2026 Macro outlook

Global considerations

With seeming calming of tensions in the Middle East (but don’t rule out re-igniting if the peace process isn’t adhered to by both sides), that leaves Ukraine-Russia as the only unresolved situation that continues to have a material impact on global markets. 

Recent noises suggest both sides are moving towards agreement, but we have been here before, and more than once. 

The US-China trade war is another risk that has diminished, but is unlikely to ever be a zero risk. Trump has shown this year he is willing to use tariffs as his international diplomatic weapon of choice and many countries have seen falling growth and resurgent or stubborn inflation as a result. 

The reason we haven’t seen any notable economies face the spectre of recession off the back of those tariffs has been the almost unwavering belief in AI that is powering equity markets. Major US indices are averaging an 18% return YTD, the FTSE 100 is up 17%, and Europe’s largest five indices around 24% up on average*. It isn’t just about the Big 7 in the US, but it is largely AI-related. So beware of any changes in sentiment on that front. We have seen short-lasting wobbles, but any material correction would have global impact and could herald recessions in multiple countries.

One other area that has its own problems independent of an AI- or growth-related shock is private credit. We have seen a few cases already, but so far they seem contained. Any sort of contagion effect in that sector could spiral very quickly, leaking from NBFIs to banks quickly and seeing yet another bank fail with only short-term public warning signs.

USA

After the October meeting, Jay Powell was very clear that market expectations for a cut at December’s meeting had got well ahead of themselves. The probability dropped from 90% to close to 30% according to CME FedWatch. But then the announcement that we wouldn’t get October’s GDP and PCE data came in the same week as Fed members started talking up the labor market weakness, so that market expectation is back close to where it was before the last meeting. 

Taking a cut as the base case, the next cut is then not fully priced in until June, with another in Q3, finding the terminal rate between there and 25bp lower as per CME FedWatch. There is a big but here though. Jay Powell’s term as Chair of the Fed comes to an end in May, and his replacement is almost certainly going to be aligned with Trump’s views that rates are too high and need cutting. That may be why June is signalled as the next cut after December’s, but it may also cause the market to reflect on the terminal rate when it becomes clearer who replaces Powell and how independent or otherwise they may prove to be. 

We also get US midterm elections in November 2026. Difficult to say right now what outcome and effect they may have, but if the New York mayoral race is anything to go by, there could be some interesting narratives emerging.  

UK

The UK outlook has been about the budget for so long… and now it is about whether the Government can leverage this budget and the extra fiscal (and political?) headroom it has given Rachel Reeves to achieve growth above the OBR’s forecasts which were slashed off the back of the budget measures - growth that a rapidly dismantling Labour election manifesto was targeting. 

December’s cut has, if anything, become slightly more likely at over 90%*. And then, like the US, it is June before the next cut is fully priced in, but after that, only another half is priced in. Stubborn inflation is the obvious blocker to further cuts sooner, so any acceleration in inflation falling may move cuts forward, but if this year has taught us anything, it is that inflation is not easy to topple.

Europe

Europe is very close to the terminal rate. The market has just 8bp of cuts priced in for 2026*, with that actually starting to reduce in Q4. Europe has undoubtedly conquered inflation in a way the US and UK have not yet, hence the shape of the outlook over the next 12 months. But growth is the key driver for moving the economy forward now - and that starts with Germany. Manufacturers and consumers alike seem to be a way off from recovering their mojo. 

France, for now, has a semblance of political stability but still needs to deliver budgetary reform that will allow it to reverse its climbing debt to GDP ratio in coming years with a population seemingly not willing to accept reforms such as a later retirement date.

Meanwhile Italy’s revival and Spain’s consistent performance are starting to support their previously more powerful peers.

*Source: Bloomberg

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