Prospects for the global economy in 2026: geoeconomics and trade tensions remain a threat
Published: 26 January 2026
Commentary
Professor Sir Anton Muscatelli examines prospects for the global economy in 2026, focusing on the risks posed by geoeconomic fragmentation, trade tensions and US protectionism. Reflecting on trade policy and the implications for the US, Europe and the UK in the year ahead.
The public usually speaks with great amusement about the (alleged) inability of economists to forecast. So, musing about what might happen in the next year in the world economy is a fool’s errand.
Nevertheless, I’m going to try to highlight some risks and opportunities ahead in 2026, specifically around trade and US protectionism.
Let’s start with where I, and many other commentators, went wrong on trade in 2025. Following the initial announcement of much higher tariffs by the Trump administration, many of us predicted that these would have a serious impact on the US economy and also on major trading partner. The global economy did not experience a slow-down in 2025 -quite the contrary, it exhibited resilience. The OECD, for instance projects global economic growth for 2025 as 3.2%, roughly the same as in 2024. It does project this slowing slightly to 2.9% in 2026, due to the impact of various factors, including increasing trade barriers. The World Bank has its latest projection for 2025 at 2.7%. In a recent blog they highlighted that both Consensus Economics and the World Bank had downgraded their forecasts for 2025 and then revised them upwards.
So why did the Trump tariffs not have the immediate negative impact on US and global economic growth and the increase in inflation in both the US and in its major trading partners? In brief, there are various reasons. In part, the effect on inflation is lagged: as Adam Posen sets out in a recent PIIE Global Economic Prospectspodcast existing inventories, how the US Administration would react to price hikes, and uncertainty about how tariffs will evolve in future (e.g. the Supreme Court is expected to rule soon on some of the President’s tariff increases) explains some of this lagged effect. Although effective tariff rates are at the highest level since 1945, the Trump administration has also rolled back tariffs which impacted on US consumer prices, or delayed tariffs as part of ongoing and protracted negotiations. A recent paper by Gita Gopinath and Brent Neiman of Harvard University and the University of Chicago respectively, finds similarly that there is a difference between statutory and actual tariff rates, in part because of lags in shipping, and use of the US-Mexico-Canada (USMCA) agreement, as well as routing of Chinese exports through other countries like Vietnam and India. They also find that that the import pass-through to US producer prices from import prices is high, so in future one would expect more of the pain to be passed on to US producers and consumers.
In terms of US GDP, underlying resilience has offset some of the initial tariff impact. One factor pulling in the opposite direction has been business investment, particularly in sectors like AI: JP Morgan estimates that this AI-related investment might have contributed 1.1% to US growth in 2025.
But as we enter 2026, I expect trade policy uncertainties to continue to weigh on the global economy. Higher tariff rates, unless they are reversed will impact adversely on US inflation and US growth, as well as on global economic prospects. Both the World Bank and IMF have shaded down their forecasts for 2026 compared to 2025. These could be revised downwards if the US starts pulling the geoeconomic levers again and seeks to use trade policy as a key instrument of its international diplomacy.
Strategically, Europe and the UK face some difficult choices. The uncertainty and unpredictable nature of US policy mean that Europe finds itself squeezed in a trade war between the US and China. The UK has tried to navigate the choppy waters of US protectionism by steering its own course, but trade tensions have not abated. The US-UK Economic Prosperity Deal (EPD) provided tariff relief in some sectors, but the Tech Deal element has been paused by the US as it seeks to make progress on other fronts in the EPD. I have argued before that the UK and the EU would stand to gain by making common cause with other G20 economies against US protectionism. But of course trade policy does not happen in a vacuum in 21st Century geoeconomics: and I am writing this at a time when security issues in Europe and the Americas are dominating the headlines. Positioning a more adversarial stance on trade with the US has proved difficult for the UK and European countries.
I expect that the impact of US protectionism will cast a shadow for some time to come. This is not the only risk for the global economy next year: there are others which, due to limited space, I will turn to in a future blog. These range from increasing government indebtedness and diminished resilience in fiscal policy in many economies across the world, to geopolitical tensions in international finance (another importance dimension of geoeconomics). But protectionism and trade will continue to matter in 2026.
First published: 26 January 2026