The past year has shown how a small set of powerful forces now shape the global economy, from the boom in artificial intelligence to renewed trade tensions and rising fiscal pressures.

In its latest outlook, Capital Economics outlined five macro themes it expects to dominate 2026 as the global cycle enters another demanding period.

1) ’The economic benefits of AI will continue to build – and the market bubble will continue to inflate: Neil Shearing, group chief economist at Capital Economics, expects AI to deliver further gains next year, though concentrated in the U.S. and driven mainly by the surge in capital spending on AI infrastructure.

He estimates AI added around 0.5 percentage points to U.S. GDP growth in the first half of 2025 and sees this support continuing into 2026, underpinning its above-consensus U.S. growth forecast of 2.5%.

Europe, meanwhile, is expected to lag due to slower adoption. The firm’s GDP forecasts for both the U.K. and the eurozone sit below consensus, at 1.2% and 1.0% respectively.

Equities remain buoyed by AI optimism, with investors continuing to reward firms tied to the build-out of AI infrastructure. Shearing notes that valuations are elevated, particularly in the U.S., but are “not yet as stretched” as during the late-1990s tech bubble.

Against this backdrop, and with earnings growth expected to hold up, the economist sees room for markets to keep advancing and forecasts the S&P 500 to reach 8,000 by end-2026.

2) ’China will remain stuck in low growth and deflation:’ China has narrowed the AI technology gap with the U.S., but its wider economy remains constrained by deep structural problems. A model that prioritises supply over demand continues to create excess capacity and weak consumption.

Capital Economics expects growth of about 3% again in 2026, with little sign of a meaningful policy pivot. The imbalance between supply and demand should widen the trade surplus and intensify deflationary pressure, keeping downward pressure on government bond yields after China’s 10-year yield fell below Japan’s for the first time this year.

3) ’The trade war isn’t over:’ The Xi–Trump agreement reduced the immediate risk of tariff escalation, but underlying tensions remain unresolved. A one-year sunset clause leaves space for a renewed flashpoint late in 2026.

Shearing warns that the U.S.’s growing reliance on tariff revenue means barriers are unlikely to be dismantled next year. Supply chains for critical goods are expected to continue shifting away from China, while changes to the USMCA may tighten rules of origin and curb China’s ability to route exports through Mexico.

Shearing expects geopolitical forces to keep reshaping “patterns of trade, capital and technology flows” throughout the year.

4) ’Central banks will continue to ease – but Trump won’t get the major cuts he wants:’ Monetary easing will continue in 2026, but with wide variation. In the U.S., resilient activity and inflation near 3% point to slower cuts than markets expect.

If the Federal Reserve cuts again this month, Capital Economics sees only one more reduction next year, keeping the fed funds rate in a 3.25–3.50% range—a stance that could create tension with President Trump.

The eurozone and U.K. are likely to cut slightly more than markets price in, while Brazil has room for deeper easing. Japan remains the outlier: the Bank of Japan is expected to raise rates to 1.25%.

"If we are right on all of this, then 2026 should prove to be a better year for the dollar against the euro and sterling, but the yen may strengthen a touch against the greenback," Shearing wrote.

5) ’Fiscal risks will continue to stalk markets:’ Fiscal strains that rattled investors in 2025 are set to persist next year, Shearing argues. Several major economies, including France, the U.S. and the U.K., are running large deficits on top of elevated debt loads.

There is “no single threshold” for a crisis, but political shocks could prompt markets to reassess fiscal sustainability. Potential triggers include France’s 2027 election, a change in U.K. leadership, or signs that figures trusted by investors are losing influence in Washington.

The economist expects central bank rate cuts and mild financial repression to help steady bond markets, but warns that short, sharp sell-offs driven by fiscal concerns are likely to reappear.