.”
