An overview of the key economic trends to look out for in the new year.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
In many ways, the world in 2026 faces similar challenges to the year of 2025 – only more intense. The big themes of the past year are evolving, rather than disappearing.
In my forecast for 2025 last year, I reckoned that “a recession in 2025 is unlikely; but on the other hand, it is too early to argue for any sustained rise in profitability across the G7 that could drive productive investment and productivity growth to new levels. Most likely, in 2025, growth in Europe and Japan will continue to be close to stagnation; as well as Canada and Australia. Also economic growth and trade expansion in every country of the BRICS will be slower than in 2024. So rather than the start of the Roaring Twenties in 2025, more likely it will be a continuation of the Tepid Twenties for the world economy.”
That proved to be the case. Global real GDP growth (at market exchange rates) was about 2.6% in 2025, down from 2.8% in the 2024. The IMF is forecasting no change in 2026. Among the top G7 economies of North America, Europe and Japan, once again the US will lead the pack. US real GDP growth may not be as much as 4%, as the Trump White House forecasts, but it is likely to be over 2% in 2026. However, the rest of the G7 economies will continue to crawl along at less than 1% a year – in effect, close to stagnation.
Eurozone growth is expected to slow by 0.2 percentage points next year to 1.2 per cent in 2026. Europe’s hopes of a return to growth in 2026 now depend on Germany’s €1tn debt funded spending drive on infrastructure and defence – a douse of military Keynesianism.
Consumer price inflation spiked after the end of the pandemic slump and prices in the major economies are now an average 20%-plus above pre-pandemic levels, with much higher rises for key necessities like energy, food and transport. The G20 countries’ inflation rate is now slowing and may be below 4% a year in 2026. But this average rate is still well above pre-pandemic levels. At the same time, employment growth is slowing and the unemployment rate is rising.
These are signs of ‘stagflation’. No wonder consumer confidence is falling in the major economies.
Among the large so-called developing economies, India will be growing the fastest at around 6% a year (a slight moderation on previous years), while China will still manage real GDP growth not far short of 5%, despite talk of overcapacity in industry and underconsumption. But the other major developing economies, such as Brazil, South Africa and Mexico, will continue to struggle to achieve even 2% real GDP growth.
That’s because, although in 2025 world trade has recovered somewhat from the crunch of the pandemic slump of 2020, the tariffs imposed during 2025 by the Trump administration on goods imported into the US will reduce exports for many economies, particularly those that rely on exporting basic commodities, like most of Latin America and many parts of Asia and Africa. World trade growth, which reached about 3.5% in 2025, is forecast by the IMF to slow to just 2.3% as the US cuts back on imports of goods. Services exports are untouched by US tariffs, so Indian exports are less affected. Positively, the average rate of US import tariffs has fallen from the initial levels set by President Trump as trade deals were made with the US. Even so, the average tariff rate is still some five times greater than before Trump’s ‘Liberation Day’ tariff announcements last April.
More worrying for the poorest economies of the world is rising debt and the cost of servicing it. Global debt has reached nearly $340trn. Emerging markets accounted for $109 trillion, an all-time high. The total debt-to-GDP ratio now stands at 324%, down from the peak in the pandemic slump, but still above pre-pandemic levels.
The debt squeeze on the very poor countries of the so-called Global South will intensify in 2026. The combined external debt of ‘low- and middle-income’ (LMICs) countries has hit an all-time high of $8.9 trillion—with a record $1.2 trillion owed by the 78 mainly low-income countries eligible to borrow from the World Bank. Low- and middle-income countries paid out $741 billion more in principal and interest on their external debt between 2022 and 2024 than they received in new financing — the largest amount in at least 50 years.
The average interest rate that developing economies will pay to their official creditors on their newly contracted public debt next year will be at a 24-year high, while the average paid to private creditors will be at a 17-year high. In all, these nations are paying a record $415 billion in interest alone next year—resources that could have gone to schooling, primary healthcare, and essential infrastructure.
Also, the impact of US import tariffs and rising trade barriers globally could lead to a sharp repricing of risk in financial markets, potentially amplified by stresses in leveraged non-bank financial institutions and volatile crypto-asset markets. That would drive up long-term bond yields, increasing debt-service burdens, potentially weighing on economic growth.
There are other key issues for 2026, as in 2025. Environmental degradation is set to worsen under current policies. The last three years were the hottest globally in 176 years of records, with 1.5C above pre-industrial levels temperature target internationally agreed in Paris 2015 now being surpassed. Though the pace of the rise in CO₂ emissions is slowing, global temperatures are still set to rise by at least 2.3°C above pre-industrial levels.
And the latest World Inequality Report 2026 reveals the stark cleavage between rich and poor in the world – a division that is getting wider to the extreme. Fewer than 60,000 people – 0.001% of the world’s population – control three times as much wealth as the entire bottom half of humanity. The top 10% of the global population’s income-earners earn more than the remaining 90%, while the poorest half of the global population captures less than 10% of total global income. Wealth – the value of people’s assets – was even more concentrated than income, or earnings from work and investments, the report found, with the richest 10% of the world’s population owning 75% of wealth and the bottom half just 2%.
In contrast, the stock markets of the Global North have boomed through 2025 and look like continuing to do so, at least in the first half of 2026. The top 10 US tech founders and chief executives possess more than $2.5tn in cash, according to Bloomberg data. The figure is up from $1.9tn at the beginning of this year and comes as the S&P 500 climbed more than 18 per cent in 2025.
All these positive bets on financial assets are founded on the predicted success of makers of artificial intelligence (AI) models delivering productivity-boosting products for all sectors of the economy. The top tech media companies, the so-called Magnificent Seven, are making massive investments in data centres, semi-conductor chips and AI agents and models. To do so, they are draining their cash reserves and increasing their borrowing to fund start-up ‘hyperscalers’ like OpenAI in the expectation that AI technology will be developed and adopted by businesses globally over the next decade. This has created an expanding financial bubble that could burst in 2026. If the returns on massive AI investments turn out to be lower than expected or claimed, that would cause a serious stock market correction. This explains the sharp rise in the gold price in dollars as investors seek a hedge against a possible bursting stock market bubble.
The US has been called a ‘K-shaped’ economy. Investment in AI data centres has surged by over 50% per year, while other forms of fixed and residential investment are contracting.
AI investment, and fiscal and monetary easing will drive US growth in 2026, but at the cost of rising budget and trade deficits and inflation. This may stop the US Federal Reserve from cutting its policy rate in 2026. However, current Fed chair Jay Powell ends his term in May 2026 and Trump will replace him with somebody who will accede to his demands for rate reductions. That is likely to boost further financial speculation in stocks, pumping up the AI bubble. Consumer spending is increasingly dependent on the top 10% of US income households. As their incomes rise, they are contributing nearly 50% of all US consumer spending. Also, the Trump administration’s 2026 budget will deliver lower taxes for corporations and boost incomes for wealthier consumers.
For me, the most important factor in looking at prospects for the world economy in 2026 is what is happening to profits (and profitability), as this is the driver of capitalist production and investment. Since the end of the pandemic slump in 2020, corporate profits globally have made a recovery. Indeed, in 2025, global corporate profits are likely to have been up by over 7%. If profits in the major companies of the world continue to rise in 2026, then financing debt and absorbing weak international trade can be coped with for another year.
Source: national stats, author
The post-pandemic rise in profits has been led by the US corporate sector, and in particular, the AI tech, energy and banks.
Source: Basu-Wasner, author
And when we consider US profitability on corporate assets , there has been a sharp rise since the end of the pandemic to levels not seen since the 1960s. Of course, much of this rising profitability is ‘fictitious’, ie based on capital gains made in the stock markets. The profitability of the finance, insurance and real estate sectors (FIRE) has risen much more than the profitability of the non-financial sector in the US.
Source: Basu-Wasner, author
Even so, US profitability is up. If that is sustained in 2026, the US economy, along with others, could see a significant rise in productive investment and labour productivity, driven by the AI sector.
So far, there has been no significant upward impact on US productivity growth.
Geopolitical conflict will be a significant wildcard in 2026. Despite attempts to end the war in Ukraine, it is likely to continue for at least another year. The European Union has now taken on the full funding of Ukraine’s survival and agreed a loan that will be financed by EU states’ fiscal budgets. That could lead to increased budget expenditure for EU governments as the US reduces its funding to Ukraine, and more restrictions on Russian oil exports. The loss of cheap Russian energy imports has already triggered deindustrialization. The EU and the UK now pay the highest industrial and household electricity prices in the developed world.
Meanwhile, the US administration has revived the 19th century ‘Monroe doctrine’, which proclaimed US hegemony over Latin America. That may lead to military intervention in Venezuela next year. And the fragile Gaza peace could easily be disrupted by further conflict, including another Israeli attack on Iran. So, although global demand for fossil fuel energy is slowing, oil prices could still spike up, hitting growth in Europe and Asia.
Elections will play a role next year. In Europe, Sweden and Denmark go to the polls with the real possibility that the mainstream parties that back the war in Ukraine will be defeated. And Macron in France, Wirz in Germany and Starmer in Britain could face damaging defeats in local and state elections during the year. On the other hand, Hungary’s current pro-Russian government may lose to the pro-EU opposition. In Latin America, the tidal turn to the right could continue in elections in Colombia, Peru and above all, in Brazil, where an ageing Lula faces possible defeat next October. Israel holds its general election also in October, two years after the Israeli destruction of Gaza and its people.
The most important election of them all will be the US mid-term Congressional elections next November. It is possible that Trump will lose his Republican majority in both the lower house and the Senate. That could lead to the blocking of Trump’s economic plans and ironically also his ‘plan for peace’ in Ukraine.
In sum, economies will still expand in 2026, if at a modest pace. There is no global recession on the agenda – unless the US AI stock market bubble bursts and causes a ricochet in financial markets across the world. However, the underlying issues of: poverty and rising global inequality; global warming and climate change; and rising trade barriers and geopolitical conflicts; will remain. But it cannot be ruled out that the relatively high profitability of US mega media companies will continue to drive investment and raise productivity to deliver a new boom through the rest of this decade.
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