The year ahead brings an unusually broad range of possibilities for inflation and global growth.\u00a0Global gross domestic product (GDP) is likely to\u00a0moderate\u00a0to\u00a0an estimated 3%\u00a0(4Q\/4Q)\u00a0in 2025\u00a0and\u00a03.2% in\u00a0both\u00a02026\u00a0and 2027, while inflation cools across different regions, allowing policymakers to reduce interest rates further, according to Morgan Stanley Research.\u00a0<\/p>\n
\u00a0<\/p>\n
Strong household finances and growing wealth are keeping Americans spending. At the same time, businesses continue to invest in AI, even as the pace of those investments starts to level off.\u00a0<\/p>\n
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\u201cThese two factors\u2014strength in consumption and business spending\u2014were why we never called for a recession early in 2025, when markets pulled back on trade policy fears,\u201d explains Seth Carpenter, Morgan Stanley\u2019s Chief Global Economist. \u201cThe U.S. remains the most likely economy to drive material upside to global growth.\u201d\u00a0<\/p>\n
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However, uncertainty\u00a0remains\u00a0high and the range of\u00a0possible outcomes\u00a0is wide: On one hand, consumer demand or AI-driven productivity could boost growth above the baseline forecast; on the other hand, the U.S. economy could be hit harder than expected by issues including monetary policy,\u00a0tariffs\u00a0and immigration.\u00a0<\/p>\n
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\u201cThe exact path depends on the strength of the consumer amid a slowing labor market and when AI adoption increases productivity gains meaningfully,\u201d Carpenter says.\u00a0<\/p>\n
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Varying Levels of Growth in U.S.,\u00a0China\u00a0and the Eurozone<\/p>\n
Looking beyond global numbers, the U.S. economy may slow notably in the first two\u00a0quarters of 2026, but\u00a0reaccelerate in the second half\u2014helped\u00a0by momentum in consumer and business spending, along with easier monetary and fiscal policy\u2014to reach 1.8% real growth in GDP in 2026 and 2.0% in 2027. The potential for growth picks up as AI adoption drives productivity increases.\u00a0<\/p>\n
\u00a0<\/p>\n
China\u2019s real GDP is forecast to expand 5% in 2026, helped by front-loaded government policy support, followed by 4.5% in 2027 as the effect of fiscal stimulus wanes. Growth in the euro area is likely to remain moderate at 1.1% in 2026 and 1.3% in 2027 as German fiscal support is partially offset by consolidation in France and Italy.<\/p>\n
\u00a0<\/p>\n
The Disinflation Trend<\/p>\n
The continued slowing of inflation is a global trend. In the U.S., the core personal consumption expenditures (PCE) index, which the Federal Reserve watches closely, is forecast to rise in the first quarter\u00a0of 2026\u00a0because of tariffs and immigration restrictions before resuming its gradual descent. Core PCE is forecast to be at 2.6% at the end of 2026 and 2.3% at the end of 2027.\u00a0<\/p>\n
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In the euro area, the outlook is for headline inflation to undershoot the European Central Bank (ECB) target of 2%, with the economy running below its potential. Inflation is expected to run 1.7% at the end of 2026 and in 2027.\u00a0\u00a0<\/p>\n
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In Japan, headline and core inflation have been above target for the past couple of quarters, but the underlying trend has been weaker, prompting a forecast for inflation to edge below 2% in late 2026 and then rise back to policymakers\u2019 2% target in 2027. In China, core CPI inflation is likely to be positive, but the GDP deflator is expected to hover below 0% as the economy\u2019s excess capacity dissipates only gradually.\u00a0<\/p>\n
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Rate Cuts Across Regions\u00a0<\/p>\n
Given the benign inflation picture, monetary policy is forecast to move toward neutral across key economies. The Fed is likely to reduce rates through April,\u00a0assuming that\u00a0job growth in the U.S. is\u00a0slow\u00a0and any rise in core inflation is modest. The forecast expects an extended pause when the Fed\u2019s target rate is at 3%-3.25%.\u00a0<\/p>\n
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\u201cEven with the transition to a new Fed Chair in the second quarter of 2026, we expect the Fed\u2019s reaction function to be roughly unchanged as most of the Committee itself will remain in place well into 2027,\u201d Carpenter says.\u00a0<\/p>\n
\u00a0<\/p>\n
The ECB has communicated that it plans to hold interest rates where they are. However, with slow growth and slack in the euro zone economy, and with inflation below target, the forecast is for two rate cuts in 2026, bringing their policy rate down to 1.5% by midyear. The Bank of England, on evidence of a softening economy and lower inflation, is forecast to bring rates down to 2.75% in 2026 before pausing.\u00a0<\/p>\n
\u00a0<\/p>\n
The Bank of Japan, the only major developed market central bank that is hiking rates, is likely to increase its policy rate to 0.75% in December in the baseline\u00a0forecast, and\u00a0then remain on hold in 2026. Rate hikes may resume in 2027 and bring the policy rate to 1.25%.\u00a0<\/p>\n
\u00a0<\/p>\n
Weighing Alternative Scenarios<\/p>\n
The outlook for the global economy is uncertain, and much depends on what happens in the U.S. If U.S. growth surprises to the upside, other countries could benefit too. But if the U.S. slows down more than expected,\u00a0there\u2019s\u00a0a chance of a mild recession that could ripple across the world.\u00a0<\/p>\n
\u00a0<\/p>\n
There may be\u00a0demand-driven upside\u00a0for U.S. growth. In this scenario,\u00a0U.S.\u00a0households\u00a0and\u00a0upbeat businesses\u2014boosted by recent government spending and tax changes\u2014could ramp up their investments. This could drive real U.S. GDP above 3% in 2026.\u00a0<\/p>\n
\u00a0<\/p>\n<\/li>\n
A\u00a0productivity-driven scenario\u00a0is based on the possibility that adoption of AI could accelerate and its impact on the economy\u00a0occur\u00a0more quickly than expected. If productivity gets a big boost, the economy could grow faster than expected\u2014even as prices stay low. Under this\u00a0scenario\u00a0unemployment holds steady in 2026, with businesses needing\u00a0somewhat fewer\u00a0workers, but without widespread job losses.\u00a0<\/p>\n
\u00a0<\/p>\n<\/li>\n
The scenario of a\u00a0mild recession in the U.S.\u00a0could adversely affect growth elsewhere, including Europe,\u00a0Japan\u00a0and China. The possibility is based on greater-than-expected slowing in the U.S. economy due to lagged effects from monetary policy,\u00a0tariffs\u00a0and immigration restrictions. If this occurs, real GDP growth quarter-on-quarter could turn negative in the first half of 2026 and unemployment could rise. In this scenario, the Fed eases but\u00a0doesn\u2019t\u00a0go to zero because the contraction is mild.\u00a0<\/p>\n<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"The year ahead brings an unusually broad range of possibilities for inflation and global growth.\u00a0Global gross domestic product…\n","protected":false},"author":2,"featured_media":190776,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[174],"tags":[15034,57736,79,2813,4393,179,18,629,9207,2818,19,185,5389,17,7441,106517],"class_list":{"0":"post-190775","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-bank-of-japan","9":"tag-boe","10":"tag-business","11":"tag-central-banks","12":"tag-ecb","13":"tag-economy","14":"tag-eire","15":"tag-fed","16":"tag-gdp","17":"tag-global-economy","18":"tag-ie","19":"tag-inflation","20":"tag-interest-rates","21":"tag-ireland","22":"tag-monetary-policy","23":"tag-seth-carpenter"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ie\/115582229956803371","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/190775","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/comments?post=190775"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/posts\/190775\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media\/190776"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/media?parent=190775"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/categories?post=190775"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ie\/wp-json\/wp\/v2\/tags?post=190775"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}