International outlook for 2026

Andreas Hauskrecht

Clinical Professor of Business Economics, Kelley School of Business

Introduction

The year 2025 has been characterized by a high level of economic uncertainty and this uncertainty will most likely continue in 2026. However, earlier pessimistic projections regarding an increase in inflation and a decrease in economic output for 2026 had to be corrected for a slightly better outlook.

Figure 1: Global inflation

Note: Values for 2024 are actual data while values for 2025 and 2026 are projections.
Source: International Monetary Fund: World Economic Outlook, October 2025 (Table A5)

The impacts of higher tariffs were milder than originally anticipated. Supply-chain rerouting, import front-loading and limited pass-through of higher import prices to consumers allowed for relatively stable economic growth with a continued decline in inflation, except for in the U.S. The relatively high 19% average effective U.S. tariff rate will likely lead importers to pass more of these costs on to final consumers.

The Organisation for Economic Co-operation and Development (OECD) reports that for the G20, headline inflation is expected to decline from 3.4% in 2025 to 2.9% in 2026, while core inflation in advanced G20 economies will fall slightly from 2.6% to 2.5%.¹

According to the International Monetary Fund, inflation in the U.S. is expected to decrease slightly from 2.7% in 2025 to 2.4% in 2026, while emerging and developing countries will also see a decrease in inflation albeit with much higher rates (see Figure 1).

Figure 2: Real GDP change

Note: Values for 2024 are actual data while values for 2025 and 2026 are projections.
Source: International Monetary Fund: World Economic Outlook, October 2025 (Table A1)

Original estimates of world economic output in 2025 were slightly too pessimistic and have been revised upwards. However, continued high levels of economic uncertainty slow down corporate investment (with the exception of significant investment in artificial intelligence). As of fall 2025, the world economy is expected to grow by 3.2% in 2025, and slightly slow down to 3.1% in 2026 (see Figure 2). Meanwhile, the U.S. economy is expected to grow by 1.6% in 2026, which is in line with potential output growth. Economic growth in Europe remains subdued, while the Chinese economy will further “normalize,” facing lower growth rates around 5% or lower.

United States

The national output (as measured by real GDP) is expected to grow around 2.1% in 2026.

Inflation is expected to continue its gradual path towards the monetary target of 2%. This assumes that higher import prices will not trigger secondary effects, such as disproportionately large increases in nominal wages.

The unemployment rate is expected to decrease slightly from its 2025 rate of 4.2% to 4.1% in 2026.

While imports from China have decreased significantly in 2025 (and are expected to continue decreasing in 2026), the overall U.S. current account deficit is expected to increase in 2025 and 2026, mostly explained by rising federal government budget deficits.

Eurozone

The European Central Bank (ECB) is expected to keep the key money market interest rate stable at around 2% in 2026. The key inflation index is expected to increase to 2.1% in 2025 and then 1.9% in 2026. Overall output growth in the Eurozone is expected to decrease slightly from 1.2% in 2025 to 1.1% in 2026. While the Spanish economy will see a significant slowdown of economic growth from 2.9% in 2025 to 2% in 2026, the German economy is expected to grow faster from 0.2% in 2025 to 0.9% in 2026. The primary reason for increased growth in the German economy is a significant increase in government spending for security as well as infrastructure.

United Kingdom

The growth outlook for the British economy is flat, with expected 1.3% GDP growth in both 2025 and 2026. Inflation is expected to diminish significantly from 3.4% in 2025 to 2.5% in 2026.

Unemployment is expected to stick around 4.7%, with a continued current account deficit of 3% of GDP.

North American trading partners

Canada

The Canadian economy will continue to grow with an increase of 1.5% in 2026. Inflation is sitting exactly at its benchmark of 2% and unemployment will slightly decrease from 6.9% in 2025 to 6.6% in 2026, while international trade is almost perfectly balanced.

Mexico

Economic growth in Mexico is expected to accelerate from 1% growth in 2025 to 1.5% growth in 2026. Inflation will most likely decrease to 3.3% in 2026, with an almost balanced current account and an unemployment rate of around 3%.

South America

Brazil

Brazilian economic output growth will slow from 2.4% growth in 2025 to 1.9% growth in 2026. Tighter monetary and fiscal policy will reduce economic growth, but it will also reduce inflation to 4%, keeping the current account deficit around 2.3% with an unemployment rate of approximately 7.3% in 2026. The appreciation of the Brazilian real against the U.S. dollar has supported the fight to reduce inflation. A loss of agricultural markets was compensated by increasingly exporting to other countries, mainly China.

Argentina

Argentina is a very challenging case for economic forecasts. The Milei administration has forcefully implemented a supply-side economic agenda with significant economic improvements, increasing GDP growth, reducing inflation (albeit from a very high level) and getting the federal fiscal budget under control. But will the political support for those policies endure given a poverty rate of more than 30%? Will the U.S. really bail out Argentina with $20 billion (USD) grants?²

Asia

Figure 3: Real GDP change for selected Asian countries

Note: Values for 2024 are actual data while values for 2025 and 2026 are projections.
Source: International Monetary Fund: World Economic Outlook, October 2025 (Tables A2 and A4)

China

The Chinese economy is further approaching normal levels of economic development with an estimated GDP growth of 4.2% for 2026 (see Figure 3). The trade war with the U.S. has not had a big economic impact on the country. Reduced exports to the U.S. were substituted with exports to other regions, such as the Association of Southeast Asian Nations (ASEAN) and Europe. The Chinese current account increased to 3.3% of GDP in 2025 with a record surplus of more than $1 trillion (USD). Inflation remains very low and touches deflationary tendencies on producer price levels. The looming debt crisis, including the unresolved debt overhang in real estate development, is still a big burden for the economy.

Japan

The forecast for economic growth in Japan is relatively modest with projected growth of 1.1% in 2025 and 0.6% in 2026. Inflation will significantly decrease from 3.3% in 2025 to 2.1% in 2026. The Japanese economy faces a rapidly aging population with decreasing domestic corporate investment. This will reduce potential output growth significantly.

India

India’s economy is expected to continue its strong growth with real GDP growth of 6.2% in 2026. Inflation will increase by 4% in 2026, while the current account will remain rather balanced at 1.4% of GDP.

Conclusions

In 2025, the world economy suffered less from ongoing trade conflicts than expected. However, the level of uncertainty remains high, making forecasts of future economic activity and inflation difficult.