Okay, folks, let's cut through the noise. We're heading into 2026, and the word on the street is "stable" global growth. 2.7% GDP growth, the reports say. But anyone who's spent five minutes staring at a Bloomberg terminal knows that "stable" can mean anything—usually something you *don't* want to touch with a ten-foot pole.
The latest forecasts are trickling in, and the initial gloss is, well, glossy. But underneath, the tectonic plates are still shifting. The big picture? The US continues to defy gravity, China's trying to stabilize, and Europe and Japan are… lagging. Predictable, maybe, but the *degree* to which these trends accelerate is what matters.
Tariff Fantasies vs. Cold, Hard Numbers
Tariffs: The Gift That Keeps on Taking
First, tariffs. Remember the tariff wars of yesteryear? They're not going away. The article states that the US isn't expecting tariffs to significantly hurt domestic activity, citing "strong household incomes and ongoing fiscal loosening." That’s…optimistic. What happens when those household incomes start to feel the pinch from inflated import costs? Exceptionalism only lasts until it doesn't. We are talking about sustained high tariffs.
China, meanwhile, is apparently shrugging it all off and continuing to pump out exports. The expectation is that China will continue to promote manufacturing-led growth. The kicker? They'll likely drive down export prices *further*. This is where things get interesting—and potentially painful.
The deflationary pressure from China isn’t your garden-variety "cheap TVs" situation anymore. Now we are talking about higher value-added products – things that directly compete with manufacturers in Europe and Northeast Asia. Falling Chinese prices will only add to competitive pressures for manufacturers in both regions. The shift in China’s export composition poses a greater risk to advanced economies. So, while the US might feel insulated, the rest of the developed world is about to get squeezed.
Is anyone tracking the long-term effects of these trade imbalances? What happens when entire industries in Europe become uncompetitive, even *with* government subsidies?
AI Investment: Boom or Bust? Show Me the Data
AI: Hype vs. Reality
Then there's AI. Ah, yes, the savior of the global economy… or its doom. The report notes that AI-related capital spending in the US has been a boon for Asian computer and semiconductor producers. This growth has offset weaker growth elsewhere in the economy. In 2025, rapid growth in US AI-related capital spending has offset weaker growth elsewhere in the economy and has given a significant boost to Asian computer and semiconductor producers.
But here's the part I find genuinely puzzling: The report presents two scenarios – one where AI investment goes through the roof, and another where it crashes and burns like the dot-com bubble. Upside scenario, US GDP growth of 3% in 2026. Downside? Below 1%. That's quite the spread. Financing is shifting from cash to debt.
Which one is it going to be? And more importantly, are we *really* learning from the past? The dot-com bust should be a stark reminder that hype doesn't equal sustainable growth. Concerns about an AI downturn is a well flagged risk in our client surveys. We need more granular data on where this AI money is flowing. Is it going to productive investments, or just chasing the next shiny object?
How much of this "AI investment" is just companies relabeling their existing cloud infrastructure spending as "AI"? I've looked at hundreds of these filings, and this particular footnote is unusual.
Fiscal Policy: The Real Economic Wild Card
Fiscal Policy: The Real Wild Card
Finally, fiscal policy. Monetary policy, we're told, is largely irrelevant for 2026. Interest rate cuts are expected to proceed gradually toward neutral levels and the exact path is unlikely to have any meaningful impact on economies’ 2026 growth trajectories. Instead, fiscal policy surprises will matter more. The real action will be in government spending. The baseline forecast assumes a slightly positive global fiscal impulse, mainly driven by China.
But the risks, they say, are tilted towards *even more* supportive fiscal policy, especially in the US and China. In a world drowning in debt, that's a terrifying prospect. Despite growing concerns about fiscal sustainability in the US, UK and parts of Europe, we are sceptical that any fiscal surprises next year will inevitably be in the form of additional tightening.
The UK's OBR (Office for Budget Responsibility) report paints a grim picture of the UK economy with debt rising as a share of GDP from 95 per cent of GDP this year and ends the decade at 96 per cent of GDP, which is 2 percentage points higher than projected in March and twice the debt level of the average advanced economy. What happens when the markets finally call their bluff? What happens when investors lose faith in the ability of these governments to ever rein in spending?
And the OBR noted that, "The tax-to-GDP ratio is forecast to increase to an all-time high of 38.3 per cent of GDP in 2030-31. A higher level of the tax take increases the risk that incentives within the tax system distort or constrain economic activity by more than expected."
The Illusion of Stability
So, what does it all mean? The 2.7% global growth headline is a mirage. Beneath the surface, we've got:
* Trade wars quietly escalating.
* An AI bubble waiting to burst.
* Governments addicted to spending.
That doesn't sound like "stability" to me. It sounds like a house of cards waiting for a stiff breeze. The stability suggested by the top-line numbers masks a more complex reality beneath the surface. Understanding these underlying forces, and the risks and opportunities they create, will be essential for navigating the global economy in 2026.
Three key trends to watch in the global economy in 2026.
So, What's the Real Story?
Here's my take, stripped of all the economist jargon: The global economy in 2026 will be defined by *divergence*, not stability. The US will keep doing its own thing (until it doesn't), China will keep exporting its way to growth (and exporting deflation), and Europe and Japan will struggle to keep up. Prepare accordingly.
