Global Economic Overview – January 2026

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Global

2026 has started with a bang in geopolitics. Financial markets though largely shrugged off the US’s audacious capture of Nicolás Maduro and the threat of US military intervention in Iran after large anti-regime protests. But they did stumble on threats by President Trump to impose tariffs on eight European countries until they dropped their opposition to the US taking over ownership of Greenland. The threat of geopolitical strife becoming intertwined with trade and the worry that US tariff hikes could be met this time with retaliation saw the re-emergence of the ‘sell US’ trade, in which US stocks, Treasuries and the US dollar sold off simultaneously. That sell-off though was much milder than post ‘Liberation Day’. Trump’s subsequent suspension of tariff and military threats related to Greenland then calmed markets again (Chart 1).

Chart 1: The ‘Sell US’ theme on Greenland threats was much milder than after ‘Liberation Day’



Note that the 10y UST line shows the % change in the price of the relevant benchmark bond at the time.
Source: S&P Global, Federal Reserve, US Treasury Direct, Macrobond and Investec Economics.
 

In fact, the bigger picture in financial markets up until recently has been remarkably bright. The major stock markets closed 2025 near all-time highs in nominal terms and up substantially year-on-year also in real terms. (Non-USD investors’ returns in US shares lagged due to the dollar’s selloff in H1 2025, but even so were positive in most currencies.) In fixed income markets, despite fiscal pressures, global investment grade sovereign bonds ended ‘25 virtually unchanged (2bps lower) from end-’24. And credit spreads declined to become historically tight, for both high grade and high yield issuers (Chart 2). With volatility trading low in both stocks and bonds, markets look priced to perfection.

Chart 2: Credit spreads are at historically tight levels, for investment grade and high yield



Source: ICE, Bloomberg, Macrobond and Investec Economics

Indeed, the only material indication of heightened worries in markets about global risks that we can point to is the ongoing strong rally in gold and precious metals more generally. Even then, the stellar performance over the past couple of years needs to be viewed in the context of gold prices having not risen by much more than consumer prices in the prior decade (Chart 3). The weakening in the US dollar must also be taken into account. Although gold prices are denominated in US dollars, they are determined on global markets. We prefer looking at the gold price against a basket of currencies such as the IMF’s SDR*. In these terms, gold is up 236% from its 2023 average vs. 255% in USD.

Chart 3: Gold has shone brightly, although looking at it in USD terms overstates its performance



* Standard Drawing Rights = a basket of USD, EUR, Yuan, JPY and GBP
** CPI data are only available up to Aug ’25
Source: LBMA, OECD, Macrobond and Investec Economics

Yet regulators have warned of two key vulnerabilities in financial markets that have the potential to cause harm. The first relates to AI. There is little doubt that AI marks a huge technological leap. If adopted widely, productivity growth is predicted to rise substantially. Indeed, expectations of future revenue of AI providers have soared, driving up their share prices (Chart 4). The worry though is twofold. First, revenue could disappoint expectations, whether due to hesitancy in adoption or due to supply constraints to the planned ramp-up, including in energy and water. Second, AI investment is very capital intensive and increasingly financed by debt, including from private markets, that is backed by GPUs* as collateral; their value could slide, triggering defaults that could spread to other sectors if financial conditions tighten.

Chart 4: Over the past few years, the ‘Magnificent 7’ have far outperformed other US stocks



* Graphics Processing Unit
Source: Bloomberg, Macrobond and Investec Economics

A second, and partially related, potential source of vulnerability is the private debt market. The collapse of Tricolor and First Brands last year highlighted potential weaknesses such as opacity, weak underwriting standards and a reliance on second-tier credit rating agencies.  Meanwhile refinancing walls are steep, increasing vulnerability if spreads were to widen.  Indeed, the interconnectedness of private credit with the wider financial system, not only through increasing debt financing of AI investment but also the substantial exposure to private credit by banks, insurance companies and pension funds, means a market shock could quickly permeate and have systemic effects.

Chart 5: Private markets are interconnected to the broader financial system



Source: Bank of England, Investec Economics

In sum, we are monitoring geopolitical risks. But our baseline assumption is that cooler heads will continue to prevail. Similarly, a crystallisation of AI/private credit risks is not in sight for now. Therefore, we predict GDP growth of 3.4% this year at the global level, a benign picture that is 0.2%pt higher than we had forecast in early December 2025. Carryover from what looks to have been a remarkably rapid rise in GDP in the US in Q4 is a key reason for this slight upgrade; we have similarly lifted our Chinese forecast a little. For 2027, we have pencilled in a small deceleration to 3.2%, predicting faster growth in Europe and in Japan to be outweighed by a deceleration in the US, in China and in India (Chart 6).

Chart 6: GDP growth prospects look benign in our baseline case, in 2026 and in 2027



Source: Investec Economics  

United States

With President Trump 2.0 now past one year in office, things are not settling down, with so far in 2026, the US extracting Venezuela's President and threatening multiple countries. But what has been clear over the past year, is that Trump is willing to row back on some of his threats, especially those prompting negative market reactions; extra tariffs on Greenland’s allies are (partly) a case in point. Indeed looking at US tariff policy and using actual revenue data the average tariff rate is 12.4%, much lower than feared on 'Liberation Day'. Changing trading patterns, trade deals and tariff exemptions have all mitigated the impacts. But tariff rates could be lower still if the Supreme Court rules the tariffs imposed under IEEPA illegal. See note.

Chart 7: IEEPA tariffs are expected to be struck down, but put back on in another form?



Source: Polymarket, PredictIt, Investec Economics, Macrobond

Despite the vast uncertainty over White House policy, the US economy has managed to shrug off much of these concerns and grow at a pace enviable to much of the developed world. This has surprised us. However, we think that the growth is concentrated in a few key areas, rather than being broad-based economic momentum. We first point to AI investment – the US is leading the way in the building of AI infrastructure, and this appears to be boosting growth by around 1%pt per annum. We expect AI investment to continue to support GDP growth in 2026. Meanwhile, on the household side, it looks to be the wealthier driving consumption gains, with Fed Chair Powell expressing the likelihood of a ‘K-shaped’ economy.

Chart 8: AI related investments were a big contributor to US growth in H1 2025



Source: Investec Economics, BIS, BEA, Macrobond
Data centre equipment investment is estimated to equal three times data centre construction investment, based on Noffsinger et al (2025)

There is also the possibility that mismeasurement in the national accounts means that the current vintage of GDP data is exaggerating the strength of economic momentum. Here we are looking closely at US inventories. In Q1 there was an understandable build-up in inventories as importers attempted to front run tariff increases. Post-tariff increase, you would expect these to be run down quickly – after all, holding inventories is expensive. The lack of a clear inflationary impact from the tariffs and the fall in imports would suggest that inventories are indeed being used up. Yet the data suggest that less than a third of the Q1 build-up in inventories has been used. That seems low to us (Chart 9).

Chart 9: Are the data underreporting the degree of inventory run down?



Source: Investec Economics, Macrobond, BEA

But we do have to take the data as given, and as such we could be in for a bumper Q4 print. Indeed, the Atlanta Fed nowcast is pointing to annualised growth of 5.4%. A large proportion of this (1.9%pts) is due to net trade, given recent strong data (Chart 10). We do wonder though if the nowcast is underestimating the impact of the government shutdown, and therefore we have adjusted for this, leaving us with a full year 2025 forecast of 2.3%. For 2026, we now look for growth of 2.7%, also boosted by AI investment and a bumper tax refund season, albeit with a downside risk to this stemming from inventories. We also publish our 2027 forecasts for the first time, pencilling in 2.1% growth.

Chart 10: US trade deficit narrowed to lowest level since 2009 as imports fall



Source: Investec Economics, Macrobond

Lower interest rates should also support the economy this year – we maintain our view of three 25bp rate cuts in H2. These moves would be under the new Fed Chair (if the Senate approves them), who is likely to be named in the coming weeks. President Trump seemingly ruled out current Director of the NEC* Kevin Hassett, leading to BlackRock’s Rick Rieder, emerging as the frontrunner. Ultimately though the new Fed Chair, whoever they may be, is going to be more amenable to the President’s requests for lower rates. But we don’t predict a rampant easing spree. Firstly, the Chair is just one of twelve voting members, and secondly, rising inflation expectations due to loose monetary policy would not play well ahead of the midterms.

Chart 11: Kevin Hassett seemingly out of the running for Fed Chair role, but does it matter?



* National Economic Council
Source: Investec Economics, PredictIt, Macrobond

In this environment predicting where US assets are heading is difficult. But what 2026 so far has taught us is that the ‘Sell US’ theme has not been left in the past. Indeed, as previously alluded to, when Mr Trump threatened eight European nations with extra tariffs, US markets sold off, albeit more modestly than last April. As such, we are cautious to put too much momentum behind our UST forecasts, despite pencilling in more rate cuts this year than markets (75bps vs 50bps). We have therefore lifted our end-26 10y yield target by 25bps to 3.75%. Into 2027 we expect yields to edge higher, to 4.00%, reflecting fiscal concerns. We have not changed our broad USD view, and still expect weakness over the course of the year.

Chart 12: ‘Sell US’ theme ignited once again in financial markets following tariff threats (20 Jan)



Source: Investec Economics, Macrobond

Eurozone

Despite 2025’s tariff uncertainties the Euro area put in a resilient performance. On our estimates the economy grew by 1.5% for the year as a whole. But the start of 2026 has seen geopolitics rise to the fore once more given President Trump’s attempts to acquire Greenland, escalating last week with the threat to eight* European countries of an extra 10% tariff from 1-Feb, rising to 25% from June, unless they backed his aim to buy Greenland. In a show of how volatile the situation is, those tariff threats were dropped after three days following what was described as a positive meeting between Trump and NATO Secretary General Rutte. The situation may have been de-escalated, at least for now, but risks remain over the details of any deal and where the compromise lies.

Chart 13: Despite the sharp rise in uncertainty last year, the Euro economy proved resilient



* Denmark, Norway, Sweden, France, Germany, Netherlands, Finland and the UK
Source: Macrobond

From a European perspective a degree of damage may already be done, with the unpredictability of Trump undermining trust in the transatlantic relationship. This is especially so with regards to tariffs given the EU-US trade deal reached last year. Undoubtedly EU officials will now view future tariffs as a risk despite the deal. Indeed, its ratification by the EU Parliament was paused on US tariff threats. The situation remains uncertain, but a US-EU trade war is in neither’s interests and so we assume the deal will hold. Thus, we see limited impact on the EU21’s prospects this year with GDP forecast to rise 1.3%, driven by a further recovery in household consumption, strengthening investment and defence-related spending.

Chart 14: €1.7trn in total EU-US trade: a trade war is in neither’s interests



Source: Investec Economics, Eurostat (2024 figures)

These factors should further support an expansion in 2027 where we see growth of 1.7%. A potentially positive uplift could come from the EU-Mercosur trade deal agreed this month. A European Parliament vote to send it for a judicial review represents a possible hiccup. However EU officials have suggested that the deal could be provisionally implemented from March, removing 91% of tariffs on EU goods exports to the bloc, which represents the EU’s 10th largest trade partner. EC estimates suggest it could boost GDP by 0.1%. Big beneficiaries include the auto sector where estimates have cited a potential 200% increase in car exports to the region as a result.  

Chart 15: EU21 GDP growth by expenditure contributions (q/q)



Source: Macrobond, Investec estimates

Against this backdrop the outlook for monetary policy over 2026 looks set to continue where ’25 left off - in a ‘good place’. HICP inflation in December stood at 1.9% year-on-year, effectively at target. Underlying measures of inflation provide further comfort too, with ‘core’ standing at 2.3%, and whilst services is higher at 3.4% it is moderating. On our estimates inflation will likely trend below 2% this year and converge to target in 2027. For the ECB, with growth expected to be at or close to potential over the next two years and inflation at target, a steady stance of policy seems warranted. Our own view and one shared by market pricing is that the Deposit rate will remain on hold at 2.00% this year.

Chart 16: ECB likely to remain on hold this year with inflation in ‘a good place’



Source: Macrobond, Investec estimates

France has seen months of problems in agreeing a 2026 Budget. But this may now be reaching a conclusion with PM Lecornu using Article 49.3 to pass the budget without a National Assembly vote. This has its limitations as it only pertains to the revenue side of the Budget and triggered no-confidence motions from the far left and right, both of which have failed given support from the Socialists. This is welcome news as it reduces the uncertainty which has hung over France, but its fiscal outlook remains challenging with the deficit only expected to fall to 5% this year, a level which will likely keep it in EDP#. The opposite can be said for Italy, where the expected improvement in its deficit to 2.8% this year is set to see its exit from EDP.

Chart 17: Progress towards a 2026 budget has seen French OAT spreads narrow



# The EU’s Excessive Deficit Procedure
Source: Macrobond

The return of the 'sell-US' trade in markets in response to Trump's threats on Greenland, although now partially unwound, has brought back questions over de-dollarisation and what this could mean for the euro. We don't expect to see the end of USD’s safe-haven status, but there are signals of reduced US asset holdings. Pimco recently announced its plan to diversify its portfolios to reduce exposure to US assets, whilst a Danish pension fund said it is to exit US Treasuries. Of course, US financial markets are the biggest and most liquid, and any de-dollarisation will take time, but we do see the euro continuing to grind higher against USD over this year to reach $1.20, helped too by increased fiscal spending in the Euro area.

Chart 18: The euro’s share in global FX reserves increased last year, whilst the USD’s fell



Source: IMF Currency Composition of Official Exchange Reserves (COFER), Macrobond, Investec Economics

United Kingdom

After three monthly declines in four months, GDP bounced back by 0.3% in Nov. A normalisation of production after the Jaguar Land Rover cyberattack was clearly a factor – car output soared by 25.5%, supporting a wider recovery in manufacturing which recorded a 2.1% increase. But JLR related events were not the sole source of the GDP rebound - services expanded by 0.3%, reversing October's decline. In practice these figures do not change our assessment of the economic environment. Rather they reinforce our view of modest growth (+0.2% q/q) in Q4 as a whole and our prediction of 1.4% growth for 2025. Similarly our forecast for 2026 remains one of modest growth of 1.3%.

Chart 19: A welcome reprieve for GDP in November…



Source: ONS, Macrobond, Investec Economics

An interesting point concerns the housing market. While the selling prices balance in December’s RICS survey remained subdued at -14%, other metrics were more buoyant - price and sales expectations balances, plus new instructions to sell all jumped sharply (Chart 20). Separately data on asking prices from Rightmove jumped by 2.8% increase on the month in Jan, the largest Jan rise since the survey began, which was attributed to the end of pre-Budget uncertainty, after Nov’s tax hikes were more modest than feared. On its own housing is a critical part of the economy, but the even wider question is whether this rise in confidence forms part of a broader revival in spending. If so, perhaps there are some upside risks to our 1.3% forecast.

Chart 20: Specific RICS balances rebounded sharply in December…



Source: RICS, Macrobond, Investec Economics

Lower interest rates should help to spur stronger activity, but we continue to expect the MPC to maintain the Bank rate at 3.75% for a while longer. As rates head towards a ‘neutral’ level, the committee seems set to adopt a more cautious approach to easing policy, partly because at 3.4%, CPI inflation remains some way above its 2.0% target. But we still forecast inflation easing back this year. Last year’s imposition of VAT on private school fees and a 26% hike in water charges (Jan and Apr) will drop out of the annual comparison soon, while falling pay growth bodes well for the medium-term. We still expect 25bp cuts on 30 Apr and 30 Jul, taking the Bank rate to 3.25% at end-year. We have one more quarter point reduction pencilled in for 2027.

Chart 21: The MPC is set to become more cautious in cutting rates in 2026…



* Announcement accompanied by a Monetary Policy Report.
Source: Bank of England, Investec Economics

On politics, the focus has been on further Conservative defections to Reform. Former Chancellor Nadhim Zahawi jumped ship two weeks ago, while both Shadow Justice Secretary Robert Jenrick and Andrew Rosindell (a shadow junior minister) followed, taking the number of Reform MPs up to seven. Interestingly opinion polls have begun to show Reform’s lead in the polls edging down. Before Christmas this was averaging 12%, but it now stands at 8%. Even so, the pressure remains on Sir Keir Starmer. Even if the current ratings are accurate, Labour faces a heavy defeat in May’s local elections and they are still only vying for second place with the Tories. Unless Labour’s standing in the polls recovers materially, there will be renewed speculation over a leadership challenge.

Chart 22: Has Reform UK’s lead narrowed slightly? Probably…



Source: Europe Elects, Macrobond, Investec Economics

A bill to force the UK govt to negotiate with the EU to rejoin the EU customs union (not the EU itself) is currently in parliament. This means that the UK would switch to levying the EU’s Common External Tariff instead of its own post-Brexit schedule. A key benefit would be an exemption from the EU’s Rules of Origin, helping UK carmakers, whose originating content (UK and EU) on current rules must be 45% to avoid a 10% EU tariff. We doubt that this bill will be passed, but rejoining the customs union would; i) prevent the UK from striking new free trade deals; and ii) render the UK vulnerable to any further US tariff action against the EU. Also it would have little effect on easing checks at the EU border, which are determined by EU Single Market rules.


Chart 23: Exporting cars to the EU under the UK’s Trade and Co-operation Agreement…



Source: European Parliament, Investec Economics

UK markets remain sensitive to the risk that Keir Starmer is replaced, with an ensuing watering down in the govt’s commitment to fiscal stability. Ultimately we do not believe that it will be, but we still expect market nerves to result in volatility in sterling and gilts ahead of May’s critical local elections. On the basis that it is business as usual post-May, we expect sterling to regain its poise against the dollar and the euro and ultimately rebound to $1.35 and 89p by end-year. Our end-2027 targets are $1.37 and 88p, respectively. Similarly, we see 10y gilt yields rising to 4.75% in H1 before falling to 4.25% by end-26 as uncertainty fades, and to 4.00% by end-27.

Chart 24: We still expect a politically driven dip in sterling in H1 this year…



Source: Macrobond, Investec Economics

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