Quarterly economic update for the financial services sector: Q1 2026

Global activity is slowing, but the economy is better than expected

Overall economic activity is slowing down, unemployment is ticking up, and so is inflation. For the time being, the US and the rest of the world are benefiting from increased investment in technology, as well as from the twin deflationary tailwinds of lower Chinese producer and global oil prices, which have eased supply-chain price pressures, allowing both the American and the European economies to grow at a pace slightly faster than previously anticipated. The US and the UK central banks have also been helpful for economic activity, with both suggesting that they are in interest rate cut cycles, despite persisting inflation in services.

Inflation in check, for now

For the time being, inflation is slightly increasing, but overall, it is being kept under control. The US and the rest of the world are significantly benefiting from lower energy prices. Saudi Arabia and OPEC+ have continued running on an increased production schedule, despite a supply glut predicted for most of the next year, accepting lower prices in exchange for higher market share and increased geopolitical influence. Without low energy prices, the global inflation picture might have been materially worse, especially in the US. Still, inflation is a notoriously unpredictable variable. In this uncertain environment, no one can positively know if the net effect of economic forces will be higher or lower wages, if growth will persist enough to allow inflation to build up or whether lower demand will drag prices lower. We can be confident that it will diverge. The tilt towards a scenario where US inflation persists, due to higher fiscal expenditure, tariffs and pressures on the central bank to lower rates, and where Europe (and the UK) see lower inflation as a result of slower growth and higher receptivity to importing Chinese deflation.

Outlook

Going forward, the effects of America’s trade war have yet to be felt to the extent economists have predicted. Unlike financial shocks (2000, 2008, etc.) economic shocks tend to take much longer to manifest. This allows businesses to adapt, for example, by lobbying for exemptions or stockpiling in advance, and mitigate some of the damage. Meanwhile, multi-billion-dollar tech deals in the US, encouraged by the previous government’s CHIPS act, are being materialised, which is temporarily helping growth. We have some concerns with the financing and efficiency of those deals, and we do see rising risks in the financing space, especially in private assets. Lower oil prices are also supportive, and even if the effect dissipates, which we expect by April, the Chinese economy will likely continue to export inflation. Loose fiscal policy and mostly cooperative central banks also help absorb a lot of the financial and economic shocks. While a global recession is still a risk, and in fact risks are still materially on the downside, we do not believe it is a central scenario. The global economy will likely continue to slow down, of course, and become yet more complex, but there are enough factors to support moderate growth.

The financial sector

The financial sector ends the year on a high note, with the financial sector performing well in the last quarter. A large part of the increase in output is due to deregulation. The ease of capital easing rules late in 2025 is releasing capital. Additionally, the steepening of the yield curve is increasing profitability for banks. Good stock market performance is increasing revenues from trading activity. The economic soft landing is decreasing pressures from bad loans and delinquencies, which have been rising after the pandemic.