THE year 2025 marked the end of the initial phase of global economic adjustments.
The global economy performed much better than feared, cruising at a soft speed estimated at 3.1% in 2025 (3.3% in 2024) as the impact of US tariffs and supply chain pressures proved more contained than expected amid persistent geopolitical tensions.
The global economy’s resilience was supported by strong labour markets, export front-loading ahead of tariffs, less restrictive monetary policy, better financial conditions, fiscal expansion, and strong performance in the United States as well as some emerging markets.
Major central banks, which generally began cutting interest rates, albeit at varying speed from mid-2024 as inflation eased somewhat, have continued in 2025 for some like the US Federal Reserve (Fed) converges towards rate cut caution on inflation risk amid softening labour market conditions going into 2026.
There were growth disparities among the advanced economies and emerging economies.
The US economy entered the final stretch of 2025 amid a mixture of relief following the conclusion of a record 43-day federal government shutdown and a one-year trade tariffs truce with China.
The labour market has softened in recent months, characterised by significantly slower jobs creation and rising unemployment (4.6% in November 2025, marking the highest unemployment rate since October 2021).
Overall, the US economy is estimated to grow by 1.9% in 2025 (2.8% in 2024), underpinned by resilient consumer spending, artificial intelligence (AI) boom-induced business spending.
Economic growth in the eurozone remained mixed, estimated at 1.1% in 2025 (0.9% in 2024) on weak consumer spending and soft business investment due to the tariff uncertainty.
Japan’s economy had turned around to grow by an estimated 1% in 2025 (down 0.2% in 2024), driven by consumer spending amid rising inflation and uneven exports.
Although China remained on track to achieve 5% growth in 2025 (5% in 2024), there remain lingering concerns about structural hinderance to growth, soft consumer demand and a deepening property downturn.
Looking to 2026, amid multiple moving parts in both the global and domestic economy, will the world economy demonstrate resilience, sustain its transition, or face renewed disruption?
Geopolitical risks remain elevated, driven by new rules governing trade and investment, with the United States and China as two strategic rivals at the centre of growing global fragmentation.
This fragmentation is evident in trade, technology and governance, giving rise to competing economic and political blocs as well as heightened concerns over supply chain security.
The real impact of a shift in trade policy and economic policy uncertainty on the global economy, trade and investment flows will become clearer in 2026.
Trade conflicts, increasing populist policies, and intense focus on securing critical raw materials for technology, advances in AI and green transitions would trigger potential market volatility in the years ahead.
We expect continued moderate global economic growth, estimated at 3% in 2026, supported by lower energy prices, further cautious pace of monetary easing against inflation risk and easier financial conditions.
It would mark the fifth consecutive year of moderating growth, which is still below the historical 2000 to 2019’s average growth of 3.7% per annum.
The World Trade Organisation projects global trade volume to slow from estimated 2.4% in 2025 to 0.5% in 2026, as the full-impact of tariffs will be felt more in 2026.
The long-term average growth of global trade was 2.4% per annum in 2011-2019.
The US economy is estimated to grow by 2.1% in 2026 amid uncomfortably high inflation.
While the labour market is faltering, continued expansionary fiscal policies, rate cuts, AI spending, and deregulation will hold up the economy.
Significant and worsening debt and fiscal pressures remain.
The government shutdown could be in the works at the end of January 2026.
The eurozone will see stable economic growth at 1.1% in 2026, with southern countries remaining robust and those in northern Europe facing headwinds.
Germany could see a rebound in growth, supported by lower interest rates, robust private-sector balance sheets, and the digital transformation of the economy.
Japan’s economy is expected to grow by 1.2% in 2026, thanks to US$118bil massive stimulus budget termed as “Sanaenomics”, anti-inflation measures, cash handouts, reduced trade tensions, as well as solid wage growth amid strong inflation pressure.
China
China’s economy is poised for resilient growth estimated 4.8% in 2026, underpinned by pro-growth macroeconomic policies, and stronger push toward a consumption-driven growth, focusing on services-oriented spending.
The tariffs-based shifting trade and monetary policies, high risk of policy missteps and a weakening US dollar are expected to persist, presenting many challenges and uncertainties across various sectors, including technology, financial market and geopolitics.
Several risks could upset the global economy and financial markets.
A fragile one-year trade truce between the United States and China could collapse; deepening uncertainty over the future path of tariffs, including at the sectoral level; surge in AI-related spending in the United States raising fears of a bubble and ongoing geopolitical tensions adding further uncertainty.
Meanwhile, an abundance of liquidity resulting from cuts in interest rates is often associated with inflationary pressures and the formation of asset bubbles.
US equity market
Watch the financial market. Some equity markets look expensive, as many investors have warned about the lofty valuations of the US equity market, driven by technology sector, especially AI optimism, pushing prices beyond fundamentals.
This led to high price-to-earning ratios of near 30 times and concerns about a potential bubble.
Additionally, the US private credit and related structures, which have grown rapidly in size from a US$40bil market in 2000 to nearly US$2 trillion has raised questions about the health of credit markets given a succession of high-profile defaults connected to bankruptcies and fraud allegations.
Inflation risk
Could inflation stage a comeback? Inflation risk remains a wild card that would influence the Fed’s interest rate path.
Inflation remains elevated, with most of the overshoot comes from tariffs.
Given the full effects of tariffs will be felt in 2026, inflation is expected to continue climbing.
If the Trump’s administration proceeds with plans to hand out US$2,000 “tariff dividend” cheques, inflation growth could accelerate.
With weak labour conditions and persistent inflation on tap, the Fed is likely to lower rates only modestly in 2026.
Markets expect two more rate cuts, which would put the target range at 3% to 3.25% by the second half of 2026.
AI boom
Will the AI boom continue? AI will remain a powerful and enduring force in shaping the market landscape.
Market fluctuations and cycles of hype versus reality are common with emerging technologies.
Lingering doubts about the investment return and economic promise of AI technology are starting to get the attention of several major financial authorities, including the International Monetary Fund (IMF), Bank of England and the Financial Stability Board, which have raised warning flags about an AI investment bubble.
There is a potential sharp correction in the high valuations of AI-focused technology firms.
As the build-up of AI infrastructure incurred trillions of dollars of capital investment, with a significant portion being debt-financed, a slowdown in AI growth or earnings could trigger steep asset price corrections across multiple sectors.
Global debt and fiscal pressures are significant risks to financial stability, fuelling concerns about sovereign defaults, banks’ stability, rising bond yields and increased borrowing costs.
The IMF estimated total global debt comprising sovereigns, corporates, and households of US$251 trillion, just above 235% of global gross domestic product (GDP) in 2024.
The Institute of International Finance estimated total global debt to reach nearly US$338 trillion by the second quarter of 2025. As of November 2025, the US debt reached US$38 trillion or 124% of GDP.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.