2026 Global Macroeconomic Outlook
First Quarter
Global Fixed Income team’s view as of December 1, 2025.
Global Economy: Growth Persists Slowly and Unevenly
Growth Pace Should Pick Up in the U.S.
The U.S. government shutdown, which persisted for the first 43 days of the fourth quarter, may modestly reduce the quarter’s gross domestic product (GDP). Nevertheless, we expect powerful tailwinds to energize economic growth in 2026.
Specifically, surges in capital and consumer spending, along with the positive effects of recent Federal Reserve (Fed) easing, could boost growth. While the Fed remains concerned about jobs, we think supply and demand in the labor market are becoming more balanced, which should limit the negative impact on GDP.
Of course, we remain mindful of lingering economic risks from persistent inflation, tariff policy uncertainty and a potentially overly accommodative Fed.
Eurozone Economy Remains Sluggish
Despite a challenging geopolitical climate, the eurozone economy has displayed surprising resilience. Nevertheless, weaker global demand and lingering uncertainties will likely limit the region’s growth rate into 2026. A trade agreement with the U.S. should help somewhat, but export growth and investment are likely to remain weak. Consumers remain key growth drivers, but sentiment is weak, and savings rates are high, restricting the impact of consumer spending.
Similarly, we expect growth in the U.K. to remain sluggish, largely due to expected tax hikes, declining business investment and a slowdown in real income growth.
Divergence Challenges China’s Outlook
A trade truce with the U.S. should modestly lift China’s growth prospects heading into 2026. The nation’s focus on upgrading its manufacturing sector remains a source of strength for its economy.
However, the household sector continues to face challenges, highlighting the divergence between robust production and weak consumption. Consumer spending remains tepid amid still-falling property values, which are outweighing the positive wealth effects from stock market gains. Additionally, persistent deflationary pressures may weigh on growth.
Elsewhere, the economic outlooks of emerging markets (EM) remain mixed, depending on the impacts of tariffs, trade, politics, and fiscal and monetary policies.
Inflation: Pricing Trends Are Mixed
Above-Target Inflation Persists in the U.S.
We continue to observe mixed trends in the overall U.S. inflation landscape. Services inflation remains elevated but is slowly falling, while goods inflation is gradually rising.
Meanwhile, tariffs continue to threaten near-term consumer prices, but we don’t believe they will be an ongoing driver of inflation. Instead, we believe that tax and other fiscal policy changes, along with a reaccelerating economy, may cause inflationary pressures to build through 2026.
Eurozone Inflation May Drop Below Target Rate
Eurozone inflation lingered at or near the central bank’s target for most of 2025.
Looking ahead, falling energy prices and weak wage growth may drive inflation below the central bank’s 2% target next year. Additionally, the region's overall sluggish growth should also help restrain pricing pressures.
Meanwhile, inflation remains above target in the U.K., due to housing costs and temporary factors relating to National Insurance contributions. We believe both factors will come down in the coming months, and U.K. services inflation will begin to cool.
Deflation Remains a Threat for China
Despite China’s ongoing efforts to boost economic growth, consumer prices have remained weak, falling in six of the first 10 months of 2025. Feeble domestic demand and consumption, high unemployment, the lingering property sector slump and industrial oversupply have largely accounted for declining consumer prices. We expect deflationary pressures to linger, given the central bank’s preference for targeted and reactive, rather than broad-based, rate cuts.
Elsewhere, EM disinflation, which triggered an earlier start to cutting cycles among developing markets, remains intact. Unlike the U.S. and other core markets, these countries haven’t experienced reaccelerating inflation and the resulting concerns.
Monetary Policy: Data Drives Monetary Policy
Fed to Proceed Cautiously
We think broad market expectations for a series of rate cuts in 2026 are unrealistic. Instead, we expect the Fed to pause again as it seeks to satisfy its dual mandate of maintaining price stability and full employment.
In our view, the data should indicate that the labor market is stabilizing and the inflation rate is holding steady. These metrics, along with improving economic growth, should limit Fed action to one rate cut in 2026.
However, the outlook also hinges on a wildcard. President Donald Trump is set to appoint a new Fed Board chair next year, who will undoubtedly influence the Fed’s forward path.
Rates on Hold in Europe
After cutting interest rates four times in 2025, the European Central Bank (ECB) is likely on hold. Inflation remains near the ECB’s target, while economic growth appears uneven from country to country and modest for the region overall. The ECB seems intent on holding rates steady in 2026, particularly because it expects inflation to dip below target.
For most of 2025, weak growth prompted the Bank of England (BoE) to implement a series of rate cuts, despite inflation remaining elevated. Recently, labor market weakness and a slowdown in private sector pay growth moved to the forefront, boosting the case for additional easing. However, the scope remains unclear, as the BoE, which expects inflation to stabilize, maintains a cautious approach.
China’s Rates Remain at Record Lows
After cutting a key lending rate to a record low in May, the People’s Bank of China remained on hold. We expect this trend to continue in the near term, as the central bank prioritizes financial stability over economic growth. China’s economy appears to be on track to meet the Politburo’s annual growth target, reducing the near-term easing pressure on central bankers.
Elsewhere, country-specific inflation dynamics and political risks have led to diverging central bank strategies.
Interest Rates: Yields Remain Attractive
Treasury Yields to Stay Rangebound
Overall, we expect U.S. bond yields to remain at attractive levels, delivering solid income and total return potential. We expect the yield range for the benchmark 10-year Treasury note to remain 4% to 4.5% in the coming months.
Fed easing, inflation expectations and federal debt levels should keep the yield curve steep, as shorter-term rates decline and longer-maturity rates stay fairly anchored. However, if the Fed cuts rates too aggressively, we would expect the 10-year yield to rise, reflecting market fears about financial conditions becoming too loose.
Eventually, the positive effects of recent Fed easing, federal tax relief and deregulation may encourage firmer growth and additional curve steepening.
Yields in Select Non-U.S. Markets Offer Opportunities
Certain non-U.S. developed market yields appear attractive versus the U.S. For example, government bonds in the U.K. and New Zealand offer yield advantages and solid total return potential.
The U.K. continues to struggle with tepid economic growth, a weak labor market and elevated inflation. Yields, particularly among longer-maturity securities, remain relatively high as fiscal concerns persist. Given the weak economy, we expect additional central bank rate cuts.
In New Zealand, sluggish labor markets and overall economic activity will likely foster continued central bank easing and attractive return potential.
Select EM Rates Look Attractive
EM disinflation, which fueled an earlier start to rate-cut cycles, has remained intact and progressed without reaccelerating. Overall, we think EM rates markets remain in a more comfortable position than their developed markets peers.
Additionally, EM central banks have retained a more hawkish tilt. Rate-cutting cycles are quite mature in many countries, even though China may ultimately export some of its excess capacity to other countries. We favor low-beta rates in Malaysia, Peru and Poland, along with high-yielding countries such as Mexico, Brazil and South Africa.
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References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.