By Kari Vatanen, Head of Asset Allocation and Alternatives at Elo: In 2026, the global economy will continue to grow in an environment overshadowed by the trade war. Investments in AI infrastructure will support economic growth in the United States, although productivity gains will remain limited. In Europe, growth will recover as industrial investments strengthen the manufacturing sector, even as geopolitical risks create uncertainty. Inflation will stay above central banks’ target levels, but monetary policy will remain accommodative throughout the year.
In 2025, global economic growth was weighed down by import tariffs imposed by the U.S. administration on its international trade partners. The uncertainty sparked by events on Liberation Day dampened growth expectations in the spring, but confidence began to recover as trade negotiations progressed and tariffs stabilized. In the United States, the impact of import tariffs on consumer prices remained moderate, while robust private consumption supported growth, particularly in the service sector. The effect of a softening labor market on economic growth was limited, as substantial investments in AI bolstered activity toward the end of the year.
In Europe, economic growth remained subdued but stayed positive, supported mainly by private demand and the service sector. Amid persistent challenges in the export industry, Germany announced early in the year its plans to ease the debt brake and pursue fiscal expansion through infrastructure and defense spending. However, the boost to growth expectations has remained muted, as Europe’s export sector continued to face headwinds from U.S. tariffs, a stronger currency, and intensifying competition from China.
Inflation continued to ease in Europe throughout 2025, although differences between countries remained significant. In the euro area, headline inflation reached the ECB’s price stability target, but core inflation, which excludes energy and food prices, declined more slowly and remained above the target. Inflation in the United States stayed elevated toward year-end, as import tariffs and protectionist policies pushed up the cost of imported goods and labor.
The U.S. Federal Reserve kept its policy rate unchanged until September as concerns over tariff-driven inflation mounted. Gradual weakening in the labor market prompted the Fed to cut rates three times during the autumn. The European Central Bank continued its gradual quarterly rate cuts as inflationary pressures eased. By the end of 2025, the ECB had lowered its key rate by one percentage point.
Macroeconomic environment and central bank actions in 2026
In 2026, global economic growth will remain positive despite ongoing import tariffs and the continuation of the trade war. Investments in AI infrastructure will continue to support U.S. growth, even though productivity gains from AI will remain limited within the year. U.S. labor markets are likely to stay subdued, and protectionist policies will constrain labor supply. However, fiscal stimulus and a more accommodative monetary policy in the first half of the year will help sustain overall demand.
“In 2026, global economic growth will remain positive despite ongoing import tariffs and the continuation of the trade war.”
In Europe, economic growth will recover as uncertainty from the trade war and inflationary pressures ease. Germany is directing substantial investments in defense and infrastructure, which will boost demand for capital goods and expand order books in the manufacturing sector. Additionally, rising real wages and lower central bank rates will support private consumption, keeping the outlook for the service sector positive.
Inflation will remain moderately above central bank targets in 2026. In the United States, headline inflation will stay close to 3 percent, as the protectionist policies, through import tariffs and immigration restrictions, keep upward pressure on the prices of imported goods and labor. In Europe, subdued economic growth has eased inflationary pressures, but the recovery driven by industrial investment will push realized inflation moderately above the 2 percent level.
Central banks will maintain accommodative monetary policies throughout 2026. The U.S. Federal Reserve is likely to cut its key interest rates 2−3 times during the spring and then pause further cuts due to slightly elevated inflation. The appointment of a new Fed Chair could influence the stance on monetary policy even more than inflation expectations later in the year. The European Central Bank will keep its policy rate unchanged for the entire year. As economic growth recovers in euro area, inflation expectations will rise moderately toward year-end, and markets will gradually begin pricing in rate hikes for 2027.
“Central banks will maintain accommodative monetary policies throughout 2026.”
Geopolitics and the evolution of the trade war between the United States and China could significantly affect economic growth and the inflation outlook in 2026. U.S. import tariffs have strained the country’s international relations, while attention to European security appears to have waned. The continuation and potential expansion of the war in Eastern Europe could slow economic growth in the region, whereas an end of the war in Ukraine and subsequent reconstruction investments would provide a significant boost to the European economy.
Investment year 2026 for the major asset classes
For the Fixed Income Investor, the year 2025 was mixed. In the euro area, long-term interest rates rose, and yield curves steepened as the central bank cut policy rates. In contrast, U.S. long-term rates declined despite the steepening of the yield curve, offering higher returns than long-term euro-area bonds. In 2026, the steepening of yield curves will continue. The Federal Reserve will cut target rates, while persistent inflation will create upward pressure on long-term rates. In the euro area, a moderate increase in inflation expectations, supported by recovering economic growth, will gradually push long-term rates higher toward year-end. Return expectations for euro-area government bonds remain subdued, with short-term rates appearing more attractive than long-term rates.
For the Credit Investor, the year 2025 provided moderately positive returns, despite a rapid increase in credit spreads as trade tensions escalated in the spring. Credit spreads on publicly traded corporate bonds have tightened toward the lower end of their historical range, heightening the risk of spread widening and a decline in bond market values. Expected returns for credit investments remain modestly positive, assuming that financial conditions in the capital markets stay sufficiently stable.
For the equity investor, the year 2025 delivered high returns, despite turbulence in equity markets during the spring as trade tensions intensified. In the United States, equity market returns were largely driven by technology giants. European markets experienced a positive shift following Germany’s announcement to ease its debt brake and implement substantial investment programs. In 2026, equity markets will continue their upward trend as ongoing investments in AI, infrastructure, and defense support the markets. The positive momentum in U.S. technology stocks is set to continue, although fluctuations in market sentiment may create a bumpy road for this highly concentrated market. AI-driven productivity gains will gradually extend to other sectors, providing broader support for equity markets. In Europe, equity valuations have remained moderate, and investment-driven economic recovery will continue underpinning equity market performance.
Illiquid investments posted highly muted returns in 2025. While the most significant write-downs in real estate valuations appear to be behind us, price recovery has yet to begin. In private equity, market activity has remained weak, and changes in valuations have been modest. In 2026, European real estate prices will start to recover as accommodative monetary policy and improving economic growth support the sector. In the United States, real estate market is likely to remain muted. Private equity market activity will gradually pick up, and valuations will begin to rise toward year-end, although returns are unlikely to reach double-digit levels.
“Expected returns for investment markets are moderately positive, although many markets are entering 2025 with higher valuation levels compared to the previous year.”
Expected returns for investment markets are moderately positive, although many markets are entering 2026 with higher valuation levels compared to the previous year. The strengthening of industrial investments supports economic growth and drives demand for capital goods, expanding order books in the manufacturing sector. Positive momentum in equity markets is broadening across sectors as AI-driven productivity gains begin to materialize. Recovery in real estate markets and private equity is also expected to begin as central banks maintain accommodative monetary policies.
