January Global Economic Outlook

United States

The U.S. economy enters 2026 caught between resilience and fatigue. Third-quarter GDP surprised to the upside at 4.3% annualized, the strongest number in two years, powered by consumers who keep spending even as their savings cushion thins. A surge in AI-related infrastructure investment added fuel, as businesses raced to build out data centers and computing capacity. But beneath the headline strength, cracks are forming.

The labor market is cooling. Unemployment has drifted to 4.6%, still low by historical standards but a clear departure from April 2023's 3.4% trough. Wage growth has slowed to 3.5% year-over-year, its weakest pace since May 2021. Good news for inflation. Less good for the consumers carrying the economy on their backs.

Manufacturing remains stuck in reverse. The Institute for Supply Management Manufacturing Index posted its ninth consecutive month of contraction in November at 48.2. The index measures purchasing activity across the sector, with readings above 50 signaling expansion and below 50 signaling contraction. Services have fared better at 52.6, though hiring has stalled.

The Fed responded with three consecutive rate cuts in the fall, bringing the fed funds rate to 3.5%–3.75%. But with core Personal Consumption Expenditures (PCE), the Fed's preferred inflation gauge, still running at 2.8%, policymakers are signaling patience. The yield curve has steepened back into positive territory after a prolonged inversion, a shift that historically marks the late stages of an economic cycle. Whether 2026 delivers a soft landing or something harder remains the central question.

Europe

Europe enters 2026 from an unusual position: cyclically healthier than developed market peers despite persistent structural headwinds. The forward-looking picture offers cautious optimism. Sentiment indicators have rebounded sharply, broad money growth has turned positive after prolonged contraction, and financial conditions continue to ease.

Labor markets tell divergent stories. Euro area unemployment remains near record lows at 6.4%, while UK unemployment has climbed to 5.1%, reflecting notable softening in the British economy.

Monetary policy supports the constructive outlook. The European Central Bank (ECB) holds the deposit facility rate at 2.00%, while the Bank of England (BoE) cut to 3.75% in December. Both retain policy space should conditions deteriorate.

The euro gained roughly 13% against the dollar in 2025, its biggest annual advance since 2017.

Political instability on the continent and the ongoing Russia-Ukraine conflict present the primary risks. But absent a significant shock, Europe appears positioned for continued modest expansion ahead.

China

China enters 2026 with structural headwinds masked by headline growth. Third quarter 2025 GDP rose 4.8% year-over-year, near official targets, but the underlying picture is less reassuring.

Consumers remain hesitant. Retail sales grew just 1.3% in November, the weakest pace in nearly three years. The National Bureau of Statistics (NBS) consumer confidence index has hovered around 89-90 throughout 2025, well below the 100 baseline that separates optimism from pessimism. Households are saving, not spending.

Manufacturing stabilized late in the year. The NBS Purchasing Managers' Index (PMI) returned to expansion at 50.1 in December after eight consecutive months of contraction. The PMI measures factory activity, with readings above 50 signaling expansion and below 50 signaling contraction. Fixed asset investment fell 2.6% through November, reflecting China's painful shift away from investment-led growth.

Trade offers a bright spot: exports rose 5.9% in November despite U.S. tensions, pushing the annual surplus past $1 trillion for the first time.

The geopolitical overlay darkened significantly. China's "Justice Mission 2025" drills (December 29-30) covered a broader geographic area than previous exercises, with live-fire zones overlapping Taiwan's territorial waters for the first time since 2022. The path forward hinges on whether Beijing can revive domestic demand while managing rising external pressures on multiple fronts.

Japan

Japan's economy stands at an inflection point as the Bank of Japan raised its policy rate to 0.75% in December, the highest since 1995. Growth remains subdued at 1.1% year-over-year, with consumer confidence well below neutral and retail sales up just 1.0%.

Exports offer a bright spot, rising 6.1% in November, the fastest pace since February. But manufacturing sentiment and actual production tell different stories: the Tankan survey, which measures business confidence among large manufacturers, shows optimism with a reading of 15. Yet industrial output fell 2.1%, suggesting factory floors aren't matching boardroom optimism.

Higher rates benefit banks but strain households accustomed to cheap money. Real wages have declined for ten consecutive months as 3% inflation outpaces pay gains of 2.6%.

Prime Minister Takaichi's assertive stance on Taiwan has triggered diplomatic friction with Beijing, adding geopolitical risk to an already fragile picture.

India

India's growth story remains intact, though the pace has moderated. GDP expanded 6.5% in fiscal year 2024-25, down from 8.2% the prior year but still the fastest among major economies.

The Reserve Bank of India has pivoted decisively toward easing, cutting rates by 125 basis points through 2025 as inflation fell sharply. That monetary tailwind should support activity in 2026.

The structural case is compelling: favorable demographics, accelerating infrastructure investment, and continued benefits from manufacturers diversifying supply chains beyond China. The October 2024 border agreement with Beijing helped stabilize a key geopolitical flashpoint.

Risks bear watching. The rupee weakened nearly 5% in 2025, pressured by capital outflows. The May 2025 military confrontation with Pakistan following the Pahalgam attack marked the most serious bilateral crisis in years. And monsoon variability remains a perennial wild card for food prices.

India enters 2026 as the world's fastest-growing major economy, supported by rate cuts, strong demographics, and infrastructure momentum. The key question is whether policymakers can sustain this trajectory while managing currency pressure and regional tensions.

Latin America

Latin America enters 2026 with familiar challenges: modest growth, structural vulnerabilities, and elevated political risk.

Regional GDP should expand around 2.3–2.5%, marking the fourth consecutive year of growth near that range. This isn't crisis-level weakness, but it reflects persistent headwinds rather than temporary setbacks.

Brazil's central bank has pushed its benchmark interest rate to 15%, its highest since 2006, as policymakers wrestle with inflation and fiscal pressures that have driven gross public debt to approximately 79% of GDP. Mexico's industrial sector has contracted through much of 2025, and uncertainty looms over the United States-Mexico-Canada Agreement (USMCA) review due by July 2026, with U.S. officials signaling that withdrawal remains a possibility.

Argentina's stabilization experiment continues under President Milei. Monthly inflation collapsed from 25.5% in December 2023 to under 2% by mid-2025, backed by aggressive austerity and a $20 billion International Monetary Fund (IMF) program. Whether these gains prove durable remains the central question.

U.S.-Venezuela tensions add regional uncertainty following escalated interdictions and sanctions enforcement against tankers tied to Venezuela's oil trade, actions U.S. officials have described as a blockade.

The bottom line: commodity dependence, political transitions, and external vulnerabilities warrant caution. Structural reforms take years to deliver results, and patience remains the operative word for regional allocation.

Southeast Asia

ASEAN's five founding economies will grow at varying rates in 2026, shaped largely by U.S. tariff policy and domestic demand.

Indonesia and the Philippines are projected to lead, with growth forecasts around 5.0% and 5.3% to 5.6% respectively. Indonesia's household spending accounts for more than half of GDP, providing some buffer against export volatility.

Malaysia forecasts range from 4.0% to 5.2%. Unemployment sits at 3.0% and inflation runs between 1.5% and 2.0%.

Singapore and Thailand face slower growth. Singapore's government projects 1.0% to 3.0%, with most private forecasters around 2.0% to 2.3%. Thailand faces weaker conditions at 1.6% to 1.8%.

U.S. tariffs remain the key uncertainty. Several large exporters in the region have negotiated reciprocal tariff rates around 19% to 20%, though rates vary widely. Companies continue diversifying supply chains into Southeast Asia, though tariff pressure may slow this trend.

Canada

Canada enters 2026 caught between domestic resilience and external pressure. The Bank of Canada has done its part, cutting the policy rate to 2.25% with inflation running at 2.2%, just above target. Now the economy's trajectory hinges largely on factors Ottawa can't control.

U.S. tariffs of 25% on Canadian goods (10% on energy) are disrupting cross-border commerce. The first joint review of the United States-Mexico-Canada Agreement, scheduled for mid-2026, adds another layer of uncertainty. How that review unfolds could shape trade relations for years to come.

The domestic foundation shows cracks. Manufacturing remains weak, consumers are cautious, and household debt continues pressuring discretionary spending as pandemic-era mortgages reset to higher rates.

The setup for 2026: monetary policy is supportive, but trade policy risk looms large. Much depends on how Washington proceeds in the months ahead.

South Korea

South Korea enters 2026 as a study in contrasts. Record exports mask genuine fragility at home.

The headline numbers look strong. Exports hit $709.7 billion in 2025, cracking $700 billion for the first time. Semiconductor exports drove much of that growth, rising 22% on sustained AI demand. Q3 GDP expanded 1.3% quarter-over-quarter, the fastest quarterly pace since late 2021.

But domestic momentum tells a different story. The manufacturing Business Survey Index sat at 70 in both November and December, well below the neutral 100 threshold. Consumer confidence remains above 100 but pulled back modestly in December as households grew cautious about inflation and the weakening won. The currency averaged 1,422 won per dollar in 2025, its worst annual average on record, surpassing even the 1998 Asian financial crisis.

The Bank of Korea has signaled its easing cycle may be ending, with rates steady at 2.5% and headline inflation averaging 2.1% for the year. President Lee Jae-myung was inaugurated on June 4 following a snap election, though elevated tensions with North Korea remain a structural backdrop.

The outlook for 2026: Korea's export engine keeps running, but watch whether domestic demand can find its footing.

Australia

Australia's economy keeps chugging along, lifted by strong commodity demand from Asia. But warning signs are flashing beneath the surface.

The big numbers still look decent: the economy grew 2.1% over the past year, and unemployment sits at 4.3%. The Australian dollar has strengthened about 8% against the U.S. dollar in 2025, recently touching its highest levels in over a year near $0.67.

Look closer, though, and the picture gets murkier. Industrial activity is contracting. Consumer and business confidence have dropped to worrying levels. And inflation just jumped to 3.8%, well above the Reserve Bank's 2-3% target.

That inflation spike puts the RBA in a tough spot. After cutting rates earlier this year, officials are now discussing whether they might need to raise them instead, a sharp reversal from what markets expected just months ago. The cash rate remains at 3.6%.

Two new trade barriers add to the uncertainty: China's 55% tariff on beef imports exceeding quotas, effective January 1, and the U.S. baseline 10% tariff on Australian goods in place since April. Australia's commodity wealth provides a cushion, but the safety net is getting thinner.

Taiwan

Taiwan is riding an AI-fueled boom. GDP surged 8.21% in Q3 2025, the fastest growth since mid-2021, and full-year growth should hit 7.37%. November exports jumped 56% to a record $64 billion, while export orders rose 39.5%. The semiconductor supply chain is running hot.

The labor market reflects this strength. Unemployment averaged 3.35% through November, a 25-year low. The central bank has held rates steady at 2.0%, and core inflation at 1.72% gives policymakers room to stay patient.

The wild card is geopolitics. China's "Justice Mission 2025" drills in late December simulated a blockade and included live-fire exercises. Taiwan's dominance in chip fabrication has become a double-edged sword: a massive competitive advantage, but also a vulnerability. Any disruption would ripple through global tech supply chains.

For 2026, expect continued growth as long as AI demand holds and cross-strait tensions don't escalate.