U.S. growth is expected to rebound to 2.2% in 2026, driven by fiscal and monetary easing.
Key takeaways
Inflation will stay above 2%, with affordability concerns and slower wage growth persisting.
AI investment and the diminishing impact of tariffs will support stronger productivity and economic expansion.
Global economic outlook for 2026
Trade tensions and global uncertainties will continue to pose a challenge for major Western economies next year, with some economies faring better than others, write RSM’s global team of economists in their economic forecast.
In the United States, a modest economic tailwind fueled by expansionary fiscal policies and rate cuts will help push growth to 2.2% in 2026, write RSM US Chief Economist Joe Brusuelas and Economist Tuan Nguyen. The probability of a recession over the next 12 months has fallen to 30%, they write, down from the previous estimate of 40%.
Elsewhere around the world, RSM’s global team of economists offer these forecasts:
- Canada: As trade tensions continue to simmer, the economy will be limited to an overall increase in growth of 1.4%, Brusuelas writes.
- UK: A large fiscal contraction, combined with weak consumer confidence, will help limit growth to 0.8%, writes RSM UK economist Thomas Pugh.
- Australia: The economy will remain resilient amid global uncertainties, producing steady but modest growth of 2%, writes RSM Australia economist Devika Shivadekar.
U.S. outlook for 2026: Reacceleration as ‘stagflation lite’ persists
- Baseline scenario
- First alternative scenario: Stronger growth
- Second alternative scenario: Downside risk
- Risks to the outlook
- The takeaway
UK outlook: Fiscal contraction brings short-term pain
U.S. outlook for 2026: Reacceleration as ‘stagflation lite’ persists
A modest economic tailwind fueled by expansionary fiscal policies, rate cuts by the Federal Reserve, the full expensing of capital investments, and deregulation should push overall growth in the United States to an above-trend 2.2% in 2026.
Because of those policy changes and tailwinds, we have reduced our probability of a recession over the next 12 months to 30% from our previous estimate of 40%.
We anticipate that the push to build the infrastructure for artificial intelligence, including a more robust energy grid, will be the primary driver of growth for at least another year.
During this time, we anticipate that upper-end consumers will maintain their spending, which will help push growth above the long-term trend this year.
Perhaps just as important, the noise from the policy sector will most likely ease as trade-related uncertainty winds down and the economy adjusts to permanently higher trade taxes.
We think that the tariffs’ drag on growth of nearly 1% in 2025 will fade, helping to spur a solid reacceleration of growth in 2026.
We expect inflation to remain well above the Fed’s 2% target, with the yield curve steepening as short-term rates ease and 10-year Treasury rates remain above 4%, potentially moving higher if inflation does not fall below 3%.
We anticipate another year in which inflation rises faster, with public discontent continuing to simmer as declining affordability and standards of living become more of an issue for consumers.
In addition, as a five-year period of labor hoarding by large companies ends, we expect hiring to slow to nearly 50,000 new jobs per month, accompanied by an increase in the unemployment rate to 4.5% with a risk of moving higher.
Below we offer three scenarios for the economy in 2026.
Baseline scenario
Our baseline assumes no new shocks to the economy and that current trends will continue throughout 2026, with trade uncertainties fading and interest rates easing modestly.
We attach a 45% probability of above-trend growth, accompanied by nearly 3% inflation and 4.5% unemployment.
We expect further easing from both fiscal and monetary policy, which should help lift growth above 2%.
The Fed should cut its policy rate to a range of 3% to 3.25% by the end of the year, which should support improved financial conditions and risk-taking.
We expect the 10-year Treasury yield will average 4% throughout the year, with a modest risk of higher rates because of persistent inflation.
With immigration policies remaining strict, the combination of solid economic gains and job growth of between 30,000 and 50,000 per month should keep the unemployment rate near 4.3%.
We expect that inflation will remain above the Fed’s 2% target, with the consumer price index staying at or above 3%. But as the short-term effects of tariffs fade, we expect the personal consumption expenditures index, the Fed’s preferred measure of inflation, to average 2.7% over the next year.
First alternative scenario: Stronger growth
Given the large tax cut, rate reductions at the Fed and deregulation that supports risk-taking, we think there is ample upside risk to growth in 2026. For this reason, we are attaching a 25% probability that growth will increase to 2.5% or higher as inflation eases and the Fed pushes its policy rate to 3% more quickly than investors are pricing in.
Investors have monitored the improvement in productivity in the postpandemic era as businesses have integrated sophisticated technology into their operations.
We are growing more optimistic that the positive effects of artificial intelligence on investment and productivity may materialize sooner than expected.
Should productivity improve, those gains would create the conditions for a quicker return to the Fed’s 2% inflation target, which would provide the ingredients for stronger growth, lower Fed rates and a decline in the 10-year Treasury yield.
Second alternative scenario: Downside risk
The adverse policy shocks associated with higher tariffs and restrictive immigration policies resulted in what we think is a 1% drag on growth in 2025. In addition, the longest shutdown in the federal government’s history created an additional 1.5% drag on growth in the fourth quarter.
It isn’t difficult to imagine further policy discord out of Washington, which would result in persistent uncertainty that dampens both spending and business investment and pushes the growth rate below 1%.
That scenario would exacerbate the current “stagflation lite” conditions that are contributing to the souring of consumer sentiment.
An increase in inflation to 3.5% or above would create the conditions for a reversal in monetary policy, with the Fed quickly returning to a policy rate of 4% or above and the unemployment rate rising to 5% or higher.
We attach a 30% probability of this outcome next year.
As demand for workers slows and inflation-adjusted wages stagnate, the risks to the labor market are also material. As a result, the impact on income growth would be large enough to keep consumer spending sluggish.
We take the affordability crisis, which is the primary cause of historically weak consumer confidence, seriously.
Given current inflation dynamics, prices could increase more than 3% and remain elevated for longer if fiscal expansion coincides with labor shortages and supply chain constraints—especially if trade tensions between the U.S. and China fail to ease.
Risks to the outlook
Over the past year we have made the case that low rates, liquidity and leverage are the holy trinity of new finance. This equation is part of the growth narrative in the upper spur of the K-shaped economy, which has supported financial markets and the domestic economy. Should expected rate cuts not materialize and liquidity grow tight, though, these sources of growth will materially weaken, dampening economic activity.
In our estimation, risks to the outlook reside in three channels.
Leverage across the financial sector—in private credit, private equity and cryptocurrency—is a risk if liquidity tightens and both the banking and shadow banking communities tighten lending.
One does not have to be a financial markets expert to understand how even a modest curtailment of liquidity and leverage would affect financial markets and equity valuations, which would then slow spending among upper-end consumers.
Uncertainty around inflation amid expansionary fiscal policies results in competition for scarce capital and higher interest rates. With inflation increasing at a 3.6% annualized pace through the end of the third quarter of 2025 and service sector pricing proving sticky, there is ample reason for the Fed to move cautiously in further reducing the federal funds policy rate.
One interesting risk is that should three-year U.S. government paper, which was yielding 3.56% as of Nov. 12, move notably above the federal funds rate, which was standing between 3.75% and 4%, the front end of the yield curve would steepen dramatically.
That kind of move would trigger an avalanche of reserves held by banks into the market, creating the conditions for a much more pronounced increase in inflation as households and firms flush with cash increase demand faster than supply can expand.
In addition, with upper-end consumers flush with cash and benefiting from a strong wealth effect, there is little to suggest that demand for services is going to ease anytime soon.
Lower-income consumers whose wage growth is slowing will experience a greater squeeze in what is left of any disposable income as inflation remains at 3% or above.
Labor demand heading into the final days of 2025 has undeniably slowed as large firms move to reduce head count while midsize and small businesses hold off on further expansion of their workforce.
With growth in the labor market slowing to an average of 29,000 jobs a month in the third quarter, conditions are ripe for an increase in unemployment if the monthly jobs growth falls short of the 50,000 or so that we think is necessary to keep labor market conditions stable.
Given the fine line between sagging demand and nearly no growth in the domestic labor supply, it would not take much to tip the labor force into a period of contraction. Such a scenario would then put the growth of the real economy at risk.
The takeaway
We expect economic growth to rebound to 2.2% in 2026, accompanied by an increase in PCE inflation to 2.7% and a rise in the unemployment rate to 4.5%.
Better economic conditions should feature a steeper yield curve that will foster risk-taking by banks and the shadow banking community, all which favor a quicker pace of economic activity.
We anticipate that the Fed will cut its policy rate to 3% over the coming year, with the two-year Treasury yield falling toward 3% and the 10-year yield remaining at or just above 4%.
But the primary risk to the economy continues to be the affordability crunch associated with our stagflation-lite baseline scenario that includes rising inflation and slower real wage growth.
RSM contributors
UK outlook: Fiscal contraction brings short-term pain
The coming year will be a tougher one for the UK economy after a step-up in growth in 2025.
A large fiscal contraction combined with weak consumer confidence and sagging business sentiment means we expect growth of only 0.8% in 2026.
But inflation should slow markedly to finish the year around 2.5%, down from 3.8% at the end of 2025. At the same time, interest rates should drop to between 3% and 3.5% by the end of the year.
Three main factors will weigh on inflation in 2026:
- Base effects: First, the base effects of the 2024 tax and duty hikes, which pushed up inflation last year, will fade as they fall out of the year-over-year comparison in April.
- Fiscal policies: Second, the measures announced in the budget, like reducing the value-added tax on energy bills, will put downward pressure on inflation.
- Tax increases: Finally, the big increase in personal taxes this year will reduce demand in the economy and increase the size of the output gap—the difference between potential and actual gross domestic product—which will put further downward pressure on inflation.
This economic weakness means that the unemployment rate will probably continue to creep up, reaching a little above 5% early next year, before starting to fall in the second half of the year as the labor market adjusts to previous increases in employment taxes and regulation.
That rise suggests a loosening but not a loose labor market, especially when compared to the 8% peak in unemployment after the global financial crisis of 2007−09.
Still, a looser labor market and sharp slowdown in inflation suggest that pay growth will also slow. We expect it to decline from almost 5% to closer to 3.5% by the end of 2026.
The combination of a loosening labor market, slower pay growth and lower inflation will allow the Bank of England to cut interest rates in December and potentially twice more next year, taking rates to 3.25%.
The good news is that the household saving ratio, at above 10%, is extremely high. That robust rate means households can offset some of the hit to their incomes from higher taxes by saving a slightly lower proportion of their income.
What’s more, financial conditions are accommodative, and lower interest rates will blunt the incentive to save, helping to bring down the saving ratio.
Ultimately, contractionary fiscal policy means that growth will probably fall from 1.5% in 2025 to a little below 1% in 2026.
But the outlook is considerably better for 2027. By the end of 2026, inflation should be back to almost 2%, interest rates will be only a fraction above 3%, and gilt—government bond—yields are likely to have come down further.
Those trends should set the stage for a recovery in consumer spending and business activity, especially if the public finances appear in better shape and the threat of further tax rises has receded.
The short-term outlook is painful, but there is hope on the horizon.
Ireland: Robust growth, but supply constraints bite
The Irish economy has proven remarkably resilient throughout 2025 despite the headwinds from U.S. tariffs, which will hit Ireland harder than the rest of Europe.
Admittedly, the first estimate of gross domestic product for the third quarter suggested the economy shrank marginally, but we think it remains on track for GDP growth of well over 10% in 2025 and domestic growth of around 3% in 2025.
But growth will probably slow in 2026 as the impact of tariffs and global political uncertainty take a toll and supply constraints start to bite.
Still, growth in 2026 will probably register another solid performance as another big increase in government spending provides a tailwind to the economy. That should lead to domestic growth of around 2.3%.
The economy, though, has reached the point where growth will be increasingly limited by supply-side challenges like a tight labor market and infrastructure constraints, especially on housing.
For this reason, we think growth will slow over the next few years toward a trend rate of around 2% to 2.5% after an exceptionally strong period.
The recent rise in inflation to 2.7% should prove short-lived, as we expect inflation to average 2.2% in 2026, in large part thanks to a strong euro, which will continue to make imported goods more affordable.
On the domestic front, we are less confident that inflationary pressures will subside. Strong domestic demand, infrastructure shortages and a tight labor market mean services inflation is likely to remain around 3% next year.
All told, we expect the Irish economy to continue to outperform the rest of Europe throughout next year as strong population growth, government spending and wage growth prop up domestic demand.
Canada outlook: A struggle for growth amid trade tensions
We expect Canada to have another modest year of growth in 2026 amid ongoing trade tensions with the United States and a continuing oil glut that will dampen export prices.
While Prime Minister Mark Carney’s budget will bolster growth and employment conditions, it is not a panacea for the broader pressures on the Canadian economy and cannot completely offset the drag from trade tensions with the U.S.
We expect an overall increase in growth of 1.4%, fueled by a modest 1.6% increase in household consumption and a 1.3% increase in gross fixed investment.
With the recent passage of the budget, the economy stands a chance of responding better than expected, with growth accelerating more than our forecast implies.
A sluggish employment environment, in which we anticipate only a slight drop in the unemployment rate—to 6.7% from the current 7%—is in the process of resetting. Next year, Canada, Mexico and the U.S. will renegotiate their trade agreement.
The Bank of Canada is in a difficult position that will not get any easier. While we think the central bank will cut rates again at its December policy meeting, market participants are not pricing in any further rate relief in 2026 as the central bank takes a back seat to the fiscal authority in its attempts to bolster growth.
The world economy has yet to fully adapt to the trade shock. Growth in Canada’s real gross domestic product recently dropped to an annual rate of less than 1%, so a well-timed fiscal boost is welcome, as is any further reduction in the policy rate by the Bank of Canada.
But while the demand for labor is falling, prices of consumer goods are increasing above the central bank’s 2% target, which makes it difficult for the bank to implement a more robust accommodative policy.
This situation presents a difficult task for the monetary authorities; there is only so much they can do to counter an external trade shock.
In the sections that follow, we analyze the slowing of the labor market, the increased prices of essential goods and the potential for economic growth.
We end with a look at Canada’s financial conditions, which are slowly deteriorating along with the prospect for economic growth, at least for now.
Labor market
Canada’s labor market has yet to fully absorb the tariff shock and the disruption to the North American economy. This is evident in a labor force that has remained stagnant this year.
We expect solid improvement in 2026, but the domestic labor market has a surplus of available workers, which suppresses wage growth.
For this reason, the timing and magnitude of the Carney budget are critical to the growth of the economy and the prospects for higher consumption via wage growth.
Real GDP growth
The American attempts to dismantle the North American trading bloc are clearly having a detrimental effect on Canada’s inflation, its labor market and its economic growth.
Canada’s all-industries real GDP growth decelerated from a solid 1.7% in 2024 to less than 1% for this past June, July and August.
The tariffs are having an impact on prices and profits while taking a toll on labor, spending and economic growth.
Yet because of U.S. tariff policy, there is no way of knowing how long this deceleration will continue. The Canadian economy is likely experiencing more than just a cyclical downturn; it is undergoing a structural transition.
The trade conflict with the U.S. has diminished Canada’s economic prospects as tariffs reduce Canada’s productive capacity while adding costs.
This damage, in our estimation, is why the attempt by the Carney administration to bolster Canadian defense and infrastructure while pulling back from the previous administration’s environmental regulation is well timed.
Financial conditions
The external shock of the tariffs limits the ability of monetary policy to boost demand while maintaining low inflation.
And with inflation likely to remain elevated if tariffs remain in place, monetary policy can only reduce the cost of credit and leave the fiscal authority to address broader economic conditions.
Still, financial conditions in Canada remain modestly positive even as GDP growth falls toward zero.
As with U.S. financial markets, the price and volatility of Canadian securities remain only somewhat neutral. With commodity prices trending lower and the Canadian dollar losing ground, it will be another difficult year for both fiscal and monetary policymakers.
Interestingly, the forward markets think it unlikely that the Bank of Canada will continue to cut its policy rate.
As of late November, the overnight index swap market anticipates the Bank of Canada will put policy on hold over the next 12 months, and estimates only a modest probability of a rate cut.
RSM contributors
Australia outlook: Moderate growth with contained inflation
We expect Australia’s economy to be resilient in 2026, with steady but modest growth, even as global uncertainties and local productivity challenges persist.
Growth among Australia’s major trading partners, especially China, continues to be a key risk, but these effects should diminish starting in late 2026, in part because of strong policy support.
Changes in global trade patterns are likely to have only a mild disinflationary impact on Australia by slightly lowering import and export prices, with the overall effect on non-tradable inflation expected to be small.
Domestically, growth in Australian gross domestic product is projected to gradually strengthen, helped by a rebound in household incomes, improved dwelling investment, and continued public sector demand, although the lift in growth will be more gradual than previously anticipated.
Weaker productivity growth is expected to act as a constraint on the economy’s potential output and income gains, but this is not likely to alter the inflation outlook significantly.
Both the demand and the supply sides of the economy are adjusting downward at a similar pace. We expect annual growth to average 2% in 2026 and 2027.
Within the labor market, conditions are forecast to remain tight, with the unemployment rate anchored in the 4.3% to 4.5% range, participation high, and a modest easing in jobs growth.
Wage growth is anticipated to remain consistent at 3.2% with the current inflation target, helping to support household spending.
Inflation is expected to remain near the Reserve Bank of Australia’s target of 2% to 3%, averaging about 2.5% through 2026.
This outlook is supported by easing pressures on the price of goods and increased government subsidies, though risks persist from tradable inflation and currency volatility.
At the same time, the housing market is projected to gain momentum as investment and demand strengthen, although affordability constraints and supply shortages continue to pose challenges.
Still, some key risks remain. On the downside, if global trade tensions endure or intensify, Australia’s export demand could weaken further, or if households remain cautious, domestic recovery may be more subdued.
On the upside, the recovery in household spending could be stronger than forecast, or business sentiment might improve faster, lifting growth beyond expectations.
A sharp rebound in consumer spending could reignite price pressures, a concern at the center of policy deliberations at the tail end of 2025. In addition, if the labor market tightness persists longer than expected, inflation could remain above the midpoint of the target range for longer.
Monetary policy is likely to remain supportive if inflation is contained. Any further upside surprises in inflation or evidence of sustained demand mean policymakers at the Reserve Bank of Australia will be reluctant to cut rates until they see clear signs that inflation is tracking back toward its target range.
Our base case remains that the RBA will stay on hold until February 2026, but the risk profile has shifted toward a longer plateau rather than an early easing cycle.
The RBA has made it clear: It prefers a data-dependent approach over giving forward guidance. We pencil in just two more 25-basis-point cuts for 2026.
Meanwhile, fiscal policy will need to focus on lifting productivity, tackling housing challenges, and adapting to demographic and environmental pressures to ensure sustainable growth.
All told, Australia is poised for steady, moderate growth with a firm labor market and contained inflation, although ongoing uncertainty and weaker productivity highlight the importance of policy reforms to lift long-term potential.
Subscribe to RSM's economic insights
Timely economic analysis and trends to help middle market businesses succeed
More from The Real Economy
