Global Economic Overview – February 2026

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2026’s year-to-date market performance has broadly been characterised by gains in equities and bonds. Japan’s Topix has been the standout performer, rising 13% on so-called ‘Takaichi trades’ following the LDP’s landslide election win. Yet there remain areas of nervousness, AI valuations being one, contributing to the underperformance of major US indices: the Nasdaq alone has fallen 2.6% in February. Private credit is another area of concern, as is this week’s re-emergence of tariff uncertainties, although US equity moves thus far have been relatively well contained. Tariffs are now back in focus due to President Trump’s imposition of a new 10% global levy in response to the Supreme Court’s ruling that invalidated his tariffs instituted under IEEPA#.

Chart 1: Market performance year-to-date and historic: US stocks have underperformed in ‘26



Source: Macrobond, Investec Economics  

Consequently, world trade now faces an uncertain outlook once again given this is unlikely to be the end point. Firstly, the 10% levy applied under Section 122 of the 1974 Trade Act is limited to 150 days. And secondly, White House officials have suggested that the rate could be lifted to the maximum level of 15%, raising questions over the validity of trade deals struck at more favourable levels, the UK’s included. This has already elicited some protests. But despite the renewed uncertainty, our initial assessment is to not make any material changes to our growth forecasts. On the new 10% rate, GTA* estimates put the weighted average US tariff at 11.6%, lower than their pre-SCOTUS figure of 16.2%, but with some relative winners and losers (Chart 2).

Chart 2: US tariff rates pre- and post-SCOTUS ruling, plus rates under different S122 regimes



^# IEEPA- International Emergency Economic Powers Act, impacts the ‘reciprocal’ and fentanyl tariffs
Source: Macrobond, *Global Trade Alert

Notably despite the tariff uncertainties last year, the global economy still recorded a resilient performance, GDP rising 3.4%*. We expect a similar picture this year. Indeed, as things currently stand, macro data has generally been supportive of our baseline view of economic prospects. For example, the Citi economic surprise index has continued to record data outturns ahead of consensus estimates. As such our global growth forecasts for this year and next are little changed at 3.3% and 3.2% respectively. Amongst developed markets the US is likely to remain the outperformer with GDP growth of 2.4% this year. China meanwhile should see growth of 4.5%. But there remain risks beyond tariffs too.

Chart 3: Citi economic surprise index: global data points have proved reassuring



* Investec estimate
Source: Macrobond, Investec Economics

One such risk clearly stems from heightened geopolitical tensions, much of which emanates from the White House. Although Trump has dialled back his threats on Greenland, he has now turned his attention even closer to home, lighting a fresh fuse with Canada, threatening to block the opening of the Gordie Howe bridge, which spans the two countries. More worryingly, he is considering withdrawing the US from the USMCA trade agreement. But a very immediate flashpoint is more distant, namely in Iran, given the significant build-up of US military assets in the region and Trump’s threat of strikes if Iran does not agree to a deal. Talks with the US are ongoing, but the risk of an escalation remains high, which could impact global growth via higher oil prices. 

Chart 4: An escalation of tensions between Iran and the US could cause oil prices to spike



Source: Macrobond, Investec Economics


The resurgence in geopolitical tensions has sparked market volatility, particularly in precious metals. Gold prices have been increasing steadily since Trump took office last year given its perceived ‘safe haven’ status amid global uncertainty. But over the past months gold seemed to shift towards being traded as a speculative asset, albeit temporarily, with the price rising to over $5,500, primarily driven by retail investors. Other precious metals rallied too including silver and platinum. A sharp correction quickly followed as the market become overstretched, but the underlying narrative of investors’ preference for safety remains, with gold buying having resumed since.

Chart 5: The gold rally has resumed after the sharpest one-day sell-off since 1983



Source: Macrobond, Investec Economics

Risks remain in the fiscal space too given challenging metrics in several major developed markets. Such concerns were visible in rising bond term premia last year, as evidenced by steeper sovereign curves. The start of 2026 has seen these retrace somewhat, but the underlying picture has not radically changed, leaving markets at risk of a repricing on negative news. The UK stands out relative to its peers: its 2-30y yield spread is higher on the year amidst the perceived risk of a Labour leadership change that may bring about larger deficits. The movements in Japanese bonds post the 8-Feb election are notable too given the 19bp fall in 30y JGB yields, which came even though PM Takaichi’s policies are likely to require greater debt issuance.  

Chart 6: Sovereign 2-30y yield spreads: UK political jitters have driven the curve steeper in ‘26



Source: Macrobond

United States

The Supreme Court's tariff ruling opens up new uncertainties, although for now we have not recalibrated our forecasts on the back of the US's new 10% tariff. So far, market moves have been relatively contained. Investors were similarly unfazed by a weak 1.4% annualised Q4 GDP print. The government shutdown knocked 1% or so off the total and we still question the accuracy of recent GDP readings, owing to issues in measuring inventories. We have though nudged down our 2026 GDP forecast to 2.4% from 2.7%. A major theme at January's FOMC was that the labour market posed fewer downside economic risks. Indeed in the 3-months to January, jobs growth averaged +73k per month against -45k in the previous three months.

Chart 7: Non-farm payrolls have picked up – there are now fewer downside labour market risks



Source: Investec Economics, Macrobond, BLS

After much speculation over who would replace Jerome Powell as Fed Chair, President Trump nominated former Fed Governor Kevin Warsh. Short-term interest rate markets sold off on the news given his relatively hawkish reputation. Warsh though has recently expressed a preference to lower interest rates again and we would note that in his five-year stint at the Fed between 2006 and 2011, he never once dissented from an FOMC decision. If and when he takes over in May, clearer evidence of waning tariff-based price pressures may be visible, enabling him to restart the easing cycle. Our base case is still for three 25bp cuts in the Fed funds target range this year to 2.75%-3.00%.

Chart 8: We expect Warsh to start cutting rates, providing inflation comes down



Source: Investec Economics, Macrobond

Warsh has long been an advocate of a smaller Fed balance sheet, referring to it last Nov as ‘bloated’. Slimming the balance sheet was relatively easy at its peak of $9.0trn in 2022 – Quantitative Tightening lowered it to $6.5trn in 3½ years. But late last year QT had begun to cause the periodic scarcity of bank reserves, resulting in shortdated rate volatility (Chart 9). Hence in Dec, the FOMC created Reserve Management Purchases i.e. the Fed buys T Bills to inject liquidity. Slimming the Fed’s balance sheet looks challenging, especially bearing in mind that reserves are also held to meet Basel III liquidity ratios. If the Fed chooses to reduce its balance sheet it will need to choose between accepting greater rate volatility and intervening more frequently to stabilise rates (Chart 10).

Chart 9: Volatility in shortdates prompted the Fed to introduce Reserve Management Purchases



Source: Investec Economics, Macrobond, Federal Reserve

Warsh has called for a new accord between the Fed and the Treasury. Specifically what he was referring to is a pact between the two in 1951 which absolved the Fed from helping to manage the Treasury's debt servicing costs, resulting in a material step forward in the central bank's operational independence. But exactly what Warsh intends is not clear. For example, does he want to put limits on when and how much QE is conducted, a policy consistent with his views on the Fed's balance sheet? Or, with government interest payments totalling $970bn last year, does he favour a return to the Fed trying to ease debt service costs by buying bonds? The latter would represent a major step towards fiscal dominance and would also expand the Fed balance sheet.

Chart 10: The Fed’s balance sheet trilemma*…



Source: *The Central Bank Balance-Sheet Trilemma, Board of Governors Federal Reserve January 2026

Indeed fiscal pressures remain. The deficit in FY2025 totalled $1.8trn (5.8% of GDP) with a debt to GDP ratio of 99.4%. Further on, new projections from the Congressional Budget Office show the deficit climbing to 6.2% of GDP by 2035 – much of this rise relative to the prior projection is accounted for by Trump's One Big Beautiful Bill Act* (Chart 11) - and the debt to GDP ratio rising to 118%. This course is unsustainable. Note too that the CBO projections assume tariffs will yield $390bn in 2035. But before the latest events, tariffs were coming down and we calculate that these inflows had already dropped to 10.0% of imports, suggesting the CBO’s revenue forecasts are somewhat optimistic.

Chart 11: CBO fiscal projections have risen over the past year



* 2025 Reconciliation Act is the One Big Beautiful Bill Act
Source: Congressional Budget Office

But Warsh's nomination has run into roadblocks. Thom Tillis, who sits on the Senate Banking Committee (SBC), has threatened to block his appointment until the DoJ drops its subpoenas on the Fed (the GoP holds a marginal 13-12 majority on the SBC). It is not unusual though for Fed Chair appointments to take time (Chart 12) and our view of Fed policy is based on Warsh's eventual confirmation. Even so, political events loom large for the President in the shape of Nov's midterm elections. Flipping four Senate seats to gain a majority there looks beyond the Democrats, but a combination of Trump's unfavourable approval ratings and various recent election results suggest they are strong favourites to recapture the House, despite the 'gerrymandering' of electoral boundaries.

Chart 12: Confirming a Fed Chair is not usually a quick matter…



Source: Pantheon Macroeconomics

Eurozone

The ECB’s decision to keep policy rates on hold this month was no surprise to markets nor to observers. But with inflation having fallen to 1.7% year-on-year in January, having averaged precisely 2.0% between May and December last year, some fine-tuning of the ECB’s message was required. The big picture is that this fall was expected (at least as per the ECB’s Sep if not quite their Dec forecasts). Moreover, tweaking rates now would have most impact during 2027, a time when the ECB’s forecasts, compiled assuming no rate cuts, envisage inflation to be on its way back to target. We concur (Chart 13). President Lagarde was more reticent to volunteer this, but subsequent ECB speakers repeated that policy is therefore ‘in a good place’.

Chart 13: Eurozone inflation looks set to fall short of the 2% target for a while, but not by much



Source: Eurostat, ECB, Macrobond and Investec Economics

Yet agility on the part of the ECB may still be needed. One factor to keep an eye on is EUR. There was some concern in the second half of January that USD might fall again and EUR find itself subject to upward pressure. Desirable though the international use of the euro is to the ECB, a stronger currency would be unwelcome as it would weigh on inflation, which could threaten the timely return to the 2% target. These fears though have receded somewhat since: EUR is now lower in trade-weighted terms than at the start of the year (Chart 14). Our end-’26 and end-’27 forecasts for EURUSD are $1.20 in both cases, as they were last month. With that, we forecast steady ECB policy rates too.

Chart 14: Year-to--date, EUR is slightly stronger against USD but down in trade-weighted terms



Source: ECB, Macrobond and Investec Economics

When it comes to our aggregate Eurozone GDP forecast, we doubt the latest US tariff changes will make a visible difference. The replacement of the US’s 15% ‘reciprocal’ tariff under IEEPA on EU members’ exports by a 10% surcharge on pre-‘Liberation Day’ tariffs cuts the average effective US tariff rate on the EU by 1.3%pts, it is estimated. This is helpful, but only marginally. If the surcharge was raised to 15%, as Trump had indicated, the effective average tariff rate on the EU would instead be 0.8%pts higher – an unhelpful but even smaller change. That said, because sector-specific exemptions apply, the picture is not uniform across the EU. Portugal and Belgium lose out (slightly); France is among the main beneficiaries of the switch from IEEPA to a 10% surcharge (Chart 15).

Chart 15: Switching from IEEPA to the 10% levy cuts US tariffs on most Eurozone countries



Source: Global Trade Alert, Macrobond and Investec Economics

We have nevertheless tweaked our Eurozone GDP forecast. Our ‘27 prediction is unchanged at 1.7%, but our ‘26 growth forecast is up by 0.1%pt at 1.4%. This mainly reflects a slightly stronger end to ‘25 than predicted. Germany is a case in point, where such ‘carryover’ has raised our 2026 GDP forecast by 0.1%pt without us having reassessed the likely quarterly growth path this year. Indeed, our confidence is growing that momentum in Germany will gather pace: both manufacturing and construction orders now point to an acceleration in demand (Chart 16). This data is volatile, but it fits with the fiscal push to infrastructure and defence spend and also with lower interest rates supporting economic activity.

Chart 16: New orders in German manufacturing and construction are trending up



Source: German federal statistics office, Macrobond and Investec Economics

Meanwhile, our French 2026 GDP forecast has also moved up by 0.1%pt: we now predict 1.0% growth (2027 stays at 1.3%). PM Lecornu achieved an end to the long-running saga that had been the passage of the 2026 Budget, which had claimed the scalps of two of Macron’s Prime Ministers before him. This victory came at the price of watering down planned fiscal tightening. This stores up issues for later; a planned 0.4%pt cut vs 2025 leaves the expected 2026 deficit at a troublesome 5.0%/GDP. But even so it has reassured financial markets, judging by the tightening in French bond spreads over Bunds to their lowest since the parliamentary election yielded a hung parliament (Chart 17). We see this helping to lift business investment a little.

Chart 17: Bond markets have greeted the passage of the French 2026 Budget with some relief



Source: Macrobond and Investec Economics

Italy, in a sharp break with trends in previous decades, looks like a beacon of political stability relative to France at the moment. Indeed, Prime Minister Giorgia Meloni has now been in office for 1222 days. This makes her the longest-serving Prime Minister since Silvio Berlusconi, outlasting Monti, Letta, Renzi, Gentiloni, Conte and Draghi (Chart 18). When she took office, the 10-year Italian bond spread to Bunds was 230bps; now it is just 61bps. Italian public finances are in better shape too, with a deficit of 2.8%/GDP expected this year. But as NextGenEU funds run out next year – Italy has spent c.€86 bn so far – we see GDP growth firming less than in Germany and France, from 0.6% in ‘25 to 0.8% in ‘26 and 1.0% in ‘27.   

Chart 18: Prime Minister Giorgia Meloni has had a comparatively long run in office so far



Source: Investec Economics

United Kingdom

After a turbulent few weeks, Sir Keir Starmer continues to hang on as Prime Minister. Indeed, the start of a plot to oust the PM by Scottish Labour leader Anas Sarwar at the beginning of the month quickly fell flat. Although some polls suggest that Starmer is the most unpopular PM in British polling history, the party cannot seem to agree on an alternative candidate. However with the Gorton and Denton by-election tomorrow and the local elections in May set to be difficult for Labour (Chart 19), pressure could intensify on the PM to resign. Betting markets are signalling Reform UK as the favourite to secure the most seats in the locals - heavy losses for Labour could finally lead to the end of what seems like Starmer's nine lives.

Chart 19: Gorton & Denton by-election and May local elections set to be tricky for Labour



Source: Macrobond, Kalshi, Europe Elects, Investec Economics

In the event that Sir Keir does resign as PM, betting markets believe that ex-Deputy PM Rayner or current Health Sec. Streeting are frontrunners to replace him. Energy Sec. (Ed) Miliband comes in third place. We also would not completely rule out Greater Manchester Mayor Andy Burnham – there is nothing to stop him trying to run in another seat, if one were to become available. We still think the uncertainty over whether Starmer will remain PM and who could replace him makes UK assets vulnerable to a sell-off. Indeed although we have toned down our expectations of the extent of any market sell-off, we still foresee a period where sterling and gilts are weak over the coming months as political concerns influence investor decisions.

Chart 20: A political risk premium is likely to weigh on UK assets in H1



Sources: Investec Economics, Macrobond

Despite this political uncertainty, economic momentum seems to be holding firm. Indeed, economic data overall has looked more positive at the turn of the year, whether that be housing market data, retail sales or PMIs. We think growth has been boosted by the lower Bank rate relative to last year but also that the Autumn Budget came and went without significant near-term tax increases on households, as has been feared. With the Spring fiscal event reportedly just an update on the finances, rather than more tax measures, consumers appear to be more optimistic over their personal finances (Chart 21). However recent developments in US trade policy do create an extra source of uncertainty.

Chart 21: Households most confident in future financial situation since Aug 2024



Source: Investec Economics, Macrobond, GfK

We are predicting GDP growth of 1.2% this year, which admittedly is a small downgrade, but that is because of a weaker end to 2025, rather than an expectation of slower growth moving forward. This is also notably stronger than the BoE’s updated forecasts, which see growth of 0.9%. The BoE also brought down its inflation projections and lifted its unemployment rate forecast (Chart 22). Given this new outlook, it is unsurprising that the latest rate decision was such a close call, with four of the nine members voting for a further 25bp cut. There does appear to be more appetite for further near-term easing; indeed, only one member – maybe Bailey or Mann – needs to switch their vote to deliver a further rate cut.

Chart 22: BoE downgrades GDP growth, inflation while raising unemployment rate forecasts



Source: Investec Economics, Macrobond

We think that switch will come in April, followed by a further 25bp easing in July, leaving our end-26 Bank rate forecast of 3.25%. We predict one further 25bp cut in 2027. The recent more dovish tilt to the MPC seems to be driven by new BoE analysis over the labour market. Indeed, Bank staff now view there to be more slack in the labour market, while it has also estimated that 3.25% wage growth would be consistent with the 2% inflation target. Although total pay growth is still some way above that, private sector regular pay growth, which has the most direct link to inflation, is very close (Chart 23). Given this, the doves view the upside risks to inflation to have diminished, creating room for further policy easing.


Chart 23: Priv. regular pay growth not far off BoE estimate of 2% inflation consistent pay growth



Source: Investec Economics, ONS, Macrobond

We are less convinced that inflation will return quite to the 2% target this year but agree that the direction of travel is down. Lower wage growth should continue to feed into lower services inflation, while we also expect a smaller rise in administered prices relative to last year – for example, water bills are set to increase by 5.4% this year, relative to 26% in FY25/26. Energy prices should also exert a drag on headline inflation. We are concerned though about tech prices, given the widespread reports of memory chip shortages. We have incorporated some impact of this into our forecasts, but even with the scale uncertain for now, it poses a key upside risk to the broader inflation outlook.   

Chart 24: Goods prices could be the thorn in the Bank of England’s side this year and next



Source: Investec Economics

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