According to Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, the baseline outlook for US growth remains constructive. Household consumption has proved resilient and is set to receive a boost from substantial fiscal stimulus in early 2026, estimated by the Brookings Institution to add well over one percentage point to gross domestic product growth. Monetary policy easing by the Federal Reserve and sustained productivity gains are also expected to support economic momentum.
Global markets enter 2026 with elevated uncertainty as US tariffs, fiscal stimulus, monetary easing and an extended AI investment boom reshape expectations, according to Franklin Templeton.
US growth remains resilient, supported by consumption and productivity gains, though labour and non-AI investment show softness.
Inflation risks are skewed upwards, keeping markets volatile.
However, warning signs are emerging. Employment growth has softened, with the unemployment rate edging up from very low levels, while companies appear cautious on hiring and non-AI investment. Weakness in labour-market data has made it difficult to assess the true scale of the slowdown, adding to uncertainty.
The inflation risks remain skewed to the upside, particularly in the first half (H1) of 2026. Additional fiscal measures and the possibility of tariff-related rebates could boost consumer spending, potentially pushing inflation back towards the 3.5-4 per cent range. Any renewed rise in prices could weigh on consumption later in the year if wages fail to keep pace.
The Federal Reserve has cut interest rates by a cumulative 175 basis points (bps), taking the fed funds rate to 3.5-3.75 per cent. While inflation remains above target, internal divisions within the Federal Open Market Committee signal that risks persist. The Fed’s renewed expansion of its balance sheet through short-term treasury purchases has also raised concerns that large fiscal deficits could entrench inflationary pressures.
Financial markets are likely to remain volatile. Long-term US Treasury yields have risen despite rate cuts, reflecting both confidence in growth and unease over loose fiscal policy. Investors are expected to stay cautious on duration, with limited scope for further credit spread tightening amid heavy issuances.
Desai noted that macroeconomic forces are firmly back in the driving seat, shaped by geopolitical realignment, China’s structural slowdown, Japan’s reflation, higher European defence spending and rapid advances in AI. With the US dollar still historically strong and valuations elevated, diversification and active management are expected to play a crucial role in navigating 2026’s uneven growth landscape.
Fibre2Fashion News Desk (SG)