Global Conditions

Global growth was surprisingly resilient in 2025, despite a substantial increase in trade barriers and heightened geopolitical risks. The world economy grew by 3.3 per cent last year, almost identical to the rates recorded in 2023 and 2024. The feared drag from higher tariffs did not materialise, reflecting trade diversion, accommodative fiscal policy, and implemented tariffs being smaller than threatened. However, lagged tariff effects may yet emerge. Advanced economies grew by 1.9 per cent in 2025, with emerging markets at 4.5 per cent. US growth slowed from 2.8 per cent in 2024 to 2.2 per cent in 2025, as tariffs, tighter immigration policy and elevated uncertainty weighed on demand. The Euro Area picked up momentum to 1.4 per cent (from 0.8 per cent), supported by lower energy costs and some fiscal loosening, while Japan returned to positive growth of 1.2 per cent. China and India maintained rapid expansion at 5.0 per cent and 7.4 per cent respectively. We project a modest slowdown in global growth to 3.2 per cent in 2026 and 3.0 per cent in 2027. This reflects delayed tariff effects and elevated uncertainty dampening investment. Growth in advanced economies is set to slow to 1.8 per cent in 2026 (US 2.3 per cent, Euro Area 1.3 per cent, Japan 0.8 per cent), with emerging markets growing by 4.0 per cent (China 4.6 per cent, India 6.5 per cent). Inflation has fallen from its peaks but remains above target in major economies. US CPI inflation (2.7 per cent in December 2025) is expected to average 2.6 per cent in 2026, reflecting tariff pass-through and a weaker dollar. Euro Area inflation is close to target at 1.9 per cent, while China is projected to see inflation rise from 0.1 per cent to 0.9 per cent as policy stimulus gains traction. The Federal Reserve cut rates to 3.75 per cent in December 2025 and we expect further easing to 3.25 per cent in 2026. The ECB has held its policy rate at 2 per cent and is likely to maintain this stance. Long–term bond yields remain elevated, with US 10–year Treasuries around 4.3 per cent and Japanese 10–year government bond yields rising sharply to around 2.3 per cent, up from 0.3 per cent in 2023. Downside risks are especially significant. Tariff effects are still working through, while US actions in Venezuela, tensions over Greenland, and China's export controls on critical minerals raise the risks of further disruption. Elevated US equity valuations, particularly in AI–related sectors, increase the possibility of a market correction.