Global Economic Overview – December 2025

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Global

In a year of large and volatile US tariff rises, global economic expansion in 2025 was reassuringly resilient. Our latest forecast is that GDP growth was 3.3%, unchanged from both 2024 and our prediction in October. In fact, despite numerous question marks, our 2025 projection was contained within a remarkably narrow range of 3.0%-3.3% all year (Chart 1). A major factor supporting activity has been the absence of a trade war. Responses to the Trump tariffs have been in the form of negotiation not retaliation, limiting additional price pressures and giving economies facing higher US tariffs scope to bring interest rates down to support growth. For 2026, we see a similar GDP outlook, with world growth at 3.2%, a touch above our previous forecast of 3.1%.

Chart 1: The range of our 2025 GDP forecasts through the year was remarkably narrow



Source: Investec Economics


Chart 2: Chinese exports to major trading partners post-Liberation Day: a change of direction



Source: IMF DOTS, Investec Economics

Other factors have also limited the impact on growth. The first is a high degree of trade diversion. While Chinese exports to the US are on average down by 36% on the year since April, those to Vietnam are up 29% and Thailand 12% (Chart 2). By contrast, US imports from various Asian economies have accelerated due to better competitiveness vis-à-vis China. Note too that the US is not the dominant player in global trade it used to be - its share of world imports is now 13%, compared with 20% or so in both 2000 and the mid-1980s. Tellingly after a lull in the spring, annual world trade volume growth has recovered to around 4% in recent months, although we would again stress the clear shift in the pattern of trade.
 

Chart 3: Balance of central banks easing policy v tightening policy



Source: Investec Economics, Macrobond

A major story in 2025 was that better inflation prospects enabled many central banks (CBs) to relax the degree of policy restrictiveness – once again more CBs cut rates than lifted them (Chart 3). This should be the case in 2026 too, albeit with more CBs raising rates. But on our baseline case of modest GDP growth, there seems to be little to justify aggressive rate reductions. Accordingly our forecasts in jurisdictions such as the eurozone and the UK are for rates to settle at levels which CBs consider to be neutral and then stay there for a period. An exception here is the US, where a (presumably) Kevin Hassett-led Fed could well deliver a mildly accommodative policy stance (see the US section).

At the same time, CBs are well on the way to unwinding a significant proportion of their QE asset purchases. Technically this reversal (i.e. QT) represents a tightening of monetary policy, albeit secondary to policy rate moves. Such sales result in lower bank reserves at CBs, which if extended too far, result in money market liquidity shortages and volatility in shortdated rates. A typical CB response would be to inject liquidity via secured lending to banks (e.g. repos), but the Fed, which recently ended QT, is now set to buy Treasury bills (and potentially bonds with maturity of up to 3yrs) instead. By contrast and more conventionally, the BoE has signalled that it wants greater reliance on open market operations via repos in a post-QT world. We discuss this further in the respective sections.


Chart 4 Central bank reserve balances have fallen as a % of GDP (though less in the US)



Note: The Fed’s Reverse Repo Facility drains reserves.
Source: Bank of England, Federal Reserve, ECB, Macrobond, Investec Economics

Many commentators suggest that the current effective US tariff rate is 17%. But these estimates do not take into account shifts in trade patterns over 2025. Using US tariff revenue data to August, we calculate the actual average rate to be 11%. Our assumption for 2026 is that there will be no extra significant tariff increases. It would be remiss of us not to mention new geopolitical flashpoints, such as that between the US and Venezuela, plus a row between Japan and China, which has resulted in a defensive build-up on Japan's Yonaguni island, 107kms east of Taiwan. At this stage though, it is difficult to decide which might become material and if so, the scale of any economic and market impact.



Chart 5: Trade diversion has yielded a lower effective US tariff rate than under old trade patterns



Source: Census Bureau, US Department of Treasury, Investec Economics

Another risk being flagged for 2026 is sharp re-pricing of assets in equity markets. Equity indices, including the S&P 500, TOPIX, Stoxx50 and FTSE 100, have reached all-time highs this year, with valuations for tech stocks particularly elevated; AI companies now account for 67% of YTD returns* of the S&P 500. But this poses risks. If the expected earnings growth from AI does not materialise, this could result in a material market correction and shift in sentiment. As the BoE highlights in its latest FSR*, this is against a backdrop of tight credit spreads, potential weaknesses in private credit markets and rising public debt, posing potential threats to financial stability and a risk to our outlook for the global economy over the next year.


Chart 6: Highly valued stocks risk what could potentially be a sharp repricing



*Financial Stability Report
Source: Macrobond, Robert Shiller, Investec Economics  

United States

Although the US federal government is back open for business, many economic data releases remain delayed, and in some cases cancelled, clouding the view of the US economy. Despite these constraints, our broad take remains that economic momentum in the US has weakened this year, and that were it not for stronger AI activity, we would be looking at a visibly softer GDP growth rate for 2025 than the 1.9% that we currently pencil in (Chart 7). We are set to get the Q3 GDP number on 23 Dec and while this looks to be strong, it is likely to be offset by a weak Q4, due to the shutdown. Following a rebound in Q1, this distortion should then filter out, provided Congress manages to extend funding beyond the current 31 Jan deadline.
 

Chart 7: AI has been a big driver of US GDP growth so far this year (saar)



Sources: Macrobond, BEA and Investec Economics

A particular point of difficulty is the lack of inflation data, given that there is not much in the way of alternative insights. From what we do know, inflation has risen by less than expected in response to tariffs, at least so far, questioning our original assumption of a 2/3 passthrough to consumer prices. There have been suggestions, such as in the Beige Book, that firms are spreading the extra costs along the supply chain. There are more numbers on the labour market however, and these have broadly shown a loosening in conditions, albeit to varying degrees (Chart 8). We tend to look at the unemployment rate, given that this also captures changing supply dynamics. The rate has risen in recent reports, although we can’t assess its October performance, with the release having been cancelled.


Chart 8: The US labour market is cooling; the question is by how much?



Heat map colours: pink z-score between 0-1, light blue z-score between 0 to -1, dark blue z-score below -1, red z-score above 1.
Source: Macrobond, ISM, ADP, BLS and Investec Economics

Fed Chair Powell’s view, as he expressed at this week’s press conference, is that downside risks to the labour market have grown, while the impact of tariffs (as they stand) on inflation should peak in Q1 of next year. This followed the announcement that the FOMC voted to cut the Fed funds target range by 25bps. Given the accompanying guidance that policy is “well positioned”, we think rate cuts under Powell as Chair are now over but that his successor, who is likely to be more dovish, will resume rate reductions in H2 ‘26. We see interest rates settling at 2.75-3.00% (Chart 9), just below what we deem to be ‘neutral’, albeit recognising the downside risks to this view if the new Chair (probably still Kevin Hassett) convinces the committee that even lower rates are appropriate.


Chart 9: We are looking for rate cuts to resume with the new Fed Chair



Source: Macrobond and Investec Economics

In early December the Fed ended QT due to growing signs of tightness in funding markets (Chart 10). All maturing Treasury securities will now be reinvested into the like, while maturing agency debt and MBS* will be reinvested into T-bills. There will be other purchases too: if the balance sheet remained frozen, bank reserves would decline as non-reserve liabilities (e.g. notes & coin) grew. Also, reserves are still being 'hoarded' by banks due to regulatory pressures (e.g. to meet liquidity coverage ratios). To prevent funding tightness, the Fed will initially buy $40bn of Treasury bills per month, which will then taper to a lower amount. This should not be viewed as restarting QE - the aim is not to artificially lower bond yields (the Fed’s intention is to buy shorter-term debt, not longer-dated bonds), but to ensure ample liquidity in the system to avoid market stress.


Chart 10: A decline in reserves as a % of GDP (blue) contributed to funding tightness (red)



*Mortgage-backed securities. From the chart SOFR is the Secured Overnight Financing Rate, i.e. the overnight borrowing rate. IORB is the interest the Fed pays on reserve balances. The spread between the two is an indicator of stress in money markets
Source: Macrobond, Federal Reserve and Investec Economics

An alternative way to inject reserves into the market would be to encourage the usage of the Fed’s Standing Repo Facility (the BoE uses repos, but via open market operations). In the US there does seem to be a stigma attached to using it. Ultimately, however the Fed opts to approach reserve management, President Trump will be keen to avoid any types of stress on the economy next year, especially with midterm elections upcoming. Indeed, on 3 Nov Americans will go to the polls with all 435 House seats up for re-election as well as a third of Senate seats. Midterms are often tricky for the incumbent, with next year’s set to be no exception – polls suggest that retaining the House could be difficult (Chart 11).


Chart 11: Is Donald Trump heading to a lame-duck Presidency post-midterms?



Source: Macrobond, PredictIt and Investec Economics

So where does this leave USD? The dollar index* has dropped by 6.5% YTD, but there is scope for further weakening. We expect that Fed easing next year will put downward pressure on the USD, whilst a potentially less independent Fed could weigh on US assets more widely. It is still unclear which way some factors such as the midterms will push the dollar (Chart 12), but on balance we predict EURUSD at $1.20 by the end of 2026. Easier monetary policy next year will likely result in a fall in US Treasury yields too; we see the 10y yield at 3.50% by the end of next year. But increased market sensitivity to the unsustainable fiscal situation in the States is a risk which could put upward pressure on Treasury yields in the longer term.


Chart 12: Possible push and pull factors on USD - on balance we expect further weakening



Federal Reserve Nominal Broad Index
Source: Investec Economics

Eurozone

Contrary to expectations earlier this year that growth would be hit by US tariffs, the reality has been more encouraging with activity proving resilient. Indeed, whilst exports to the US have fallen 2%* post ‘Liberation Day’, they have defied fears of larger falls. Our forecast for 2025 GDP growth continues to stand at 1.4%, notably higher than the sub-1% consensus estimates following Trump’s 2 April tariffs. Inflation too has effectively returned to target, with headline HICP having been at or within 0.2%pts of 2% since March. That is in contrast to some of the EU20’s major peers where inflation remains above target. All told, as repeatedly emphasised by members of the ECB Governing Council, the Eurozone is in a ‘good place’.


Chart 13: Activity and inflation metrics point to the Euro area’s ‘good place’



* Sum of May- Sep y/y. Heat map colours: pink z-score between 0-1, light blue z-score between 0 to -1, dark blue z-score below -1, red z-score above 1.
Source: Macrobond, Eurostat, ECB

That good place will be enjoyed by Bulgaria who joins as the 21^st member of the Euro area on 1 January. In overall terms its inclusion will not fundamentally alter the outlook of the new EU21 as it will represent just 0.6% of total GDP. Nonetheless it will bring with it a strong economic performance having seen GDP growth of 3.2% in ’24 and is set to record a similar if not stronger pace of growth this year and in 2026. The EU21 itself should see momentum pick up in ’26, aided, crucially by a recovery in Germany following a stagnant two years. This in itself will be helped by a loosening in fiscal policy. Our forecast for EU21 GDP stands at 1.3%, but although the outlook looks upbeat there are risks. One key question is whether countries deliver on defence spending.


Chart 14: Bulgaria’s economic metrics are broadly in line with the Euro area aggregate



* Latest readings: Inflation Nov-25, Unemployment Oct-25
Source: Eurostat, European Commission

This year the European Commission unveiled its Readiness 2030 plan to bolster spending on Europe's defences, causing us to upgrade our growth outlook for the bloc. So far appetite looks positive. The €150bn SAFE* fund is fully subscribed; meanwhile the NEC**, which gives budgetary flexibility in EU rules to increase defence spending, has already been activated by 16 countries. But how fast will spending rise? Poland and Germany are leaders, with Berlin set to push €83bn of defence contracts through the Bundestag by the end of 2026, whereas countries further away from the conflict will be slower. But with Trump now demanding that Europe takes on the bulk of NATO’s defence capabilities very quickly, the need to increase spending cannot be ignored.  


Chart 15: The SAFE* fund is fully subscribed; Poland alone wants €43.7bn



* Security Action for Europe (SAFE) joint procurement fund   **National Escape Clause  ***As of 30 Nov 2025.
Source: European Commission, Investec Economics

‘26 should offer a picture of stability for ECB rates, with the Deposit rate likely to stay at 2.00% given that inflation is forecast to remain close to target.  That said there are risks, with hawkish comments from Isabel Schnabel prompting the curve to steepen and price in the risk of a 2026 hike. Her view is likely to be a minority one though. In fact we see risks tilted towards further easing given the risk of an inflation undershoot. The ECB’s Sep forecasts envisage what has been deemed a tolerable undershoot in ‘26 and into ‘27, but a decision to delay ETS2 until ‘28 may cut the ‘27 forecast by 0.3%pts. Unless the ECB lifts its projection for other reasons, questions over the policy setting may return. We suspect the ECB will bide its time, but we view the risk of 50bps of easing in 2026 as not immaterial.


Chart 16: ECB forecast a minor inflation undershoot, but ETS2* delay poses downside risk



* ETS2- EU Emissions Trading Scheme 2
Source: Macrobond, ECB September 2025 forecasts

Fiscal policy will be a feature of the 2026 landscape, not least due to the first aggregate fiscal loosening since 2021 (albeit by just 0.1% GDP) due to increases in defence and infrastructure spending. But not all is equal across the EU21, with France continuing to face difficulties in passing a ‘26 Budget given the need to address its deficit, which at 5.8% this year is almost double the EU limit and set amidst a divided National Assembly. Recent events have eased pressure on PM Lecornu though given the narrow passing of the social security bill, aided by concessions over pension reform. This is a positive step ahead of a full vote on the Budget, with a debate expected on 15-Dec.


Chart 17: Change in 2026 fiscal stance: annual change in cyclically adjusted primary balance



Source: Macrobond, European Commission, ECB

France still represents a risk to market sentiment, if a limited one given its woes this year have not had a material impact on EUR which has gained 12% versus USD year-to-date. Admittedly, a weak USD has been a key driver, a theme which we expect to endure in ‘26 given the outlook for US rates. Improving EU21 fundamentals should also prove EUR-supportive, so we see €:$ reaching $1.20 in Q4 ’26. In terms of bonds we see Bund yields ending ’26 at 2.75%, close to current levels given the expected stability in interest rates. But one market that could outperform and see yield spreads narrow relative to Bunds from their already 16y low is BTPs, should Italy exit the EU’s EDP* in June.


Chart 18: A strong year for the €: the USD has been a factor, but the € has gained in its own right



* Excessive Deficit Procedure
Source: Macrobond, Investec calculations

United Kingdom

Perceptions in the press and in financial markets regarding the performance of the UK economy have not exactly brightened recently. However, through the course of 2025, consensus forecasts for this year’s GDP growth have actually trended up, recently to converge with our own view, which had been more optimistic all along; it is currently for 1.4% expansion (Chart 19). No similar improvement is discernible in 2026 GDP forecasts though. There too, we are relatively optimistic, looking for 1.3% growth. And even with its heavily trailed 0.3%pt downgrade of long-term productivity growth, the OBR’s latest forecast for 2026 is close to our expectation. This would by no means be spectacular, but nor would it be poor in the context of potential growth.


Chart 19: Consensus GDP growth forecasts for 2025 have climbed; those for 2026 not (yet?)



Source: Consensus Economics, OBR, Investec Economics

Several factors stand to bolster growth. The impact of past monetary easing is building, and we expect extra rate cuts, lowering borrowing costs further. Investment is receiving other support too: even if the government’s target of delivering an extra 1.5m new homes in this parliament may be a stretch, an easing in planning restrictions should help residential construction to step up from 2026. There is also a significant extra investment push in energy* and water** infrastructure; these have already been a key driver of the recent rises in overall business investment, at least as per the latest (revision-prone) vintage of data (Chart 20). And the global race for AI deployment could also add to UK GDP.
 

Chart 20: Utilities investment has been the main driver of business investment growth lately



*£28bn between ’26 and ‘31
*£104bn between ’25 and ’30
Source: ONS, Macrobond, Investec Economics

Yet there are forces holding back activity too. Net inward migration has already fallen sharply (down to 204k in the year to June, 445k less than the year before) and the aim is to cut it further. But the most discussed factor is fiscal policy. The Budget did deliver an extra £24.1bn of net tax rises by FY2030/31. Those though are largely backloaded, to kick in from April 2028 onwards. This poses questions of how willing the government will be to follow through with them, close to an election. Gilt yields would certainly be sensitive to any subsequent watering down. But for 2026, it is the fiscal impulse* of past Budget decisions that stands to affect growth. This will be somewhat of a brake on GDP growth, albeit merely to a similar extent as was already the case in 2025 (Chart 21).

Chart 21: The government’s primary deficit is to shrink in 2026, but at a similar pace as in 2025



Source: OECD, Macrobond, Investec Economics

Against this backdrop, we expect the labour market to stay subdued; unemployment may climb a little further in 2026, even if probably by not much. This would leave scope for some further cooling in wage inflation, albeit with the upcoming 4.1% rise in the National Living Wage constraining falls. In turn, this should help to bear down on inflation: after all, alongside steep rises in administered prices, another reason for the stubbornly high rate of UK services inflation to date is still elevated inflation in those components of market services that are most wage-sensitive, as per our calculations*. (Chart 22). That said, we do not foresee the 2.0% inflation target to be attained in full during 2026: after 3.4% inflation in 2025, we predict 2.4% in 2026.


Chart 22: Administered and wage-sensitive market services are contributing to sticky inflation



*Applying ECB staff analysis for the Eurozone that identified the most wage-sensitive types of services to UK data
Source: ONS, Macrobond and Investec Economics

Even so, we expect this to leave scope for the BoE to cut policy rates further. Recent macro data look sufficiently reassuring on inflation outturns and its future drivers to push Governor Bailey, the swing voter at the last meeting, over the line to sanction a 25bp rate cut to 3.75% this month, we think. Next year, the inflation outlook is not quite benign enough, we suspect, for the MPC to be comfortable to lower rates to the level we consider neutral, namely 3.00%, quite yet. But two 25bp cuts, perhaps in April and in July*, seem plausible as inflation approaches its target (Chart 23). To keep money market rates close to the Bank rate as QT shrinks its balance sheet, the Bank intends to step up repo operations further.


Chart 23: The Bank rate is likely to approach, if not quite reach, its neutral level in 2026



*n.b. the 2026 May & Aug MPC decisions take place in Apr & Jul   Source: BoE, Macrobond and Investec Economics

With more rate cuts looking in store in the UK, but none in the Eurozone, GBP might slip a little against EUR next year. Other factors will matter too though. One downside risk to GBP comes from politics. Labour is languishing in the polls (Chart 24), and unless these improve soon, there could be pressure for Starmer and Reeves to cede their places to others from within the Labour party. It is by no means clear a very left-leaning pair would gain enough support to take over; a centrist duo may prove more popular. But markets could well fret in any interregnum, sending bond yields up and GBP down. For now though we pencil in sterling holding the middle ground between a weaker USD and stronger EUR: our end’25/’26 forecasts are $1.34/$1.35 and 88p/89p, respectively.


Chart 24: In polls, Reform is well ahead of Labour, leaving Starmer and Reeves under pressure 



Source: Europe Elects, Macrobond and Investec Economics

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