Despite a massive tariff shock initiated by the US in 2025, and a substantial increase in geopolitical uncertainty that looks likely to continue in 2026, global economic activity proved resilient last year. It was supported by front-loaded shipments and inventory accumulation ahead of the tariff increases, further monetary policy easing in most major economies and a large and ongoing investment in Artificial Intelligence (AI).

Unfortunately, the major geopolitical conflicts appear likely to remain unresolved in 2026. There is a perpetual risk that any of the major participants could easily “miscalculate” the consequences of their actions, leading to an escalation of conflict. Consequently, the global economy will probably remain on edge in 2026, and will be prone to flashes of pronounced volatility that could disrupt supply chains and undermine business and consumer confidence.

Fortunately, a range of factors should have a positive impact on world growth. These include advances in AI that could boost GDP growth by increasing business investment and continuing to boost productivity growth. The recent increase in economic multipolarity can be unsettling and disruptive to supply chains, but new trade routes are forming to mitigate the impact of the global tariff war. Many countries are exploring new trading relationships and agreeing to new trade deals to mitigate the higher US tariffs. Alternatively, some countries may seek to promote their domestic industries instead of necessarily seeking new trading partners. This would be less than ideal for global growth but offers new investment opportunities. Lastly, most major economies are expected to maintain a high level of macroeconomic policy support, including sustained low interest rates.

Consequently, global economic growth is forecast to ease only modestly to around 2.7% in 2026, down from 2.8% last year and meaningfully below the pre-pandemic average global GDP growth of 3.2% between 2010 and 2019.

‍The US is expected to expand its investment in AI

US GDP growth is currently projected at around 2% for 2026. This is similar to the growth outcome achieved in 2025, but well below the preceding 10-year average of 2.5%, which includes the negative impact of Covid in 2020.

The 2% growth rate was sustained despite much higher import tariffs, which raised the estimated average US import tariff rate from 2.5% at the end of 2024 to 17.7% by the last quarter of 2025. Fortunately, the impact of the higher tariffs was more moderate than the headline data suggests. This is because the effective tariff - calculated from actual tariff revenues collected – is estimated at a more manageable 12%, as importers moved a portion of their business away from countries with relatively high tariffs.

Other areas of weakness in the US economy in 2025 included subdued consumer confidence due to the higher tariffs, a decline in housing and commercial property development, a slowdown in job creation and elevated inflation. In 2025 the US economy added a total of 525 000 jobs compared to 2.095 million in 2024.

A large portion of the 2% economic growth rate was heavily supported by substantial and ongoing investment in AI, and technology more broadly. This includes the development of data centres on an unprecedented scale. In 2025, the AI sector alone accounted for around 20% of US GDP growth, and maybe more if you include the wealth effect generated by the equity performance of AI-related companies.

There was also an easing of trade tensions between the US and China towards the end of October 2025, strengthened by the signing of a one-year trade truce that ends on 10 November 2026.

Importantly, in 2026 the US economy should be supported by a further (modest) reduction in interest rates, significant tax rebates for the household sector in the first few months of the year, slowing inflation that should result in positive real wage growth, ongoing strong growth in productivity, and a further strengthening of household wealth, which has risen by 7.6% over the past year to end September 2025 and by 27% over the past three years.

In December 2025, US consumer inflation rose by 0.3% month-on-month, which kept the annual rate of inflation unchanged at 2.7%. Core consumer inflation was unchanged at 2.6% and has slowed from 3.3% at the start of 2025. Fortunately, core inflation is not expected to re-accelerate meaningfully over the next 12 months, despite the persistently high import tariffs imposed by the Trump administration. It appears that most companies have simply absorbed a substantial portion of the tariff increase rather than pass higher costs onto the household sector. At the same time there was an impressive increase in labour productivity, which is probably partly related to growing adoption of AI. This is also helping companies to mitigate various cost pressures.

In 2025, headline inflation averaged 2.7%, down from an average of 3% in 2025, 4.1% in 2023 and a very substantial 8% in 2022. Despite the slowdown in inflation, it is still not in line with the US Federal Reserve’s (Fed) inflation target of 2%. It appears likely to remain uncomfortably above the inflation target over the coming months.

The Fed started its current interest rate cutting cycle in September 2024 and has cut rates on six separate occasions and by a total of 175 bps since then. At this stage we still expect the Federal Open Market Committee (FOMC) will keep rates on hold in the short term but cut by a further 50 bps before the end of 2026 – depending on how the May 2026 change in the chairman of the FOMC starts to influence monetary policy. In the FOMC press conference on 1 December 2025, Chairman Jerome Powell highlighted that the Federal Funds interest rate was in the ballpark of neutral, indicating that interest rates are very likely to remain “on hold” in the short to medium term.

According to the Fed’s own Summary of Economic Projections (SEP) the members of the FOMC expect (on average) only one further interest rate cut of 25 bps in 2026. Six of the 19 members indicated that they would expect interest rates to remain unchanged throughout the year. Clearly, views within the FOMC committee are currently meaningfully divided.

‍Eurozone economy shows resilience despite ongoing risks

The Eurozone’s third quarter GDP was surprisingly robust, growing by 0.3% quarter-on-quarter, following a muted expansion of 0.1% in the previous quarter. The growth was supported by a rebound in investment spending (+0.7%) amid lower borrowing costs and resilient household consumption activity (+0.2%) thanks to a solid labour market. Importantly, country-level data continues to show a divergence in performance between the largest economies in the region. While France (+0.5%) expanded by its fastest rate since 2023, Germany (0%) remained stagnant and narrowly avoided a technical recession.

Some high-frequency economic indicators revealed signs of weakness in the final quarter of the year. Notably, the region’s manufacturing sector suffered a setback at the end of the year with the manufacturing PMI falling further into contraction territory in December, as production levels decreased for the first time since February 2025. In addition, demand for manufactured products displayed fresh signs of weakness as new orders fell at the quickest pace in almost a year, despite continued discounts by manufacturers.

Despite the region’s resilience in the face of tariff disruptions and geopolitical tensions, the economic outlook remains fragile. A probable slowdown in wage growth will weigh on consumption activity going forward. Given the balance of risks, Eurozone GDP growth is expected to be 1.4% in 2025 and moderate to 1.1% in 2026. Importantly, the Eurozone’s growth prospects in the medium term depend on the success and speed of Germany’s planned €1 trillion debt-funded infrastructure and defence spending drive.

Eurozone inflation ended the year at the European Central Bank’s (ECB) target after hovering above the target for three months. The headline inflation rate moderated to 2% year-on-year in December, decelerating from 2.1% in November. Importantly, services inflation also moderated to 3.4%, although this was driven by base effects linked to volatile airfares. Services inflation is expected to continue its downward trend amid slowing wage growth, which is likely to prevent any real build-up in price pressures in the Eurozone. For 2025, inflation was 2.1%, largely in line with the ECB’s target and a deceleration from 2.4% in 2024.

Given relatively well-contained inflation in the region and optimism around the economy, the ECB maintained its “wait-and-watch” approach, keeping rates unchanged at 2.15% for the fourth consecutive meeting in December. It has reduced benchmark interest rates eight times since the start of its easing cycle in June 2024. The ECB did not commit to a particular rate path but stressed that the inflation outlook was “more uncertain than usual” amid a “volatile international environment”, meaning that all options remain on the table. Importantly, the central bank did raise its 2026 forecasts for inflation and economic growth, which seems to imply that the rate-cutting cycle is over.

China’s planned policy measures are likely to cushion the economy in 2026, but not sustainably lift it

Chinese economic growth maintained some momentum in the third quarter of the year, with GDP growing by 1.1% quarter-on-quarter, higher than the previous quarter’s growth of 1%. The resilient growth continued to be driven by strong export performance, outweighing weaker domestic consumption and investment activity.

High frequency data showed that overall growth slowed in the fourth quarter, when there was growing divergence between the supply side and demand side of the Chinese economy. China’s official manufacturing PMI jumped into expansionary territory at 50.1 in December, amid an unbalanced rebound, as production picked up while demand remained relatively weaker. The rebound was driven by large firms while small firms contracted further.

The hard economic data confirms this. China’s retail sales slowed to their lowest growth rate since December 2022 amid the diminished effectiveness of government’s consumption trade-in programme, increased negative wealth effects from the housing market, and payback from an early start to the shopping season. Industrial production continued to lose momentum in November, with growth falling to its lowest level since August 2024 amid ongoing domestic weakness and the anti-involution push by government. Importantly, Chinese exports accelerated in December, reflecting the resilience of external demand and the competitiveness of Chinese products. Exports to other regions more than offset the ongoing double-digit fall in shipments to the US.

Despite the resilience, there are clear signs of a challenging year ahead. The strength in China’s exports is likely to continue in early 2026, especially if the trade truce between the US and China holds. The competitiveness of Chinese goods, along with a stable global economy, are also likely to provide additional support. Headwinds remain, however, that could put some pressure on exports. A possible re-escalation of trade tensions is not out of the question. Other countries have become more concerned about cheap Chinese goods hurting domestic industries. Given this, the performance of exports faces persistent uncertainty and may weaken, affecting its ability to continue to support the Chinese economy. The strong performance in the third quarter means that China is likely to meet its 5% GDP growth target in 2025, before growth moderates to 4.3% in 2026.

China’s headline consumer prices moved further out of deflation but remained soft in December, pointing to continued deflationary pressures that are likely to persist until consumption recovers more sustainably. Consumer inflation was 0.8% year-on-year in December, better than the 0.7% deflation in November, driven by food prices. Core inflation stayed at 1.2% for the third consecutive month, where it is still below the pre-pandemic norm of 1.5%. Chinese inflation averaged only 0.1% in 2025, down from an already anaemic 0.2% in 2024 and well below the PBoC’s target of 2%, amid persistently weak domestic demand conditions.

During the Central Economic Work Conference in December 2025, Chinese policymakers committed to maintaining economic support, although more detail is likely to come in March 2026. From a monetary policy perspective, the People’s Bank of China (PBoC) reiterated its commitment to monetary policy easing by announcing a 25 bps cut to its one-year relending rate effective 19 January, opening the door for cutting the seven-day reverse repo rate in February. This is the first cut in policy rates since May 2025 and shows that the PBoC will maintain moderately loose monetary policy in 2026, stopping short of ramping up stimulus. Further policy rate cuts are likely in 2026, but only to ensure sufficient liquidity, and maintain a “necessary” level of budget deficit and government spending.

On the fiscal side, policymakers have decided to maintain a proactive fiscal policy in 2026, doing just enough to cushion the economy from external headwinds. While policy is likely to remain supply-centric, boosting domestic demand remains a priority. Policymakers announced an initial public spending plan worth 357.5 billion yuan to boost investment and consumption (via another goods trade-in programme) for the first quarter of 2026. While this is a step in the right direction, effective implementation remains key, along with additional efforts to sustainably stabilise the property market.

‍SA’s economic environment remains challenging, but the fundamentals are improving

In the third quarter of 2025, SA’s GDP grew by 0.5% quarter-on-quarter, (seasonally adjusted, but non-annualised). This compares with a revised increase of 0.9% in Q2 2025 and only 0.1% in Q1 2025. Over the past year the economy expanded by a very welcome 2.1%, helped by the upward revision to the prior quarter as well as the fact that almost all economic sectors recorded growth in the quarter – the one exception being electricity/water, which declined by -2.5%.

Despite the recent uplift in economic performance, a few economic sectors remain on track to record a negative performance for 2025. These include construction (which will be in its ninth consecutive year of decline), electricity/water, manufacturing, and possibly mining. While the growth in mining and manufacturing has improved noticeably in the second half of 2025, the damage inflicted on these sectors in the first quarter of 2025 was severe. However, we are hopeful that the recent improvement in industrial activity will be sustained into 2026, and economic growth will broaden further in 2027.

An important reference in evaluating the GDP growth rate is population growth. According to the most recent population estimate released by Statistics South Africa, the country’s population is currently growing at around 1.4% a year, which suggests that the GDP performance is now exceeding population growth. Ideally, SA’s GDP performance needs to exceed 3% a year on a sustained basis to start to make a difference to employment, lifestyles and investment opportunities. While 2.1% year-on-year growth is encouraging, it needs to improve further and remain elevated on a consistent basis.

Fortunately, in 2025 there was a meaningful further improvement in key policy reform initiatives. These include further evidence of fiscal consolidation by National Treasury, which contributed to S&P upgrading SA’s international credit rating, and a downward revision to the inflation target from the 3% to 6% target band to a point target of 3%, with a 1% tolerance band on either side. Other developments were Transnet signing a 25-year partnership with International Container Terminal Services (Philippines-based) to manage the Durban Container Terminal Pier 2, more than 488 companies registering (with NERSA) their intention to invest in renewable energy projects with a total output of almost 6 000MW, and Transnet awarding conditional approvals to 11 private train operating companies to operate on its freight rail network across 41 routes and six major corridors.

While these and other growth initiatives are extremely encouraging, it will take time for the policy reforms to translate into sustainable higher economic growth. Consequently, we expect SA’s economic growth rate will improve only modestly in 2026 to around 1.7%, up from an estimated 1.3% in 2025 and 0.5% in 2024. Importantly, however, ongoing implementation of the key policy reforms should combine to lift the growth rate above 3% over the next 3-5 years.

In April 2025 there was concern that the 30% import duties imposed on SA by the US, together with the removal of the AGOA agreement, would significantly undermine the country’s industrial performance. While the higher US tariffs appear to have had a negative impact on exports to the US (in the first eleven months of 2025, SA’s exports to the US declined by 6.4%y/y, which is a R9.3 billion loss of export revenues) this has not heavily impact industrial performance. Manufacturing and mining all recorded positive GDP growth in the second half of 2025.

In November 2025, headline CPI inflation decreased by 0.1% month-on-month, which was below market expectations that CPI would be unchanged. This pulled the annual rate of inflation down from 3.6% to 3.5%. Although the annual rate of inflation has drifted higher in recent months, rising from a low of 2.8% in May 2025, the monthly rate of change has tended to surprise mostly to the downside. From November 2024 to November 2025, the headline inflation rate has averaged a respectable 3.1% - effectively the South African Reserve Bank (SARB) has achieved a 3% inflation outcome over the past year.

Importantly, core inflation was also well contained at 3.2% in November 2025. It has held steady within a narrow range of 2.9% to 3.2% in each of the past nine months, which is helping the SARB to pull inflation expectations lower, thereby supporting the Bank’s new inflation target of 3%. It is, however, important to recognise that over the past 12 months inflation has benefited from a convergence of numerous positive factors that are not all likely to persist over the next 12 months. These include a year-on-year decline in the fuel price, a reasonably strong currency, continued deflation in China’s export prices, and a weak domestic housing market which has kept rental inflation stable at around 3%. Consequently, we expect South Africa’s inflation rate will move closer to around 4% over the next 12 months as some of these factors become less supportive. This is still a compelling outcome in the context of the SARB’s new inflation target of 3%.

The SARB cut the repo rate (repurchase rate) by 25 bps to 6.75% at its Monetary Policy Committee (MPC) meeting on 20 November 2025. The decision was unanimous. Since August 2024, the SARB has cut interest rates by a total of 150 bps, taking the repo rate down to its lowest level since October 2022. It is expected to cut rates by a further 25 bps in the first half of 2026.

In making the decision to cut interest rates on three separate occasions in 2025, the MPC consistently highlighted that SA’s inflation rate has surprised on the downside relative to forecast and that there has been some moderation in inflation expectations. The bank expects inflation will be convincingly in line with the new inflation target of 3% in 2027.

Encouragingly, in the November MPC meeting the bank highlighted that employment was rising, and household spending was relatively strong, supported by wealth effects, further withdrawals from two-pot pension savings, and lower inflation and interest rates. However, the MPC added that fixed investment spending has disappointed.

Interestingly, the MPC warned of an investment boom under way in AI infrastructure, accompanied by aggressive valuations for major technology stocks. Despite the promise of AI, there are signs of a bubble inflating. With lower interest rates, and cheap credit even for riskier borrowers, financial markets appear vulnerable to a correction. If that happens, emerging markets could suffer from spillovers. This would include SA.

Overall, the recent downside surprises in domestic inflation, coupled with the government’s endorsement of a 3% inflation target, have been applauded by financial markets. This should result in significant economic benefits over the next few years, including a very welcome reduction in SA’s cost of capital and a less volatile and better-performing exchange rate.