Nine Forecasts For 2026: If We Build It, Will They Come?

Consensus believes that Europe and the UK will grow roughly above 1% and the US around 2%. We believe that growth risks are to the downside. Partly, this is because the world has yet to see the effects of America’s trade war. Yet, as stocks wane and supply chains are slow to adapt, while disruptions in deliveries will occur, inflation for key items will likely go up, reducing real growth. With AI siphoning most of the available capital, non-tech-related industries will likely see slower growth.

The US is using the Dollar’s dominance to fiscally expand faster than Europe. The CHIPS and GENIOUS Acts, combined with Europe’s reluctance and regulatory drive, ensured that the US will be the centre of the fourth industrial revolution, and be the first to reap the gains. Despite an increase in defence spending, Europe is also stunted by internal divisions, difficult politics and an American demand shock from the trade wars.

 2026 is the year when the provisions of the Big Beautiful Bill begin to take effect. Fiscal dominance (fiscal expansion over monetary prudence) is the preferred strategy in the United States, as well as in many European states that see low growth, defence challenges and pension systems threatened. In this environment, inflation control becomes a secondary priority. After April, the benefits of $60 oil will likely begin to dissipate (unless oil prices fall significantly below that level, which we don’t see as a likely scenario). Countries may tolerate 3%-4% of inflation and focus on nominal rather than real growth.

 Fiscal dominance means growth becoming more important than inflation. Both leading Fed candidates have agreed that the President needs to be consulted on decisions (for those who want to find out what happens when a leader’s trusted advisor becomes head of an independent body and then doesn’t follow directives, I find the story of Thomas Becket is always relevant). A Fed which is tilting more towards the government’s strategy for low rates to fuel growth may well reduce rates more than it currently projects (once in 2026) and even more than what markets currently project (two in 2026). Having said that, it is not likely that all Fed members will simply fall in line if independence is challenged and the regime changes abruptly. We thus expect a more inflationary and more divided Fed.

The US Dollar lost 11% versus international currencies between January and June. Historically, its credibility has survived 40%-50% declines. We believe that the Presidency will succeed in pushing for lower rates than the Fed presently expects, and that the White House will favour renewed Dollar weakness in order to improve exports and increase local manufacturing. With the Renminbi, the official currency of China, more or less pegged to the USD, the question is whether Europe and the UK will follow the Dollar downward. We believe that the UK can ill-afford to allow for more depreciation, as inflation is already squeezing economic growth. The EU in 2025 opted to use the Euro as a store of value, rather than a competitive tool, and it is likely that it will follow a similar approach in 2026.

We realise that on a one-year view, and given the constraints of AI, this is a bold statement, and it is more likely that we are seeing the beginning of a trend. Having said that, AI is already disrupting employment across the board, especially among younger workers and consumers. We think that 2026 will likely be a pivotal year for the theme, especially in the services industry and especially for knowledge workers, as companies reduce the large headcounts they accumulated during the pandemic. In this vein, we expect to see the first productivity gains as companies begin to figure out how to use AI more strategically.

Even as consumers and knowledge workers scramble to adapt to the new reality, AI growth is now linear, not exponential. Partly this is because of the non-linear way that tech grows, with leaps rather than a series of small steps. Partly, it has to do with physical constraints (processing power, availability of data centres, availability of electricity etc. A slowdown, even a market correction, is entirely possible, and up to a point welcome. Financial markets may leap on faith, policy and a good narrative, but they cannot do so consistently without seeing profitability. We believe that initial leaders will lose ground as other competitors begin to assert themselves in the market. Ultimately, the industry will survive, like the tech industry survived Yahoo’s retreat two decades ago.  

 We believe this for a number of reasons. One, because the US has already struck deals with major allies and has achieved a trade truce with China (which could be jeopardised by the “Pax Silica” agreement). Second, legal challenges to the President’s power to unilaterally impose large tariffs are likely to succeed. Third, and most important, because the AI race takes precedence, and physical constraints are as big as they are, the US will need to import raw materials. In the same vein, we expect the US to relax some visa rules to attract more talent. 

Year 2 in government, recent electoral losses, and the President’s admitting that the party could lose the Mid-term elections, may put the White House’s legislative efforts on the back foot. An already extremely thin Republican majority will be hard-pressed to pass expansive bills, like the Big Beautiful Bill. Efforts to deregulate industries could be hampered. A second government shutdown (funding ends on the 30^th of January) is looming.