Many of the themes that dominated 2025 particularly the unpredictability of US policy, remain central. Tariff legacies, sticky inflation in the US, and trade disruptions continue to ripple through the global economy. The rules-based international system is increasingly under strain, while geopolitical tensions have disrupted global supply chains, with globalization giving way to fragmentation. Many nations are adopting protectionist measures, prompting the UK to respond with a new industrial policy. Economic policymaking is increasingly intertwined with national security, mirrored by rising defence spending across western Europe.
According to the International Monetary Fund, global growth is projected at 3.1 per cent in 2026, slightly below 2025’s 3.2 per cent, highlighting resilience despite being well below pre-2008 levels of over 4.5 per cent. The US and China, together driving a large share of global growth, face hurdles such as weak domestic demand in China and fiscal pressures in the US. China is expected to ease fiscal policy and unveil a new five-year plan, while the US may cut interest rates if necessary. These dynamics could contribute to a gradual weakening of the US dollar as investors diversify their holdings.
Two key global risks stand out: fiscal and financial. Public and private debt levels are near record highs, exposing government bond markets to sentiment shifts. France’s stalled pension reform exemplifies this risk. Monitoring the relationship between growth and interest rates, the so-called “g-r” spread will be critical for fiscal stability, as weak growth combined with high debt servicing costs could strain budgets.
On the financial front, non-bank financial institutions (NBFIs), or “shadow banks,” now hold $257 trillion in assets, representing 51 per cent of global financial assets larger than the traditional banking system. Shadow bank assets grew 9.4 per cent in 2024, double that of banks. A narrower measure focused on leveraged activity shows $76.3 trillion in assets, nearly three-quarters of global GDP. These institutions rely on short-term funding and are vulnerable to liquidity shocks, raising contagion risks if global financial conditions tighten. The Bank for International Settlements has highlighted concerns about leveraged shadow banking in government bond markets, particularly amid rising public debt.
For the UK, this global outlook underscores the need for competitiveness and resilient domestic demand. Reducing energy costs without compromising the green agenda is a priority. Fiscal prudence remains critical to mitigate the risk of contagion from global investor sentiment, especially given the high-risk premium currently embedded in UK gilt yields due to inflationary and fiscal concerns.
Inflation is expected to decline toward the Bank of England’s 2 per cent target, supported by competitive imports from China, moderating service-sector price pressures, and lower household energy costs from April. Fuel duty and rail fare freezes will further ease inflationary pressures. This environment may allow the Bank of England to reduce interest rates from 3.75 per cent to 3.5 per cent by spring 2026, potentially falling further to 3 per cent if the economy weakens.
The UK faces a modest growth outlook. Unemployment has risen from 4.1 per cent at the last general election to 5.1 per cent, with new policies such as the Employment Rights Bill adding to business costs and constraining jobs. Nevertheless, high savings rates and sound corporate balance sheets should help sustain spending. Official projections anticipate 1.4 per cent GDP growth for the year.
The overarching lesson is clear: growth remains the only path to improving living standards, safeguarding national security, and insulating the UK from global uncertainty. Strategic economic planning, fiscal discipline, and competitiveness will define the country’s resilience in 2026.
Dr Gerard Lyons is chief economist at Netwealth.
