With the U.S. government continuing to look unpredictable given the risks highlighted above, we expect some convergence in global growth given structural and policy tailwinds in other regions.

Asia: Fitting into the global AI cycle

The main concern for the Asian region remains mainly focused on trade issues and export performance, as these are still key drivers of growth. Following robust front-loading activity this year, as we move into 2026, the sustainability of export performance is in question, underscored by the tight linkages between U.S. demand and Asian exports. The imposition of tariffs and ongoing uncertainty over future trade policy have cast a shadow over Asia’s outlook. Negotiations are ongoing, and agreements are still prone to changes. While we have argued that the uncertainty around this front has peaked, the lack of resolution threatens to drag on economic activity and weaken demand, as businesses and consumers adopt a more cautious stance.

However, a potential offset to the drag from tariffs is the strength in capex demand related to artificial intelligence (AI). While AI has been generally thought to be U.S.-centric, Asia has increasingly been part of the ecosystem, given the production of high-performance semiconductors, memory chips and AI-related products that could provide tailwinds for Asian tech manufacturers in Northeast Asia.

ASEAN’s role as an emerging hub for data centers also implies that, insofar as the AI trend remains intact, this could be a consistent avenue for growth amid headwinds around industrial policy. However, the region’s ability to adapt will be crucial, and there are signs that current disruptions are prompting economies to shift supply chains and forge new trade partnerships. Deals between the European Union and Asia, as well as intra-Asia agreements, such as those between ASEAN and China, could provide some support. Nevertheless, the overall outlook remains cautious, with prolonged uncertainty likely to weigh on economic activity.

China: Striking a balance between cyclical and structural support

In that context, the anti-involution campaign that addresses the issue of overcapacity in certain sectors that has arguably dampened industrial profitability and the recent communiqué from the 15th Five-Year Plan (FYP), which will guide the economy’s development from 2026 to 2030, reiterate this long-term commitment. Policymakers have emphasized upgrading manufacturing processes, prioritization of self-sufficiency and achieving dominance in advanced technologies over the next five years. This reorientation is expected to benefit technology and advanced manufacturing sectors in the long term, as China seeks to move up the value chain and foster sustainable growth amidst external headwinds.

Europe: Voters vs. bond investors

More positive domestic policy is now lifting growth momentum in Europe. The fiscal buffers that were built from the pandemic and energy crisis with balance sheets could provide ammunition for both corporates and households. Unlike the U.S., Germany is using its considerable fiscal space, which could pose upside risk to growth. The improving consumer backdrop, alongside rising real wages and the ongoing transmission from the series of monetary policy rate cuts into the real economy, could guide growth momentum to an above-potential pace next year.

The risk is that tariff headwinds could impact sentiment levels, which implies that the fiscal multiplier effect on growth could be limited. While the fiscal package that has been unveiled by Germany is substantial, a key question is how the funds are deployed. Beyond Germany, other European governments could also find it difficult to balance between voters’ preference for high deficits, versus bond investors’ demand for fiscal discipline.

All told, we expect more geographical dispersion within global growth. Both monetary and fiscal policy have done plenty of heavy lifting in boosting growth, but this additional support could be hard to come back. Both developed market (DM) and emerging market (EM) central banks appear to be approaching the end of their rate cut cycles, except for the U.S. 

Like China, fiscal spending is seen as a key support for growth for many economies to shore up weak confidence and domestic demand, but this may prove tougher than imagined for some, particularly France, Japan, and the UK, where fiscal discipline has become an issue. High government debt burdens and fiscal cutbacks that are unpopular with voters are fueling market anxiety, with investors increasingly demanding credible government spending plans to ensure that debt and deficit levels remain under control. There are rumblings of investor expectations for governments to cap risk premiums and avoid an even bigger drag from higher interest rates, which could result from diminished credibility and confidence if fiscal spending is not brought under control. In some cases, this may force economies to raise taxes or curtail spending plans, further restraining growth. The challenge for policymakers is to spend more effectively while reinforcing market confidence in their debt trajectories. Failure to do so could elevate borrowing costs and leave growth forecasts subdued.

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