Global Economy 2026: Sturdy Growth, Stagnant Jobs, Stable Prices

Key Quotes

"As we go into 2026, I think the story is a little bit clearer because the tariff issue is now in the rearview mirror. The increases in tariffs are behind us. Going forward, we'll probably go sideways to lower depending on what happens on the legal front, what happens with perhaps tariff reductions as we go into the midterms. But it's no longer a negative."

Jan Hatzius explains that the resolution of tariff increases provides a clearer economic outlook for 2026 compared to the previous year. He suggests that this issue will no longer be a drag on growth, potentially becoming neutral or even slightly positive depending on future policy developments.

"US growth at 2.5% fourth quarter to fourth quarter, and that is really driven by some of the forces I just talked about. Tariffs are no longer a drag. Maybe they're even going to turn into a small boost in terms of real income as the year progresses. We are getting tax cuts on the consumer side, strong tax refunds. We're getting fiscal help on the business side as firms can fully depreciate equipment and plants. And we're probably going to see a boost from the rate cuts that the Fed has already delivered."

Jan Hatzius highlights that US growth is projected at 2.5% due to the absence of tariff headwinds and the presence of supportive fiscal policies, including tax cuts and accelerated depreciation for businesses. He also anticipates a positive impact from previously delivered interest rate cuts by the Federal Reserve.

"The property sector still, we think, going to subtract something like 1.5 percentage points from growth this year. And yeah, I think that is naturally going to lead to a growing external imbalance. The current account surplus, we think, is going to grow to about 1% of global GDP, which would be the biggest number for any economy in recorded history."

Jan Hatzius points out that China's property sector is expected to reduce growth by approximately 1.5 percentage points. He anticipates this weakness will contribute to a growing external imbalance, projecting China's current account surplus to reach 1% of global GDP, a historical record.

"We think that dynamic of dollar weakness probably on balance with our central case forecast is going to continue. The Fed's more likely to cut rates and more likely to cut them further than many of the other developed markets. This good global growth environment is generally supportive of and consistent with dollar weakness. But we think the gradient is likely to be much shallower than before, and the mix is probably different."

Dominic Wilson suggests that the trend of dollar weakness is likely to persist, supported by the Federal Reserve's anticipated interest rate cuts and a favorable global growth environment. However, he cautions that the pace of this weakness may be slower and the contributing factors more varied than in the past.

"And that speaks to stronger productivity growth. And we've seen in the US pick up from about 1.5% productivity trends in the 2008 to 2020 cycle to about 2% now, probably with further acceleration coming because that 2% doesn't really have any significant AI impact in it yet."

Jan Hatzius attributes the disconnect between solid GDP growth and weaker labor market performance to an increase in productivity growth. He notes that US productivity has risen from approximately 1.5% to 2% and anticipates further acceleration as the impact of Artificial Intelligence becomes more pronounced.

"I mean, at the top of the list and the most immediate is more deterioration in the labor market. We've already seen a sizable increase in the unemployment rate, and it wouldn't take that much more, a few tenths more from here, and you'd be triggering on us the SAM rule, the idea or historical regularity that if you get a half percentage point plus increase in the unemployment rate in a year's time, that's a reliable indicator of recession."

Jan Hatzius identifies a deteriorating labor market as the most immediate and significant risk to the economic outlook. He explains that a further increase in the unemployment rate could trigger the SAM rule, a historical indicator suggesting a heightened risk of recession.