Key Takeaways
- This week we see a raft of data releases with US non-farm payrolls and inflation numbers in the US and UK. There are also central bank meetings in Europe, the UK and Japan.
- Heading into 2026 our view is that overall growth looks resilient with both fiscal stimulus and monetary policy set to add support.
- European growth (especially in Germany) could pick up, and China is expected to maintain its 5% target. The US could repeat 2025’s performance but the UK is set for another year of lacklustre growth.
- The impact of tariffs turned out to be less than anticipated but they will likely remain a feature in 2026. Supply chains and the global economy will continue to adjust.
- Valuations across equity and bond markets reflect much good news and investors will be monitoring the monetisation of AI closely. Will companies be able to avoid disappointment around returns on capital expenditure?
It is our final update of the year but there is plenty going on this week in financial markets. We have the belated release of US non-farm payroll data – numbers that were delayed by the US government shutdown. Will insight into both October and November change the narrative slightly on the state of the US labour market? Recent data has been mixed but served to challenge the view that there is a sharp softening in the US labour market. We also have inflation numbers in the UK and the US and on top of those three central bank meetings. The European Central Bank is expected to hold, the Bank of England expected to cut and arguably most notably, the Bank of Japan looks set to hike rates by 25 basis points.
Looking forward into 2026 our view is that global growth looks resilient and on balance we think that 2026 could be a year of ‘extending the cycle’. By that we mean we are expecting fiscal stimulus and monetary policy to both be supportive. In combination this backdrop should keep global growth on a par if not slightly above what we’ve seen in 2025.
On the fiscal side we are expecting stimulus in Japan. Germany has announced stimulus already and, in the US, the “One Big Beautiful Bill” was agreed in Congress. This will start kicking in and positively impacting the economy. China is also expected to pursue incremental measures to keep the economy ticking. On the monetary policy side, we expect to see divergence in 2026. The US and UK will likely see further rate cuts, and we could see an acceleration in the trend in the US given a more dovish Fed chair is set to be appointed by President Trump. In the UK we expect to see a couple of rate cuts over the course of 2026 – downward moves that will be in addition to this Thursday’s anticipated rate cut. For the eurozone, rates are likely to remain on hold unless something dramatic happens. Japan is heading in the other direction, and rates will tick upwards as the Bank of Japan becomes more confident that inflation is entrenched and moving towards their 2% target.
Looking at the economic outlook we are forecasting solid growth for 2026. We expect a pickup in growth in parts of Europe with Germany particularly well placed thanks to announced stimulus. China is expected to maintain their growth target of about 5% and US expansion likely to be in line with this year. The UK growth outlook remains lacklustre but not significantly different to 2025. There is some scope however, for it to deteriorate at the margin.
Tariffs are here to stay but we still lack clarity around their legal status and are awaiting a US Supreme Court ruling. Irrespective of the decision, tariffs will likely be a continuing theme for 2026 but the global economy and supply chains are adjusting accordingly.
We head into 2026 with both equity and bond valuations looking pretty rich and that leaves limited margin for error. Given the AI theme remains dominant there is scope for disappointment should related companies miss very high expectations for future growth. More broadly, 2026 will likely be a year in which AI monetisation and generating returns on related capex becomes more of a theme.
Politics is set to be relatively quiet in terms of what’s scheduled, but it probably won’t turn out that way! November will see the US midterms and the results will help shape what happens in the final two years of President Trump’s four-year term. We have UK local elections and these could shape the political destiny of Keir Starmer and Rachel Reeves. Further afield the Brazilian presidential elections are looming and President Lula will stand for re-election.
On balance we head into 2026 with a relatively optimistic mindset and do expect a positive year for global growth. At the same time, we are cognisant that a lot of good news is already priced in.
