Global macro outlook: From policy divergence to structural dispersion

2026 is shaping up to be a year defined by the interplay of structural shocks and cyclical policy dynamics. The era of monetary dominance is giving way to one where fiscal levers, political priorities and productivity revolutions steer the macro environment. Governments are deploying record fiscal outlays while central banks retreat to the sidelines.

This new policy hierarchy is colliding with diverging growth paths – a U.S. fiscal reckoning, Europe’s fiscal awakening, Japan’s normalization, China’s structural adjustment – and the transformative impact of AI-driven investment and capital flows. The result is a dynamic, policy-led backdrop that is reshaping relative value across asset classes.

1. The U.S. fiscal reckoning: exceptionalism meets supply-side strain

The U.S. economy enters 2026 still outpacing its peers, supported by robust consumption, industrial-policy incentives and AI-related capex. Fiscal policy is poised to further support growth, with the economy likely avoiding a recession next year. Yet the same fiscal largesse driving resilience is also feeding imbalance.

The deficit remains near 6% of GDP and the “One Big Beautiful Bill” is set to add trillions to the national debt, pushing the budget shortfall above 7% by 2028 - high by historical standards for a non-recessionary period. As costs of servicing the debt climb, markets could reprice long-term fiscal risk through a rebuilt term premium, a more vulnerable U.S. dollar and steeper curves with 10-year Treasuries likely anchored around the 4-4.25% range.

Mid-term election-year politics reinforce the bias toward spending over consolidation. The debate is shifting from how strong growth is to how sustainable is the debt. While productivity gains from AI may support trend growth, fiscal arithmetic is becoming harder to ignore.

Investment lens: Cautious on chasing duration with the Fed poised to cautiously cut to 3.25%; favour high-quality credit linked to infrastructure and technology capex; watch for bouts of volatility as markets refocus on fiscal concerns over growth momentum.

2. Europe’s fiscal awakening: Germany’s growth engine ignites

Europe’s macro story turns on Germany’s €800 billion multi-year investment plan – roughly 20% of GDP through 2029 – the largest fiscal programme since reunification. The package channels around 3.5% of GDP into defence and €300 billion into infrastructure, with additional green and social spending aimed at lifting potential growth and strategic autonomy.

Markets appear to be underestimating the implementation speed and multiplier effect. Defence orders are already executing with minimal bottlenecks, and infrastructure investment should accelerate through 2026 as backloaded Next Generation EU funds deployment from the periphery overlap. Fiscal spillovers will radiate across the euro area: Italy in particular stands to benefit through supply chain integration and reform momentum.

These fiscal dynamics reposition Europe from a policy taker to a growth maker with the ECB cautiously hawkish - our expectation is for one rate hike to 2.25% in H2-2026. We see bund yields gravitating toward 3%, continued peripheral outperformance and EUR/USD rising toward $1.23 by end-2026 as fiscal expansion supports above-trend growth.

Investment lens: Prefer periphery European government bond exposures over core; maintain short EUR duration; position for mild curve steepening as fiscal acceleration replaces monetary stimulus.

3. U.K. fiscal resilience: overpriced risk in a constrained environment

The U.K. remains a story of superficial resilience as labour markets weaken. Public debt sits above 100% of GDP with a structural deficit near 5.7%, yet fiscal institutions remain credible. The government faces a consolidation requirement of about £35–50 billion for the November budget, which we expect to happen through mainly near and medium-term tax hikes and moderate spending restraint with cognizance to avoid implementing an inflationary budget.

But markets continue to overprice fiscal risk. Gilt term premiums exceed what fundamentals justify, given strong institutional guardrails and fiscal rules that remain sacrosanct into the November Autumn budget though revenue raising measures need to show credibility and not be largely backloaded. Our expectation for the Bank of England’s (BoE) terminal rate of 3.25% (4% base rate currently) assumes one additional 2025 BoE rate cut in December, which should support mid-curve gilts. We also expect long-end gilt compression versus U.S. Treasuries as the U.K. fiscal premium narrows. 

Investment lens: Favour five-year gilts where real yields are compelling; lean into long-end gilts versus U.S. Treasuries; expect gradual BoE easing and renewed demand for gilts as inflation pressures and the long-end U.K. fiscal risk premium fade.

4. Japan’s policy normalisation: quiet catalyst for global re-pricing

Having been at the forefront of ultra-low and negative rates, Japan is finally shifting course.

The Bank of Japan’s controlled exit from yield-curve control and cautious rate hikes reflect firmer wage growth and sticky domestic inflation. Meanwhile, the government’s twin fiscal drivers – record defence and green-investment budgets – are providing support to the economic growth outlook, further abetted by the “Takaichi” trade, which reflects the new prime ministers’ bias towards Abenomics of loose fiscal and monetary policy.

Japan is no longer the world’s zero-yield outlier. While on net, Japanese investor flows still tilt to international bond markets, rising local asset returns are prompting domestic interest, subtly lifting global real-rate floors and adding a new source of cross-market volatility.

Investment lens: Anticipate mild upward pressure on global yields; maintain hedged exposure to Japanese equities benefiting from fiscal outlays and reflation; maintain cautiously bullish outlook for yen against the US dollar through end-2026.

5. China’s structural adjustment: stabilisation, not re-acceleration

China’s growth path is levelling out near 4.0-4.5% in 2026, reflecting structural headwinds rather than cyclical weakness.

Recent data point to tentative stabilisation: Third-quarter GDP was 4.8% year-on-year, supported by a wave of quasi-fiscal measures, including the RMB 500 billion policy-bond initiative, targeted 10 basis points (bps) rate cuts and 50-100 bps reserve-requirement reductions.

Policy support remains targeted rather than broad-based, aimed at stabilising confidence rather than reigniting leverage. The economy remains driven by select industries; technology, clean energy and robotics are expanding, while property and local-government sectors contract.

External dynamics complicate the picture. U.S.-China trade tensions have re-emerged, with renewed tariff threats and strategic export restrictions resurfacing ahead of the Trump-Xi Summit and 15th Five-Year Plan meetings in late 2025. While modest consumption support may follow, the focus of the next plan will remain on advanced manufacturing, AI and supply-chain independence.

Investment lens: Favour high-quality Asia credit with policy support; upgraded our outlook on emerging market debt hedge renminbi volatility and tariff risk into 2026.

6. The AI productivity supercycle: capital deepening redefines growth

AI investment is shifting from hype to execution. Companies are accelerating spending on datacentre infrastructure, semiconductors and automation, fuelling a new capital-deepening cycle that offsets demographic drag and raises potential growth across advanced economies.

AI-related industries are now a core driver of goods trade, power demand and corporate margins. Earnings breadth remains narrow but is gradually broadening as adoption spreads beyond mega-cap leaders. We estimate AI-linked productivity gains could lift medium-term potential growth by 0.3-0.5 percentage points, helping sustain profits even as real rates stay higher for longer.

This structural capex boom ties together the fiscal and technological arcs of the cycle – governments and firms alike are re-wiring the global economy.

Investment lens: Maintain selective exposure to companies and credits tied to the AI and energy-infrastructure ecosystem; diversify across geographies and supply-chain beneficiaries; monitor valuation concentration as diffusion continues.

2026: From fiscal dominance to structural dispersion

Across all major regions, fiscal policy – not monetary – now defines the macro cycle.

Inflation is easing but remains uneven across countries; fiscal strategies diverge; and political cycles increasingly shape market behaviour. The global economy is entering an era of structural dispersion, where investors must navigate multiple policy regimes rather than a single synchronised narrative.

2026 will challenge investors to think differently about policy, volatility and fiscal discipline.

The easy macro trade is gone; investment opportunities will depend on selectivity, relative value and clarity on which fiscal narrative you are funding.

From Washington’s debt arithmetic to Berlin’s investment surge, from Tokyo’s quiet normalisation to Beijing’s structural recalibration, the global cycle is being re-wired – and investors can best position through active management to benefit from the dispersion.