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The Macro Brief – The global economy in 2026
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From inflation and monetary policy to trade and AI, Janet Henry, Global Chief Economist, looks at the factors set to shape the world economy this year.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/tL9dgcP
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Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto to today's show.
00:00:26
Speaker
Hello and a very happy new year to all our listeners.
Introduction to The Macrobrief: Global Economic Issues
00:00:30
Speaker
I'm P.S. Butler and welcome to The Macrobrief, the podcast that looks at the issues driving financial markets across the globe. And to kick off the new year, we're going to assess the outlook for the global economy.
00:00:41
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Can it continue to muddle through amid heightened geopolitical risks? What role could AI play? And where next for interest rates? Those are just some of the topics we'll be covering with Janet Henry, Global Chief Economist.
2025 Economic Focus: Trade, Inflation, and Tariffs
00:00:52
Speaker
Janet, Happy New Year and welcome back to the studio. Happy New Year, Piers. And as always, it's a pleasure to be talking to you. Well, perhaps before we talk about 2026, we can recap on 2025. I know that there was a huge focus on trade, but should 2025 be seen as a year when, broadly speaking, inflation was brought back to levels that allowed central bankers to ease monetary policy? Wasn't that really one of the most important things?
00:01:19
Speaker
It was, but of course that wasn't the beginning of the easing cycle. you know We'd had seen inflation come off its highs. Obviously in the case of the Fed, in the course of the year, they were able to resume their easing policy. ah But I think 2025 was a rollercoaster year. You may remember that in January 2025, there was actually still quite a lot of optimism about the US and the pace of growth and liberalisation, deregulation. etc. And then there was the all of the nervousness regarding tariffs and the damage that that would would would impact on the global economy. And that's why um for 2025 was a year of, I would say, significant revisions in consensus forecasts in terms of what happened to the global economy. And we pretty much ended the year where we started with most people's estimates. You mentioned the yeah the tariffs and there there was obviously shock and awe on on Liberation Day and and a lot of negative reactions as to the impact on trade, but trade has actually proved to be quite resilient.
00:02:20
Speaker
Yes, I think that's fair. I mean, it it is interesting because, you know, we remember what happened on on Liberation Day. First of all, the numbers were much, much bigger than I think ah most people had actually thought was likely. And also the manner and the methodology with which they were delivered um surprised people and led to a reassessment as to the whole policy setting framework um that now sat um in the White House. But trade has been more resilient. You know, yes, we saw a lot of import front loading because we saw it even in late 2024 because we thought maybe tariffs would happen in January. Some people did. Then we got something on Mexico. We got something on China. China tariffs took effect in February. So that had its own story on U.S. front loading and then payback. in terms of a slowdown in imports from China. For much of the rest of the world, the the front-loading story ran for a little bit longer. Remember, a lot of trade deals were only reached in August or perhaps even later. So the trade data has been very, very noisy. Some countries have seen some payback, India for one. saw upsurge in exports to the US. There's now been quite a lot of payback. and And Europe has been quite weak on the export side. But across Asia, they've been the region that have really benefited either from exports to the rest of the world or because of their enormous exposure to various parts of the AI ecosystem.
US Import Strategies and Resilient Trade Sectors
00:03:48
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And just to sort of a final point on tariffs, you mentioned very high numbers were announced on Liberation Day, sometimes up to 50%.
00:03:56
Speaker
Where have we ended up in terms of effective tariff rates for the U.S.? Well, that's a very good question, Piers. If you just look at what's been announced, um despite the exclusions, then actually the the effective tariff rate on U.S. imports is of the order 15%, 16%, maybe 16.5%. But trade shifts, you see transshipment, you see rerouting. and you see you know the US s seek other markets. So actually, um if you just look at the latest trade data, the total amount of tariffs collected on the imports is probably more like 12 or 13 percent because you see a ah a shift in the trade mix. And the exclusions are huge. you know Oil does not have tariffs. um Pharmaceuticals, long awaited the tariffs on on pharmaceuticals. So a lot of those refined petrochemical products, you know no tariffs. So somewhere like Singapore has a tariff rate of 6% effective tariff rate to the US because of the strength um of those exclusions. So um the actual effective tariff
00:05:01
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is anyone's guess at the moment, but but lower than perhaps. much Much lower than what we had expected on on Liberation
2026 Economic Outlook: Risks and Opportunities
00:05:07
Speaker
Day. Yes. Let's turn to the outlook. And in your latest Global Economic Squirtly, where you set out your your views for 2026, you titled Shaky Foundations, which to me doesn't sound very reassuring.
00:05:18
Speaker
No, ah there is actually some optimism in the report as well. And actually, I think we will start the year on a pretty strong note, even in the case of the US, because we've got the payback from the government shutdown. um And 2026 is going to be a year of more fiscal stimulus, not just from the US and the big, beautiful bill, um but from Europe, particularly Germany. And of course, Japan has announced a fiscal package. But to some extent, that is one of the shaky foundations. So when I talk about the shaky foundations, it is the extent to which growth is being driven by the fiscal support, some of it in countries that already have a lot of debt. um And the other shaky foundation is the sheer extent to which global growth has been driven by a number of stories that are to varying extents related to that AI story. So that's a lot of what I talk about in the report is the the various K-shaped story.
00:06:16
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When people talk about K-shaped recoveries, we always talk about the US, the US consumer, the fact that higher earners and older people, baby boomers that own you know nearly 80% of total household ownership of equities and mutual funds, and they've really been driving the consumer spending story in the US even as employment growth slows and a lot of their wealth does come from the AI-related equity market gains. And then the second part of that AI a um story that's been really important has obviously been the massive global investment in AI, not just the US hyperscalers, which have obviously driven quite a lot of it. And that, in turn, has driven to the third major driver of growth, the one we touched on to start with which is the the sheer outperformance of Asian exports against a backdrop of US tariffs. Their export growth has been very, very strong. A lot of it underpinned by all of those exports related to the AI ecosystem. So yes, the global economy can muddle through as long as you've got the fiscal support and you've got this big AI related story, even if it fades to some degree. But if that were to go into reverse, then it may not look quite as sound.
AI's Impact on Productivity and Economic Risks
00:07:28
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How hard is it in making your forecast to take this AI situation and think about it in terms of boon or bubble bust? I mean, there's a lot of talk about that and almost we're sort of climbing the wall of worry, as' a favorite stock market term, but you know how how do you sort of cope with that?
00:07:45
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Yes, there has been a lot of talk about um a bubble, particularly given now that some of the tech companies themselves are actually um you know taking on a a lot of debt. So I think you know no one doubts the potential transformational shift um and the technologies related to AI, but they are starting to question some of the valuations. so So yes, we do highlight that as one potential downside risk because it would be it would be global. The US would be most affected, but the share of the US equity market that's held by foreigners seems to be at close to a record high, something like 18% is held um by by foreigners and the stock market capitalization is a lot bigger now in the US than it was, for instance, at a time when the dot-com bubble um actually burst, even though you know the gains have not been as big. So there would be global implications if if the AI bubble were to burst. But but as you say, there's also the productivity risks. um You know, for the last couple of years, we've written a lot about the productivity story, potential productivity story in the US from AI. Most literature suggests that the the kind of peak period for productivity benefits will probably be the early 2030s. But we've all seen what's happened in the last two from ChatGPT and more recently from DeepSeq. suddenly there seems to be more of an exponential shift. so So if we were to get very quickly, even in 2026, a much bigger upsurge in productivity, then that could be helpful against a backdrop where you've got a lot lower immigration, um a much lower labour supply.
00:09:27
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It could prove to be well-timed. Productivity growth would would be quite good. It would certainly help the public finances, but then again, you don't want it to lose too many jobs in the economy because governments are very reliant on labor-related incomes to actually deliver most of their government revenues.
00:09:48
Speaker
Yeah, it's not going to be all straight line. um We'll come back to AI maybe, but I just wanted to also ask about monetary policy. We talked about lower interest rates, but that's not the case in Japan. Is is that a concern for you?
Global Interest Rates: Japan, Australia, New Zealand
00:10:01
Speaker
Well, Japan's interest rates are still very low, ah but as we well know, but they have obviously recently delivered at the end of last year um in December another rate rise. And Japan still has very, very low interest rates. real interest rates, you know, significantly negative real interest rates because inflation has been picking up. And that's one of the reasons why the yen has been weakening. And the government recently announced a big fiscal package. So already it bucked the trend through 2025 in terms of very, very, ah you might say glacial pace of policy normalization rather than actual tightening. But we expect to see more in the year ahead. But but the other point to note on interest rates is that 2025 did end with something of a hawkish tilt. It's quite clear that Australia and New Zealand will probably be amongst those that lead the way. We're looking for rate rises in the second half of 2026. And for the ECB, growth may not be weak, but Europe, Eurozone is a low growth region. and service sector inflation is still quite sticky. Wage growth may be close to to bottoming and I think they are at the neutral rate. We think the next move is up even if we probably do have to wait until the second half of 2027 on our forecast to actually see that rate rise come through.
00:11:23
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We see the Fed on hold, maybe one more insurance cut and others raising rates. We do still see some rate cut possibilities across emerging markets, particularly in Asia where inflation is much lower.
00:11:35
Speaker
And inflation? Inflation, it's still gradually edging lower, um but it is, you know, we've seen the big improvements. The slope is getting shallower. It's getting shallower. and And in many countries, but but the important one being the US, we have inflation that's still um above above target. But then the Fed does too. But the Fed has a dual mandate, which is obviously price stability, but full employment um as well. And with unemployment above four and a half percent, they are arguably no longer quite at full employment. So they have to balance um the two risks. So I think it's, you know, we think that the the pause is in for
Inflation Trends and the Federal Reserve's Balancing Act
00:12:19
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the Federal Reserve. They will need to be, you know, moved in one direction rather than the other. other
00:12:24
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And certainly our view is that, you know, pretty robust growth and inflation that's still above target and arguably, you know, now some upward pressure. We've seen DRAM prices rise. Certain food prices, remember, you know, we've had the reversal on imports of agricultural products because food prices were going up.
00:12:41
Speaker
I don't think that this is a president that wants to um do too badly in the midterm elections because of all this talk about the cost of living squeeze in the US. Affordability, yeah. Affordability, exactly. Inflation may have fallen from 10 to under 3, but people don't see that. They just see that prices have risen 28% over the last five years. Yeah.
00:13:02
Speaker
So in a way, to to to your response, there is, looking at your central forecasts, the risks. And one risk is obviously around the Fed and the sort of debate about Fed independence.
00:13:15
Speaker
We're going to have a new chairman fairly imminently. Do you see that as a risk in terms of U.S. monetary policy? Yes, absolutely that is a risk. As far as the Fed, ah new Fed chair, we should find out that reasonably quickly. um Ultimately, it will come down to the policy actions. You know, when markets price what their expectations are for interest rates, it is their best guess of the likely reaction function um of the central bank. um The way that ah Powell has explained things, Chair Powell, is that most of the committee see the same risks. They see some upside risks to inflation, They see some downside risks to the labor market. They just have differing views on the policy actions required to address those two-sided risks appropriately. So I think when we think about the role of a new Fed chair, ultimately it will come down to the persuasive powers of the individual um on the rest um of the committee and whether he can persuade them. And I say he carefully because all of the candidates are he's. yeah So um if he can persuade the committee to to move um in what will presumably be a more dovish direction, um then we'll be wrong with our Fed forecast. But I think the market already is ascribing some possibility to Fed chair that influences the committee sufficiently to deliver a bit more in the rate cuts than we think is warranted by what are still pretty accommodative monetary conditions for large parts of the economy and reasonably resilient growth and still quite sticky inflation. Is it worth sort of reminding everyone that it is a committee decision and whilst we've been used to kind of leadership by the chair, actually we should accept that perhaps there will be a bit more dissent?
00:15:02
Speaker
I think that's a really important point actually, Piers, because you know it's not just the Fed, is it? um In fact, in Australia they've actively been encouraging more dissent from the committee and the Bank of England is a famous one. where it tends to be four people voting for on hold, four people voting for cuts. And then ultimately, it just comes down to Andrew Bailey on the day, which way he votes, as to whether rates stay on hold or they're actually cut. So yeah we're certainly going to see a a Federal Reserve Board that is more divergent. In their votes you probably will see um more more dissent um coming through. i think that's a reflection of the uncertain environment that we are facing.
00:15:41
Speaker
I think it's very difficult for any policymaker to be completely confident about the growth inflation trade-off, but for them it's about their credibility and inflation expectations, and that's why it's really important that they do demonstrate to the markets that they are going to maintain their own hard-won but potentially easily lost credibility because of the implications that would have for for exchange rates and obviously the long end of the bond market. You talk about credibility, and I guess I want to finish on inflation as a risk. Inflation is partly what happens in real time, but it's also about inflation expectations. Do you think they're well anchored now, or is there a risk that with uncertainty around monetary policy that they could become unanchored?
00:16:24
Speaker
Well, financial markets think they're anchored. So it's it's been actually quite extraordinary in terms of inflation swaps recently, how much even, you know, the 10-year, the two-year, the five-year, you know, it really has fallen back. It's also surprising just how much those expectations over the long term are tied to what happens um on the oil price on a daily basis. um But I think when the Fed looks at inflation expectations, they look at an array of indicators. and household and corporate inflation expectations matter um as well. And then ultimately it comes down to um whether companies are able to push through price increases. If they're now seeing memory chip prices or pushing up, how much are they willing to squeeze their margins when they're already squeezing them regarding tariffs? And for workers, labour market softening, are they able to ah you know achieve more in the way of pay growth? So all of that ah matters for what happens um to to inflation, as does um the the mix of growth. Service sector in particular, if consumer spending is being more driven by services, then it could actually be. you know That's where you see the demand coming through. But inflation expectations are critical. They they were very hard won, as I say, and the Fed
00:17:43
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On my view, the majority of the committee will still really care about what is happening to inflation expectations on the array of measures that they
Markets Adapting to Geopolitical Events
00:17:52
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look at. Now, we can't finish this podcast without mentioning geopolitics. And of course, we can't forecast geopolitics, but this year has started already with some geo geopolitical events in in Venezuela. I guess my question is, the market's reaction to what happened in Venezuela was relatively muted. Are markets becoming a bit more inured about geopolitical events, or is it just the specifics of this case?
00:18:16
Speaker
I think there is a case of markets are just learning to live with it. But part of the reason they are learning to live with it, and they're not oblivious to it clearly, is that the macroeconomy has not been um as impacted negatively. um as had been feared. So, you know, the comparison that's often drawn is, for instance, the geopolitics back in 2022, the impact of um the Russia invasion of Ukraine, which really pushed up the oil prices that had an enormous impact on Europe. And then there was a macroeconomic impact. Inflation was a lot higher.
00:18:53
Speaker
Growth was a lot weaker. And then that impacted clearly on on on you know companies' performance and equity markets
Conclusion: HSBC's House Views Report
00:19:00
Speaker
and such like. So I think as long as the growth numbers and the profit numbers and the earnings expectations hold up, then you shouldn't get necessarily get some negative pressure on markets. Markets obviously getting a little bit more concerned about the AI story, which is why you are seeing a little bit more in the way of of diversification yet. So, yeah, it ultimately depends on if or when these geopolitical shifts and these potentially looming changes in the new world order start to have
00:19:32
Speaker
what at some point will likely be you know relative winners and losers in this world, that's when we'll see markets start to respond to it. I think on that note, we'll close it for today. I'm sure we'll have you back, as I'm sure the global economic environment will continue to sustain us in terms of its trials and tribulations. But for now, thank you for joining us. Thank you very much, Piers.
00:19:58
Speaker
Janet Henry there about what she's looking out for in the global economy next year. If you'd like to know more about what our analysts and strategists think, then check out our new 2026 HSBC House Views report.
00:20:10
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It includes sections on global economics, currencies, macro strategy, trade, fixed income, emerging markets, multi-asset strategy, equity strategy, gold, digital assets, and sustainability.
00:20:23
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For more information on that, or if you have any other questions, please get in touch with us at askresearch at hsbc.com. So that's the first podcast of the year wrapped up.
00:20:34
Speaker
This week's episode was hosted by me, Piers Butler, and produced by Tom Barton. From all the team here at Global Investment Research, thanks for listening, and we'll be back next week.
00:21:09
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.