Growth set to weaken worldwide in 2026

GLOBAL GROWTH OUTLOOK

Growth set to weaken worldwide in 2026

AI boom masking structural slowdown

Wachstum 2026 schwächelt weltweit

KI-Boom überdeckt strukturelle Eintrübung

▪ Global economic growth is set to weaken slightly this year. After relatively robust growth last year of just over three percent, the global economy will struggle to grow three percent this year.

▪ The US economy should expand by around two percent again this year despite the self-imposed supply shock in immigration and trade policy.

▪ The euro area economy is expected to slow down slightly and grow by 1.1 percent this year overall. Domestic drivers of growth are gradually gathering pace, but net exports will make a negative contribution, particularly in the first six months of the year.

▪ The German economy is set to grow by around one percent, buoyed by a strong fiscal impetus. The coalition government measures should propel investment levels into positive territory and keep consumption expenditure up, while net exports are likely to pull down growth once again.

▪ China’s economy is expected to expand 4.5 percent this year. Growth here is still being curbed by consumer sentiment, investments and the property market.

▪ Global inflation subsiding further with price pressure varying among the major economies. Central banks remain cautious, keeping adjustments to their monetary policy gradual to contain risks of inflation and economic uncertainty.

▪ Fiscal policy will be neutral overall. Impetus in the United States, Japan and Germany will be counterbalanced by consolidation measures in other countries.

▪ OECD countries need structural reform to mobilise investments in the twin transition. Reforms that reduce red tape, simplify regulation and lower barriers to market entry are vital to strengthen productivity, investment and innovation.

Weak growth amid heightened instability

2025: global economy reeling under trade shock

The development of global economic growth was extremely difficult to estimate reliably last year, not just at the start but throughout the year. Uncertainty was the dominant factor. The fog has lifted gradually revealing both a surprisingly high level of resilience in terms of growth but also little grounds for confidence. As recently confirmed by the leading international economic organisations (IMF 2025, OECD 2025, European Commission 2025a), the year 2025 did not turn out to be quite as bad as feared at the start of the year. Despite the curbing force of US trade policy of well over one quarter of a percentage point, the global economy is estimated to have grown by 3.2 percent year on year, which is only just below the level of growth measured in 2024 (3.3 percent). Growth is expected to be on a similar scale of three percent in 2026. The downward momentum was less steep than expected for several reasons, with the sudden drop in growth of half a percent expected in April not materialising and growth for the year not dropping below three percent after all.

Reasons for the economic resilience seen in 2025

The reasons for the slightly better than expected level of global economic growth last year were manifold. First, the Trump administration imposed the tariffs later than expected. Second, the tariffs were not quite as high overall as initially announced. Third, deliveries to the US market were pulled forward in the first quarter on account of the announced tariffs and once again in the summer months lifting the course of growth throughout the year. Fourth, the tariffs did not cause an appreciation of the US dollar as would normally be expected in such a situation but a considerable depreciation instead.

Furthermore, the investment boom in artificial intelligence fuelled a thriving trade in electronic goods particularly with East Asia (Taiwan, Korea, Singapore) and stepped up risk propensity on the international capital markets from the end of the first quarter onwards, masking the negative effects on growth caused by the escalating trade policy uncertainty which tends to curb activity and delay private sector investment decisions.

Last but not least, the cuts in key interest rates propped up activity even though capital market yields did not drop to the same extent. Nonetheless, the financing conditions for businesses and households improved overall. Disposable incomes also continued upwards, with wage increases again outpacing inflation in most countries. Downward oil prices and declining gas prices towards the end of the year also helped to steady the economies of energy-importing countries.

Global trade did not plunge but drifted up

Global trade volumes also showed resilience in the face of the tariff shock and did not plunge. Preliminary figures show that global trade grew a good 4.5 percent compared to the previous year with industrial production up by well over three percent (BDI 2025a). The negative impact was curbed particularly by front-loading activity and the fact that both exporters and US importers did not pass on the full additional costs to interim and end customers, although margins are likely to return to normal over the course of the next few quarters. The brunt of the effects on prices and volumes is only expected to fully unfold over the next few months. Mexican and Canadian exporters to the United States were particularly swift to respond, making greater use of the preferential tariffs under USMCA to roughly halve the anticipated downward momentum (OECD 2025). China was also able to avoid a

sharp downturn in its exports and economic activity, robustly expanding its exports instead with Chinese companies managing to bring products destined for the US market to the United States after all via Thailand and Vietnam or diverting them to South-East Asia and Europe (Kiel Institute for the World Economy, 2025a). Furthermore, the upswing in the trade in electronic goods triggered by AI, as mentioned above, kept trade flows in East Asia buoyant and was a further stabilising factor for global trade and production levels.

Uncertainty has diminished most recently but is not off the table yet

Trade policy uncertainty initially dropped slightly following a number of agreements between the US administration and its trade partners but remains high. The US administration’s threats of penalty tariffs against some EU member states in the middle of January 2026 on account of the Greenland crisis again caused a flare-up in uncertainty. Numerous other factors also remain unclear. First, in many areas the medium-term level of tariffs is not certain either because the legality of major tariff decisions taken by the US administration is currently under review by the Supreme Court and will be replaced in the short to medium term in case of a negative decision. Second, the implementation of customs rules is still unclear in many areas, such as in the case of additional tariffs on steel and aluminium derivatives. Third, in some cases tariffs are dependent on corporate decisions. Pharmaceutical companies, for example, can reduce tariffs by pledging foreign direct investment in the United States. Fourth, some aspects of the US-EU trade deal are unclear (such as the EU purchase pledges to the US). Fifth, the USMCA is scheduled to be reviewed in 2026, with the result uncertain here too. Sixth, it can certainly not be ruled out that the US administration will decide to impose further tariffs against trade partners in contravention of the WTO to pursue other objectives, as clearly shown by its most recent threats in connection with the Greenland crisis. Finally, it remains open whether and to what extent the United States will uphold the current regulations following the end of the Trump administration.

The effects of the US tariffs

Trump sets US trade policy on a new course

Since taking office as US president a second time, Donald Trump has pursued a much more aggressive ‘America First’ course than during his first term in office. Shortly after his inauguration, Trump started to resolutely implement his main campaign promises Instead of multilateral cooperation, he is making use of tariffs to apply pressure and bilateral negotiations to enforce more favourable conditions for the United States. The new course of US trade policy does not seem to follow a coherent masterplan but rather a bundle of objectives, including a balanced trade in goods, reindustrialisation and bringing back industrial jobs, strengthening industrial competitiveness, and generating tax revenue through tariffs. Two of these objectives appear to have the highest priority: First, tackling the trade deficit which is considered a risk to financial stability because of the rising imbalance. Second, strengthening national security by building up adequate production resources at home in critical areas and reducing external dependencies.

Erratic and expansionary tariff policy

The new course in tariff policy adopted shortly after Trump’s return to office has been erratic as well as expansionary and includes both sectoral and country-specific measures. Based on Section 232 of the Trade Expansion Act of 1962, the Trump administration reintroduced and extended tariffs on steel and aluminium as early as February last year. In the following months, further tariffs were imposed under Section 232, including tariffs on cars and car parts, copper, lumber, trucks and truck parts

April 2025 galt ein pauschaler Ad-valorem-Zoll von zehn Prozent auf alle importierten Waren aller Länder. Ab dem 9. April 2025 sollten zusätzlich „reziproke“ Zölle für Handelspartner mit aus US-Sicht besonders ungünstigen Bedingungen greifen. Für Einfuhren aus der Europäischen Union war beispielsweise zunächst ein Zollsatz in Höhe von 20 Prozent vorgesehen – später wurde ein Zollsatz von 30 Prozent angedroht, der für die EU jedoch nicht in Kraft trat, da zuvor ein „Deal“ erzielt werden konnte. Kurz nach Inkrafttreten wurden die „reziproken“ Zölle vorübergehend jedoch wieder ausgesetzt, der Basiszoll von zehn Prozent blieb bestehen. Am 7. August traten die „reziproken“ Zölle erneut in Kraft. In der Folge schlossen verschiedene Länder bilaterale Handelsabkommen mit den USA, um die „reziproken“ Zölle zu senken und sektorale Ausnahmen oder

In parallel, the government introduced country-specific tariffs under the International Emergency Economic Powers Act (IEEPA), initially against Canada, Mexico and China. On 2 April, which President Trump had labelled in advance as ‘liberation day’, he announced what he termed ‘reciprocal’ tariffs. Starting on 5 April 2025, the United States imposed a general ten percent ad valorem tariff on all imported goods from all countries. Starting 9 April 2025, plans were to introduce additional ‘reciprocal’ tariffs on trade partners which the US viewed as having particularly unfavourable conditions. For imports from the European Union, for example, a tariff of 20 percent was initially announced, with later threats to increase it to 30 percent, which the EU avoided by agreeing on a ‘deal’ before it was imposed. Shortly after coming into effect, these ‘reciprocal’ tariffs were temporarily suspended, with the basic tariff of ten percent remaining in place. The ‘reciprocal’ tariffs entered into force again on 7 August. Various countries consequently negotiated bilateral trade agreements with the United States to reduce the ‘reciprocal’ tariffs and arrange sectoral exemptions and reliefs.

The Trump administration’s protectionist policy has increased average tariff rates considerably. The Budget Lab at Yale (2025) estimates that the effective US tariffs were at just under 17 percent as of November 2025. Where consumers and companies substituted their imports on account of the tariffs, the effective tariff rate was still estimated at over 14 percent. The OECD (2025a) also estimated the effective tariff rate for US goods imports at 14 percent as of November 2025. This puts current US tariffs on a similar scale to what they were in the 1930s. The European Commission (2025) estimates the effective (trade-adjusted) tariff rate for the EU at ten percent, with tariffs for individual member states ranging widely from around three percent (Ireland) to almost 30 percent (Luxemburg). For German goods exports to the United States, the effective tariff rate is at around twelve percent.

The average level of tariffs remains volatile given the highly unpredictable nature of US tariff policy, as exemplified by the ongoing legal proceedings and the latest threats of the US president during the Greenland crisis to impose additional tariffs against some member states. Current tariffs under Section 232 can be expanded in so-called inclusion rounds and further sectoral measures are possible under Section 232 with several investigations ongoing or expected to be concluded shortly. Further new measures and more tariff increases are also conceivable. What is clear is that the Trump administration will continue its protectionist course and that tariffs will remain high.

Economic impact of US tariff policy

Tariffs generally curb growth because they make trade more expensive and are detrimental to business processes. Tariffs increase costs for companies and consumers at home and therefore act like a negative supply shock, whilst decreasing demand among trade partners by reducing exports and putting pressure on global value chains. Protectionist trade policy thus weakens economic momentum on both sides.

In our Global Growth Outlook of January 2025, we examined model-based estimates of different institutions ahead of the introduction and subsequent adjustments of the tariffs based on announcements at that time (60 percent on Chinese imports, 10 to 25 percent on other trade partners; average US tariff rate of over 18 percent). These estimates showed that global GDP could be around 0.3 percent lower than the baseline scenario until 2026. In the case of the United States, estimates indicated a decrease in GDP of 0.6 percent (until 2034) and short-term reductions of up to 1.7 percent. For the EU, GDP losses were estimated at 0.4 percent in 2025, 1.1 percent in 2026 and 1.3 percent in 2027 and 2028 compared to the baseline. The impact on Germany was estimated to be particularly high, with losses of 0.5 percent in 2025, 1 4 percent in 2026 and 1 5 percent in 2027 and 2028, amounting to a total loss of around 180 billion euros (2020 prices). In the case of China, the tariffs were estimated to lower real GDP by up to one percent in the short term and up to 1.7 percent in subsequent years.

Even though the tariffs actually imposed have turned out to be slightly lower than initially feared on account of later agreements and bilateral deals, and individual factors have temporarily lessened the overall economic impact (such as front-loaded activity in spring 2025) or been masked (by high AI investments, for example), it is still considerable. Considerable both because of the direct impact of higher tariffs and also because of the continued high uncertainty, further exacerbated by the latest tariff threats by the US president during the Greenland crisis. The tariffs have had a tangible effect on investment, trade and the intensity of competition in the United States and on third markets on account of trade diversion effects.

In this context, the IMF (2025) points out that while global growth rates have been upwardly adjusted compared to July 2025, they are 0.2 percentage points lower than the forecasts of October 2024 on account of the tariffs and uncertainty. The IMF additionally modelled a risk scenario simulating additional increases in US tariffs (based on the highest rates announced in April and in the letter of June/July), without considering retaliatory measures on the part of other countries. Global GDP would be 0.3 percent lower than the baseline, with the impact increasing until 2028 and leading to a permanent loss of around 0.5 percent of global GDP. China would be the worst hit (2026: a direct loss of a good 1.5 percent before subsiding), and for the euro area and the United States a loss of around 0.4 to 0.5 percent until 2028, possibly slightly more for the United States. These regional values are based on readings from the chart and are not explicitly reported by the IMF

The OECD (2025) also emphasises that the full impact of the higher tariffs has not yet unfolded, but will increasingly play into expenditure decisions, corporate costs and consumer prices going forward, particularly in the United States. According to the OECD, for example, observed (ex-post) monthly tariff rates calculated from United States revenue and trade statistics (reported customs duties divided by the value of merchandise imports) have risen sharply this year, but are lower than estimated effective tariff rates, indicating an increase in tax collection in the coming months. Despite the lagged effects of higher tariffs, the value of US imported goods subject to tariffs has decreased sharply compared to non-tariffed goods The OECD interprets this development as an indication that tariffs are affecting demand and will continue to weigh on trade volumes. In addition to the direct effects of tariffs, the OECD also underlines the weight of heightened uncertainty and estimates that this could reduce the expansion of the global trade in goods by around three percentage points within the space of one year if trade policy uncertainty remains at the high levels seen in early 2025.

While these different calculations show that the estimates presented last year in our Global Growth Outlook are still valid as a basis for orientation, the adjustments to the tariff measures, time delays and extraordinary factors mean that the height and development of the actual impact of the tariffs no longer fully corresponds to the original estimates. This is particularly true in the case of China where reciprocal tariff rates have been reduced considerably in comparison to the initial high levels, and the country has evidently managed to divert a part of its US exports relatively swiftly to other markets. Currently, there are only a few updated estimates of the different regional effects on growth of the adjusted tariff measures in the form of some analyses for the US and the EU

The Budget Lab at Yale (2025), for example, estimates that the current tariff measures reduced real GDP growth in the United States by around 0.5 percentage points in 2025 and are set to lower real GDP growth by another 0.4 percentage points in 2026. In the long term, the tariffs are likely to permanently reduce real GDP in the United States by around 0.3 percent or 90 billion US dollars per year (in 2024 prices). The calculations estimate that the unemployment rate in the course of 2026 will be well above the baseline scenario (up 0.6 percentage points). The sectoral effects are mixed: industrial production could increase by 2.9 percent but is set to be more than compensated for by reductions in construction (down 4.1 percent) and in agriculture (down 1.4 percent). From a fiscal perspective, the tariff measures are estimated to generate around 2.7 trillion US dollars until 2035, but weaker growth will bring down the net impact to around 2.3 trillion US dollars

For the EU, the Kiel Institute for the World Economy (2025) estimates a short-term negative impact on production of minus 0.1 percent in its analysis following the announcements of the US-EU trade deal of 27/28 July 2025, with a particularly high impact on Ireland (down 0 9 percent), Luxemburg (down 0 7 percent) and Belgium (down 0 3 percent). Germany is slightly over the EU average with minus 0.13 percent, while Italy (down 0.03 percent) and France (down 0.01 percent) are anticipated to experience much lower reductions in production levels. A separate study by the European Commission (2025c), though based on the tariffs announced on 2 April 2025, calculates that the tariffs could reduce EU GDP by a good 0.2 percent in the short term and trigger a decrease in EU exports of between 1.1 and 1.5 percent. Negative terms-of-trade effects would have a more pronounced downward impact on real disposable incomes. Overall, the real value of EU GDP would drop by around 0.4 percent in this scenario. If the US tariffs remain in place permanently, the European Commission estimates the real reduction in EU GDP would be around twice that compared to the first scenario that assumes highly persistent but not permanent tariffs.

Overall, the available analyses show that the US tariff policy will still have a tangible downward impact on the global economy despite individual mitigating effects and extraordinary factors. The impact ranges from higher costs and stifled demand to persistent uncertainty and considerable reductions in output, trade and real incomes in almost all major economic regions. While the scope and timeline of the effects will vary on account of subsequent adjustments to measures and regionally differing responses, the overall conclusion remains the same – protectionist trade policy puts a continual drag on growth, trade and prosperity, weakening economic momentum far beyond the United States

Outlook 2026

The global economy is set to slow down slightly in 2026, particularly in the first six months of the year. From the summer onwards, upward forces are expected to gather strength, particularly the macroeconomic support, financing conditions and the propensity to consume and invest (OECD 2025a, IMF 2025a).

The short-term indicators were slightly weaker worldwide in the last quarter of the year. The global purchasing managers’ index dropped slightly across all components but still pointed to growth overall. In the case of the United States, the index for services has been somewhat downward since the early summer and for industry since late summer, but both indices remain in expansionary territory overall. In China, both partial indicators and the composite indicator also declined considerably, with industry dropping to stagnation at last count. In the euro area, in contrast, services and the composite index rose considerably, while industry continued to indicate stagnation. In Germany, all three indexes dropped in autumn, with services and the overall economy remaining in expansionary territory while industry dropped down further into contractionary territory again. Consumer confidence indicators remained weak overall and below their long-term average, particularly among industrialised countries (OECD 2025).

We expect the global economy to grow by three percent this year, following growth of an estimated 3.2 percent last year. Industrialised countries are only set to grow a moderate 1.5 percent, with anticipated growth also a moderate four percent among developing and emerging countries. Growth is expected to drop slightly in three of the four major economic regions (China, euro area and Japan) despite fiscal impetus in Germany and Japan. Germany alone is expected to return to tangible growth following three weak years. We expect growth to drop to 4.5 percent in China, and amount to 1.1 percent in the euro area, one percent in Germany and 0.9 percent in Japan. These estimates do not factor in the most recent tariffs threatened by the US president against some European countries

The outlook for the United States is already complicated, even without the effects of additional tariffs. Economic momentum in the United States has subsided slightly recently but growth should still come in at around two percent despite the declining labour supply in view of the anticipated monetary easing, the tax legislation coming into effect with an impetus for consumption expenditure, catch-up effects following the government shutdown and the high investment momentum in artificial intelligence.

On a positive note, global inflation should decrease from 4.1 percent to 3.8 percent in 2026 (IMF 2026). Monetary policy impetus is nonetheless set to remain limited around the world. World trade is expected to grow less strongly than last year when it outpaced the expansion of economic output. It is nonetheless anticipated to grow by 2.25 percent, which will bring it below global economic growth in 2026. Asian emerging countries will expand more than the average level of growth, buoyed by the AI boom and high demand for the associated hardware.

Growth of real gross domestic product in 2026 compared to previous year (in percent)

Source: BDI

Forecast summary: Growth in real GDP 2025/26/27 in percent

1: IMF (2026), January.

2: OECD (2025), December. *September. , Forecast for India for fiscal year beginning April.

3: European Commission (2025), November.

4: Forecast on basis of 70 percent world GDP (PPP of 2013).

5: Information on India for the fiscal year in current prices.

Underlying structural trends remain worrying

Most OECD economies and China will be confronted by a number of structural trends in the medium term that will curb growth with only a few positive structural trends working the other way. Alongside upheavals in the international division of labour, specific political factors are also at play (OECD 2025a, IMF 2025a).

In the next few years, the labour supply in industrialised countries particularly will come under pressure due to the drastic reduction in net migration. This development is already visible in the United States and set to become relevant in other countries as well. Reduced net migration will also reduce financial flows into the countries of origin, which tend to be developing countries. In conjunction with declining amounts of official development aid from industrialised countries to developing countries, this will make the framework conditions for the least developed countries more difficult.

Furthermore, investment trends have remained weak across the world since the global financial crisis, affecting investment in plant and equipment and the construction sector particularly. According to an OECD study (OECD 2025c), global investments in the digital transition have only displayed very elevated momentum in the United States, in both hardware and software

Political uncertainty caused by instable governments and narrow parliamentary majorities, populist forces and dangers for international security are all factors that are negatively affecting the propensity of households to consume, leading to higher levels of savings in many countries. Confidence indicators for consumers as well as companies remain below their long-term averages according to many studies, also by the OECD and the European Commission.

In addition, most industrialised countries have implemented much fewer tangible reforms of a structural nature that strengthen growth forces over the last decade than they have in the past. This is all the more problematic considering that the increased requirements for security and defence, the stronger aging of populations in most industrialised and emerging countries and the associated knock-on effects on productivity and social expenditure, the need to lower carbon emissions to comply with climate regulations and growing resilience requirements in the face of the concentration of international economic relations all really call for a higher level of reform to create the financial scope for these tasks in the first place. Instead, consolidation requirements have moved down the agenda in three of the four leading economies in the world, with problematic consequences in the medium term. Germany’s medium term financial outlook, in contrast, remains solid despite the rising debt ratio seen in the last few years.

Political factors cause weak outlook for second half of decade

For the medium term of the current decade, the global economy is anticipated to grow 3.2 percent on average between 2026 and 2030 according to the medium-term projections of the IMF, which is a good half a percentage point below growth in the first twenty years of this century. The slump in momentum is largely the consequence of poor decisions in economic policy. A return to a rule-based, liberal trade policy, widescale application of artificial intelligence, resolute implementation of overdue structural reform to strengthen the deployment of labour and capital, technical progress and a growth and stability-friendly course in fiscal policy, particularly in the two largest economic regions, the United States and the People’s Republic of China, could lift overall growth above four percent. The IMF postulates that a return to rule-based liberal trade policy alone is worth more than half a percentage point. Artificial intelligence could contribute a second half a percentage point on average and structural reform could certainly improve potential growth by a third half a percentage point by the end of the decade. Fiscal policy would, above all, be required to follow a viable course of consolidation which combines the higher demands on public budgets for defence and resilience, additional expenditure due to aging populations in industrialised countries and the transition requirements for climate protection and digitalisation in the medium term with declining deficits, improved debt sustainability and the renewed formation of a financial buffer to cater for future economic shocks. However, the world economy is far removed from three of these four pillars: very far from a liberal trade and solid fiscal policy in the major economic regions, very far from an overall package of structural reforms in the large majority of industrialised and emerging countries, above all in China, but at least with a chance to succeed in terms of artificial intelligence.

The weak outlook is a heavy burden particularly for the poorest countries as the current mix of relatively expensive financing conditions, declining development aid, lower emigration flows and politicised

global trade relations is particularly challenging for them. These countries would also be extremely exposed to corrections on the financial markets in the event of an abrupt turnaround in the current high risk appetite of investors.

Second China shock greatly affecting the rest of the world, particularly Germany

Macroeconomic mismanagement without adequate corrections

Global economic recovery is also being hampered by China’s mismanaged economic policy, which has got worse over the last ten years (see the large number of articles on the topic, most recently IMF 2025b, 2024 and Lee 2025). The Chinese leadership has only been trying to strengthen consumer spending, the social protection system and the service sector and scale back excessive investment in the manufacturing sector in the last one to two years (IMF 2025b). Serious imbalances persist nonetheless and domestic deflation has triggered a real depreciation of the renminbi which is keeping China’s export surplus high.

The rebalancing of the Chinese economy called for by the international community, away from very high savings and investment to higher consumption, from industrial production to services, and from foreign trade to domestic trade has not taken place to any great extent in the last few years and is not likely to broadly take hold until 2030. The regular monitoring of China by the IMF between 2023 and 2030 saw almost no change yet in 2023 in savings and investment rates, with both stubbornly persisting at close to 42 percent (IMF 2024). The details of the latest review have not yet been published.

The Chinese leadership has, at least, placed an emphasis on consumption spending in 2025 to support its growth target of five percent. Despite a certain amount of consolidation rhetoric, in view of the pronounced weakness of domestic demand, it has postponed adopting a solid fiscal policy and accepted general government deficits of more than seven percent at nominal growth rates of just under five percent. China’s structural budget position is even set to deteriorate further from a deficit of a good 7.5 percent to more than eight percent. Incorporating all levels and subordinate bodies (local government financing vehicles and government-guided funds), the annual increase in total debt has consistently been more than ten percent of GDP since 2017 (IMF 2024). In this respect, the sharp upward trajectory of the government debt ratio from around 80 percent in 2018 to more than 120 percent and the current projection of 150 percent by the end of the decade is not without risks.

This short-term stimulus should be followed by consolidation as soon as the deflationary trends have been brought under control. Weak domestic demand and deflation have, however, triggered a real depreciation of the renminbi. The IMF estimates that the trade surplus in goods is set to remain constant at 3.5 percent of GDP while the current account surplus should, at least, decrease from 1.5 percent towards one percent. It remains to be seen whether the explicit strategy of the Communist Party to terminate excessive investment and provide for a certain extent of consolidation in industry will take hold. Investments have, at least, dropped considerably in the course of last year, with monthly rates turning down in the fourth quarter.

Industrial policy part of mismanagement

All the same, on account of China’s overarching objectives in foreign and security policy (Doshi 2024, Lee 2025), the Chinese leadership is pursuing a consistent strategy of import substitution and massive subsidisation of strategic industries which harbours considerable potential for conflict with the rest of the world. In the last three decades, China has largely refused to drive an economic policy course that initiates the called-for reallocation of resources from investment to consumption. To the contrary, in the last ten years, the Communist Party of China has further stimulated the shift of resources into industrial value added for a number of reasons related to security, power and ideology. An incomplete analysis of the OECD indicates that subsidies amount to more than four percent of GDP which is two to four times as high as in the United States and the EU. Other studies estimate even higher levels (OECD 2023, Boullenoius et al. 2025, Oxford Economics 2024). In the specific case of cars, Chinese carmakers receive subsidies of around two percent of revenue while the OECD average is half a percent (OECD 2025b). An in-depth analysis of the European Commission on China’s status as a market economy according to WTO rules sets out further examples of subsidies which indicate that Chinese support measures are many times higher than the measures of Western industrialised countries in several important areas, e.g. in batteries (European Commission 2024).

The main objectives of the leadership’s various broad policy approaches are to support domestic production, drastically reduce China’s dependency on imports and dominate the global market in certain product groups. Further energy and technology policy objectives include the promotion of ‘new productive forces’ (including renewables, electric vehicles and other means of transport, chemicals and metal products) These inherently problematic policies have intensified in the last few years in response to the deflationary trends in the overall economy following the massive correction on the property market, which was itself a consequence of misguided economic policy in the previous decade, and the ensuing weakness of private consumption and associated services. The strategy to reach the overarching growth targets of the 13th and 14th Five-Year Plan (2016-2020, 2021-2025) was through investment in plant and equipment and research outside the construction sector and net exports The proposals for the 15th Five-Year Plan, to take effect from March 2026, set the course for partial corrections but do not represent a turnaround in strategy.

Overarching measures and instruments far beyond OECD level

The key initiatives of China’s industrial policy include the Made in China 2025 strategy from 2015, and, to some extent, the New Silk Road Initiative in that it uses surplus capacities of the Chinese construction sector for infrastructure projects abroad, the dual circulation strategy of the 14th Five-Year Plan and other sector-specific measures. The last three five-year plans have therefore not just been focused on growth but also, implicitly, on targets for industrial production. The plans are implemented not only through programmes of the central government but also, to a large extent, through local governments in the form of support measures without coordination and with no regard for profitability and capacity utilisation. In other areas, the substitution of imports and conquest of export markets has taken place without attracting as much attention, such as in global ship construction in which China took over the two market leaders of the 2010s, Korea and Japan, using the usual industrial policy instruments, with subsidies accounting for around half the revenue of Chinese shipbuilders during the critical phase between 2006 and 2013 (Barwick et al. 2024). In aircraft production, in contrast, China is still in an early phase of foreign dominance despite huge support measures.

Industrial policy objectives are pursued using a broad approach which includes direct grants from the central and local budgets, politically-induced loans of the state-owned bank sector, explicitly preferential loans, government investment funds, production factor, production and export subsidies, explicit investments in upstream industries, particularly in raw materials and their processing, specifically low regulation and pricing of external environmental factors, and other support instruments. In a steady succession, this has produced excess domestic investment and initially intense competition in a range of industries and technologies and a rapid degression of costs with low profitability among a large number of suppliers. In a second phase, the best companies conquer the global market through very low production costs. In a third phase, limited consolidation takes place on the domestic market and the initially massive support measures are reduced. In the last few years, this process has been driven particularly by local governments in response to the decline of their lucrative source of revenue from the sale of commercial space following the crisis on the property market and centralised guidelines. The local governments have instead taken on the role of start-up investors aiming to maximise industrial value added through subsidies to generate a correspondingly higher volume of ensuing value added tax. The overinvestment was and continues to be systemic (Lee 2025).

Producer price deflation and renminbi depreciation

In the last three years, a drastic cost and price shift between China and the rest of the world has compounded the situation additionally. Excess industrial production in China has led to a decrease in producer prices of around ten percent since 2019, while producer prices have increased in Europe particularly, on account of Russia’s war against Ukraine and the ensuing price increases in energy sources and the general inflation shock, by a good twenty percent (Deutsche Bank Research 2025). For over one year now, China has been pursuing a consolidation policy in its industrial sector to reduce surplus capacities and stabilise producer prices. This should lead to a slight recovery of producer prices but is unlikely to narrow the delta to the euro area much (Deutsche Bank Research 2025a).

At the same time, the renminbi has depreciated strongly against major trade partners. The IMF estimates that the external value of the renminbi was undervalued in real and trade-adjusted terms by around 8.5 percent in 2024 (IMF 2025b). Even more importantly, the real effective exchange rate of the euro against the renminbi increased by around 20 percent until 2024 while the real external value of the euro has remained relatively constant against the rest of the world (ECB 2024). For some product groups, such as metal products and paper, the differences caused by the real appreciation are higher than 30 percent. The difference in the case of chemicals is average, while the difference in the case of machinery and cars is over 15 percent. This has created large cost advantages for Chinese companies compared to Europe and, in part, also the rest of the world, enabling them to capture market shares. Proper rebalancing combined with a stronger market-driven real appreciation of the renminbi would help create a better foundation for China’s foreign trade relations.

China shock affecting Europe, and Germany particularly

In the last three years, these developments have produced a second China shock for industrialised countries and particularly for Europe (Birkenbach et al. 2024, Tordoir and Setzer 2025, Matthes 2025 a, b, The Economist 2025), the individual dimensions of which have not received sufficient attention either in expert circles or in broad public debate. The Deutsche Bundesbank, the European Central Bank and several research institutes have produced studies that reveal the profound and broad effects of the shock on the global trade in goods (Bundesbank 2025, European Central Bank 2024, Project Group Joint Economic Forecast 2025). Basically, in the last 25 years, euro area exports have lost eleven percentage points of global market shares among non-energy goods compared to a fifteen percent rise of Chinese shares in the global market. The market share of the euro area has dropped from a good 26 down to around 15 percent, while the Chinese share has risen from just under seven to over 20 percent. Between 2015 and 2020, the shares of both economic regions were approximately equal since which time a difference has opened up of around five percentage points.

The German economy is particularly affected by these negative developments as China’s industrial policy is largely focussed on industries in which Germany has enjoyed comparative advantages in the past. Even disregarding the rapid change in the preferences of Chinese car buyers towards domestic, electric and other alternative drive vehicles and special taxes on high-quality mostly German vehicles, the downward competitiveness of German producers since 2012 has not been a purely market-driven phenomena but also a consequence of Chinese policy. As a result, German carmakers and the German chemical industry still have comparative advantages but Chinese industries have gained much ground. This was the explicit objective of the Chinese leadership’s Made in China 2025 strategy.

Overall, the parallel slump in exports and increase of imports from China has alone already reduced German GDP by around half a percentage point.

Effects on the EU slightly lower overall

China is the EU’s most important trade partner after the United States, but the relationship is becoming increasingly asymmetric. The bilateral deficit in the trade in goods has increased from 150 billion euros in 2015 to more than 300 billion euros currently, after an interim high of just under 400 billion euros in 2022. The proportion of EU goods exports to China of total non-EU exports increased from around eight percent in 2015, peaking at 10.5 percent in 2020, before dropping to the current level of a good eight percent. Although exports to China increased marginally in nominal terms between 2020 and 2024, they have increased much less than total non-EU exports so that their proportion has decreased. The proportion of EU imports coming from China increased from 18 percent in 2015, peaking at 22.4 percent in 2020, before dropping to below 21 percent between 2022 and 2023 and has since increased again slightly. The value of Chinese imports rose steadily from just under 300 billion euros in 2015 to 385 billion euros in 2020 before shooting up to 628 billion euros in 2022 on account of the Covid price shock before dropping down to just over 520 billion euros in 2023 and 2024. The value of imports thus stabilised in 2024 but the import volumes of the People’s Republic of China increased by 20 percent (see BDI 2025b). The shifts in producer prices and exchange rates have also caused Chinese imports to stabilise at a level well over 25 percent higher than before Covid with correspondingly production losses in the EU.

Chinese export prices in the EU have not followed a particular trend (Deutsche Bank Research 2025a). They increased a good 35 percent during the Covid price shock in 2021 and 2022 and have since dropped back down to their initial level before the shock in late 2020 While the European Commission does not see a massive diversion of trade, in its trade import monitoring heat map it does record a high frequency of potentially harmful increases in imports in the areas of textiles and clothing, chemicals, machinery and transport equipment and above-average frequency in the product groups of rubber and plastics, metals, computers and electrical equipment (European Commission 2025b).

Competition intensifying on the Chinese market, on third markets and in the EU

In many areas, German and European companies have failed to maintain their competitive position in the face of politically supported Chinese companies. Not only have German and European exports to China experienced structural breaks and continuous reductions in absolute terms, but particularly German companies have lost global market shares on third markets and become exposed to greater competitive pressure on their domestic market. Producer price differences of between 30 and 50 percent open up much scope for various Chinese market access strategies

A further consequence of the wide differences in producer prices is that, despite the large number of relatively problematic framework conditions, companies from the rest of the world are rediscovering China as an export producer and tapping into new facilities through foreign direct investment not just for the Chinese market but also as an export platform, which raises issues particularly in terms of resilience.

International conflicts are unavoidable

This would all not be particularly relevant to the global economy if it was not for the fact that China’s share in global industrial production has meanwhile risen to over 30 percent. If the leading market massively distorts the international division of labour in favour of domestic producers, it is bound to lead to international conflicts and will also not help the Chinese economy in the long run, as IMF head, Kristalina Georgieva, has expressed repeatedly. This situation has gone far beyond the first major case in which the surplus production of China’s steel industry paired with growing global market shares, dumping and other problems over the last ten years has triggered structural adjustment problems in industrialised and other emerging countries despite a range of different trade protection measures. Furthermore, the rest of the world and industrialised countries, in particular, have not only taken action in the form of a number of protection measures including WTO-compliant anti-dumping and antisubsidy measures, but some countries have also gone much further, such as the tariff measures imposed by the United States and closing markets to Chinese battery electric vehicles, as the United States and several Asian industrialised countries have done. All these measures have only slowed down the advance of Chinese companies.

In the medium term, producer prices in China have already recovered slightly. The IMF assumes that the renminbi will gradually appreciate in real terms in view of the expected weakening growth rate of the Chinese economy, driven both by fundamental forces and Chinese economic policy. In view of the continued high level of subsidies for industrial production through all channels, the potential for international conflict is nonetheless set to remain very high for several years to come.

Fiscal policy very mixed across the world

Fiscal policy in industrialised countries overall is set to change very little this year and be largely neutral. Budget deficits will remain high and average a good 4.5 percent of GDP even though growth is almost at potential growth meaning that gradual consolidation should be on the cards (OECD 2025). Deficits are set to rise slightly in many countries in 2026 with a turnaround only expected from 2027 onwards. No improvement is in sight for the United States, with deficits of over 7.5 percent, primary deficits of over three percent and a further increase in the debt ratio scheduled for the next two years. In the euro area, Germany is driving fiscal expansion while France and Italy are planning slight fiscal consolidation. There is a wide variance between the smaller economies in Europe. Overall, fiscal policy in the euro area will see very little change, with primary deficits remaining at just over one percent. Japan, on the other hand, is in line for a large fiscal stimulus while the United Kingdom is pursuing an ambitious course of consolidation. The developing and emerging countries are set to consolidate slightly at around a quarter of a percentage point of GDP, while China continues to record distinctively high primary deficits.

This decidedly unambitious course of fiscal policy in many major economies is taking place in an environment of weak growth, considerably increased real long-term interest rates, particularly in the United States and in the United Kingdom, and substantial pressure to increase defence and social spending On average, the debt ratios among industrialised, developing and emerging countries will continue to rise slightly until 2030 with large increases in both the United States and the People’s Republic of China (IMF 2025). Monetary policy worldwide

*Central budget, excluding debt provinces and state-owned enterprises

Inflation and monetary policy normalising in most countries

Global inflation weakened considerably in 2025 but still varies widely across the world. According to IMF estimates, the annual average global inflation in 2025 was 4.1 percent and is expected to go down to 3.8 percent in 2026 (IMF 2026). In the advanced economies, inflation was around 2.5 percent in 2025 and should drop to 2.2 percent in 2026, while in emerging and developing countries it is expected to drop from 5.2 percent to 4.8 percent (IMF 2025). The OECD also expects inflation to return to more normal rates, from 3.4 percent among G20 countries in 2025 to 2.8 percent in 2026 and 2.5 percent in 2027; by the middle of 2027, inflation should have returned to target in almost all major economies (OECD 2025).

The monetary tightening over the last few years has contributed significantly to bringing down inflation. Many central banks have meanwhile cut rates but remain cautious as inflation is still above target in several countries. In the United States, the latest tariff increases have triggered a supply shock,

especially increasing the prices of goods. The tariffs are also burdening economic activity by dampening demand (IMF 2025). In the euro area, inflation is approaching the two percent target but remains slightly higher in the United Kingdom and in Japan, due in part to tax adjustments and robust wage increases (OECD 2025). Inflation remains extremely low in China. The anti-involution measures taken by the leadership are aimed at reducing overcapacities and bringing consumer prices up slightly in the medium term (OECD 2025).

There is a clear divergence between the inflation of goods on the one hand and services on the other. While the prices of goods in the OECD region have risen slightly most recently, inflation among services remains persistently high particularly in labour-intensive areas such as hospitality and leisure. Short-term inflation expectations of households in some countries including the United States and Greece have increased, while medium-term expectations remain stable but partly above target Real interest rates are still restrictive in many regions despite first key interest rate cuts but are expected to move towards a neutral level again by the end of 2026 (OECD 2025).

Inflation forecasts* 2025, 2026 und 2027

2026 2027

*in percent, compared to the previous year

Source: IMF

Labour markets are showing first signs of slowing down and are projected to ease further which will put additional downward pressure on labour cost growth and inflation. The OECD (2025) expects the average unemployment rate among OECD countries of 5.2 percent (2024) to increase to 5.7 percent in 2026. Nominal wage increases have slowed down in most countries but remain high in some countries on account of minimum wage increases or indexation mechanisms. In Japan and some Eastern European countries, robust wage increases are contributing to persistent inflation in services, while in the United States and in the euro area more moderate wage increases and a slight improvement of productivity has reduced costs somewhat (OECD 2025). Overall, the combination of easing wage pressure and increasing productivity should further reduce inflation and increase the scope for normalisation in monetary policy

Key interest rate in the international environment

Source: Macrobond

US monetary policy caught between inflationary pressure, labour market weakness and political uncertainty

As 2026 gets underway, the US central bank is in a difficult situation with conflicting targets. While the labour market is increasingly losing momentum, with lower job gains and unemployment rising to 4.4 percent by September 2025 (Federal Reserve 2025a), inflation remains above target. According to the Bureau of Labor Statistics (2026), the consumer price index in December was 2.7 percent higher than one year previously with core inflation at 2.6 percent. Inflation accelerated further in 2025 as the effects of higher import tariffs are increasingly being passed on to consumers (IMF 2025, European Commission 2025a). Although longer term inflation expectations remain well anchored and the underlying pressure on prices is muted overall, inflation risks remain tilted to the upside in the short term (Federal Reserve 2025a, OECD 2025). This is a challenging situation for the Federal Reserve –too much monetary easing could drive up inflation again while an overly restrictive course would put increased pressure on already weakening employment.

In this context, the Federal Reserve lowered its policy interest rate in its most recent meeting on 10 December 2025 by 25 basis points to between 3.5 and 3.75 percent and decided to purchase shorter-term Treasury securities to keep liquidity on the money market stable (Federal Reserve 2025a, 2025b). The Federal Reserve justified this step because despite the higher inflation seen recently the downward risks for the labour market have risen and the price increases triggered by the tariffs are deemed to be largely transitory. Chair Jerome Powell emphasised that the sole purpose of the new purchases of shorter-term Treasury securities was to maintain an ample supply of reserves over time in order to support effective control of the policy rate (Federal Reserve 2025a). Even if the purpose was officially of a technical nature, the additional reserves could curb short-term financing costs slightly and therefore make the financing conditions a little easier. Overall, the Federal Reserve has cut rates three times since September 2025 and assesses that it is approximating a neutral interest rate level which, according to Powell, means it can now adopt more of a wait-and-see approach. At the same

time, the Federal Reserve emphasised that the risks remain asymmetric in the short term, with higher inflation risks and increased downward risks for the labour market so that monetary policy going forward will be largely data-dependent and remain unusually uncertain (Federal Reserve 2025a)

In view of this situation, the development of inflation in 2026 will be monitored closely. As outlined above, the Federal Reserve expects the price increases triggered by the tariff increases to be largely transitory and inflation to drop down to around 2.4 percent by the end of 2026 (Federal Reserve 2025a). International organisations, however, expect the effects of the tariffs to last somewhat longer and anticipate inflation for 2026 overall to be on a scale of around three percent (OECD 2025; European Commission 2025a). The introduction of new tariff measures would further delay the downward movement in prices The differences in expected inflation show how uncertain the further course of inflation is both because of the uncertain timeline of the tariff effects and on account of the varying assumptions for trends in the labour market, wages and growth.

In addition to the economic uncertainty, there is also a sensitive political situation. Jerome Powell’s term in office will end in May 2026 and it is conceivable that the upcoming staffing choices by the US administration will affect the Federal Reserve’s basic stance in monetary policy. Although the person at the head of the Federal Reserve plays an important role in shaping its strategic course, monetary policy decisions are always taken collectively in the Federal Open Market Committee (FOMC) and require majorities among both the Board of Governors and the voting regional bank presidents. Nonetheless, the attempt to anchor a more expansionary course in monetary policy through new staff could lower the institutional predictability of the Federal Reserve. This would be relevant to the financial markets is several ways. A more strongly politicised decision-making environment could weaken confidence in the longer-term stability of the monetary policy framework, increase risk premiums and elevate uncertainty overall, particularly if political preferences impact the response to inflationary risks.

Inflation in the euro area close to target and interest rates remain unchanged

Inflation in the euro area was at 1.9 percent in December according to Eurostat (2026). It has been very close to the target of two percent since early 2025 already, mostly slightly above target. Energy prices continue to have a downward effect while service prices remain elevated at just under 3.5 percent. A major upward driver is the cost of labour. Renumeration per employee was around four percent higher than one year ago at last count (ECB 2025a). The latest Eurosystem projections (ECB 2025b) are overall inflation of 2.1 percent in 2025, 1 9 percent in 2026 and 1 8 percent in 2027, before returning to target in 2028. The temporary levels of inflation below target in 2026 and 2027 will be caused primarily by negative energy prices with core inflation remaining elevated for longer. Core inflation is expected to be at 2.2 percent in 2026, an upward adjustment of 0.3 percentage points compared to the September forecast.

In this context, the ECB left interest rates unchanged in its meeting in December 2025 The deposit facility rate remains at two percent, the main refinancing operations rate at 2.15 percent and the marginal lending facility rate at 2.40 percent. In parallel, the reserves from the bond purchasing programmes APP and PEPP are being cut back further as the Eurosystem has discontinued reinvestments of maturing securities. President Christine Lagarde emphasised that the ECB’s monetary policy is ‘in a good place’ and would continue to be data-dependent and decided on a meeting-to-meeting basis and that interest rates would not follow a preset course. There are risks for the development of prices in both ways going forward. A further appreciation of the euro or weaker

demand could curb inflation more rapidly, while persistent pressure on wages, higher public expenditure or fragmented supply chains could lift inflation again. The postponement of the start of the ETS2 to 2028 is also likely to lift energy prices in the medium term (ECB 2025a).

The OECD (2025) regards the monetary stance as ‘broadly neutral’ and expects interest rates to remain at two percent in the next two years to durably bring inflation to target. How long this phase will turn out to be largely depends on the development of the central risks and what effects these have on prices. These risks include geopolitical tensions, trade barriers and diversion effects, possible unexpected developments in wages and the effect of additional public expenditure. Uncertainties in energy prices and the global economy could also change the situation.

Bank of England eases course in response to slightly moderated inflation

Consumer prices in the United Kingdom were 3.2 percent higher than one year ago in November 2025, after 3.6 percent in October and 3.8 percent in September (Office for National Statistics 2025). Inflation has reduced tangibly since the summer but remains well above the target of two percent. The Bank of England expects inflation to approach the target level in the course of 2026 and to stabilise at around two percent in the second quarter of the year (Bank of England 2025).

In this context, the Bank of England has gradually eased its monetary policy which has remained restrictive since August 2024, even though inflation temporarily rose again over the summer on account of temporary factors such as higher transport costs and regulated prices. After a total of four rate cuts in 2025, the base interest rate has been at 3.75 percent since 18 December 2025, down from previously four percent (Bank of England 2025). The narrow decision of the Bank’s Monetary Policy Committee (5:4 votes) reflects the difficult balancing act between decreasing inflation and continued high wage and price expectations. The decisive factor was the most recent downturn in prices, subsiding wage growth and the easing labour market although the risks of easing too swiftly remain in view of elevated inflation expectations (Bank of England 2025).

The Bank of England’s monetary course is expected to become more neutral going forward, with wage pressure subsiding, demand weak and an easing labour market. Fiscal policy will remain restrictive in the face of high public debt and rising financing costs which should additionally curb inflation. As noted by the Bank of England (2025), the risks for medium-term inflation have balanced out more with the danger of inflation persisting at a high level on the one hand and the possibility of weaker demand pushing inflation below target on the other. The OECD (2025) expects the cycle of monetary easing to end in the second quarter of 2026 and the key interest rate to settle at around 3.5 percent.

Japan sees downward inflation and cautious interest rate cuts

In Japan, consumer price inflation in November 2025 was at 2.9 percent after fluctuating largely between three and four percent throughout the year (Statistics Bureau of Japan 2025). Inflation thus remains above the target of two percent but has dropped substantially compared to the high levels seen in early 2025. Inflationary pressure has decreased particularly since summer 2025, also on account of government relief measures in energy and a normalisation of food prices (European Commission 2025a). For the next few years, the OECD expects overall inflation to drop from 3.2 percent in 2025 to 2.2 percent in 2026 down to around 2.1 percent in 2027 (OECD 2025). As the price pressures ease, wage growth is likely to subside although the continuing tight situation on the labour market will limit downward movement here (European Commission 2025a).

The Bank of Japan already started to gradually tune down its expansionary monetary course in 2024. After initial interest rate hikes in 2024, it raised its policy interest rate by another 25 basis points in December 2025 up to around 0 75 percent, the highest level in the last 30 years. In parallel, the central bank has been reducing its purchases of Japanese government bonds since the middle of 2024 and is planning to reduce its holdings of exchange-traded funds and real estate investment trusts (OECD 2025) with the objective of cautiously lifting interest rates and reducing its extensive security holdings without endangering economic growth. At the same time, the Bank of Japan needs to navigate its exit from its ultra expansionary course in such a way that it does not disrupt price stability and the exchange rate. Raising interest rates too quickly would weigh down the fragile demand and make the high public debt more expensive while raising them too slowly would extend the weakness of the yen and could exacerbate imported inflation. The OECD (2025) expects Japan to gradually withdraw its monetary accommodation in line with inflation and wage developments and a policy rate of around two percent at the end of 2027.

Financial markets: financing conditions set to improve further

The global financing conditions continued to improve over the last year (OECD 2025, IMF 2025). Financing conditions remain very favourable in a historical comparison in both advanced economies and in emerging countries (IMF). The easing of conditions is being helped along by a combination of low market volatility, tight credit spreads and a weakening of the US dollar against most currencies. This development also reflects the strong risk appetite of investors, as evidenced in steep gains on the equity markets as well (OECD 2025).

The positive sentiment is being fuelled additionally by optimism regarding the potential effects of new technologies. Particularly in the United States, price-earnings valuations are approaching levels last seen during the dot-com bubble while equity risk premia have continued to decline. Despite individual corrections, technology stocks remain the main driver of the surge in equity prices, reflecting expectations of the potential gains from AI and stronger expected earnings growth. At the same time, the market value of crypto-assets has recently declined sharply after soaring for most of last year (OECD 2025).

Emerging market economies are also benefiting from the higher global risk appetite. A weaker dollar and declining exchange rate volatility have made their assets relatively more attractive (OECD 2025, IMF 2025), which has reduced financing costs and expanded monetary policy scope (IMF 2025).

However, advanced economies are showing first signs of steepening at the long end of the yield curve. Ten and thirty-year yields have risen at last count, which could reflect growing concerns of long-term fiscal sustainability (OECD 2025). In most emerging market economies, on the other hand, long-term yields have eased since the middle of the year and spreads on US dollar-denominated bonds have declined (OECD 2025). At the same time, stretched asset valuations and high economic uncertainty have triggered a stronger demand for hedging strategies. Gold prices have reached historically high levels, recording their strongest rise since the oil price shock in 1979 (OECD 2025). In this context, the IMF (2025) has warned against possible risks for macro-financial stability and an erosion of the independence of key economic institutions which could jeopardise the credibility of economic policy.

Bank lending recovers worldwide, with mixed trends in euro area most recently

Bank credit growth has been recovering gradually in major advanced economies, albeit from low levels, supported by an ongoing decline in lending rates for businesses and households (OECD 2025).

Development in the euro area was mixed at last count. According to the ECB’s Bank Lending Survey of October (2025c), the banks reported an unexpected slight tightening of lending standards for corporate loans in the third quarter 2025 (net share: four percent). Reasons given by lenders was the increased risks related to geopolitical uncertainty, trade disputes and industry-specific factors. While banks in Germany tightened standards, they remained unchanged in France, Italy and Spain. Banks expected lending standards to remain largely stable in the fourth quarter. For private households, standards for residential property loans remain mostly unchanged, while standards for consumer loans have tightened moderately.

Bond markets show rising government bond yields and robust corporate financing

Ten-year government bond yields have risen in many major economies, underpinned in the United States by a persistently high estimated real term premium (OECD 2025). Euro area yields were also up. In Germany, the overall more expansionary fiscal course is likely to have supported upwind, while sovereign spreads between France and Germany have widened, probably due to the political uncertainty and cloudy fiscal course of France (OECD 2025).

Yield on 10-year government bonds

Source: Macrobond

In Japan, yields rose notably, going up by around one percent since early 2025 to slightly over two percent by the end of the year. The end of the yield curve control in March 2024 could have had an impact as yields in Japan already rose steeply in 2024. Other upward factors were the tightening of monetary policy, the end of negative interest rates and inflation rates of more than two percent In

China, on the other hand, yields have remained low, dropping below two percent at times, probably reflecting the weak structural growth and very low inflation.

Corporate bonds have continued to benefit from favourable financing conditions. Spreads on high-yield corporate bonds remain close to historical lows and issuance remains robust. Low credit risk premia and sustained portfolio inflows in the United States and the euro area have helped to support strong corporate bond and leveraged loan issuance Spreads on corporate bonds issued by emerging-market companies have also continued to fall, reaching their lowest levels since 2007 (OECD 2025).

Equity markets show record levels and warning signs in 2025

2025 was another good year for equity markets Despite the ‘liberation day’ tariff shock on 2 April and continued uncertainty about final trade policy decisions, valuations of key global indices rose by between 16 and 23 percent until the end of the year. US markets reached a new record high, fuelled by optimism about the large tech and AI stocks while other equity markets also rose, lifted by reduced trade policy uncertainty and better than expected macroeconomic data (European Commission). The main German index, the DAX, recorded the strongest growth, followed by the US technology index, Nasdaq.

At the same time, the International Monetary Fund (2025) has warned about risks. The strong focus on AI stocks has caused valuations to rise substantially. A large portion of the gains is based on AIdriven stocks whose valuations are now very high. Higher volatility and significant stock corrections could be on the cards in case uncertainty increases again or the expected productivity gains of AI investments fail to materialise

Source: Macrobond

Currency markets: 2025 marked by weaker US dollar

The US dollar has tangibly lost value since the start of 2025, affected primarily by the changed course of US policy and decreasing confidence of market players in the security of the dollar (German Council of Economic Experts 2025). In spring, international investors stepped up their hedging activities against currency risks through forward exchange contracts which additionally increased demand for other currencies (ibid.).

In the course of 2025, the dollar depreciated over eleven percent against the euro and almost seven percent against the British pound. The dollar depreciated more moderately against the Chinese renminbi, falling a good two percent. The movement against the yen was mixed. The initial weakness of the dollar until April was partly compensated through appreciation later in the year, possibly fuelled by the continued comparatively loose monetary policy of the Bank of Japan.

Exchange rates against the US dollar

Yen (left axis)

(right axis

Industrial production

Global industrial production gathers pace

Global industrial production (excluding construction) increased by 3.1 percent in the first three quarters of 2025, according to the Netherlands Bureau for Economic Policy Analysis (CPB). This was the first time since 2022 that global industrial production has risen more than the average rise over the last ten years of 2.6 percent. After expanding three percent in the first quarter, industrial production continued to gradually gather pace, growing 3.1 percent in the second quarter and 3.2 percent in the third.

Production levels increased primarily among emerging countries, where industrial activity rose more than four percent over the previous quarter in each of the first three quarters of the year. Production levels also increased among advanced economies following two years of downturn. Output among advanced economies increased by a total of 1.5 percent in the first three quarters of the year compared to the same period the previous year.

The latest figures show that global industrial production slipped down a minimal 0.1 percent in October compared to the previous month after a strong month-on-month increase in September. Production was nonetheless still a good 2.9 percent higher year on year. The purchasing managers’ index for manufacturing has lost ground somewhat since reaching its highest level of the year in October. At 50.4 index points in December, it is nonetheless still in expansionary territory. Based on the results of the year so far, we estimate global industrial production increased by three percent in 2025 (up from 2.5 percent so far).

World: Industrial production*, Purchasing Managers Index

economies

economies

Managers Index seasonally adjusted (left axis)

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations

Advanced economies: industrial production turns up everywhere apart from the United Kingdom

Among advanced economies, industrial production increased by 1.4 percent in the first quarter 2025 year on year which was the first rise in two years. In the second quarter, industrial activity expanded on a similar scale, increasing 1.3 percent. Industrial activity continued its upward trend at the start of the second half of the year, rising 1.9 percent among advanced economies in the third quarter year on year. Asian countries (excluding Japan) recorded the highest increase in production by far among the advanced economies. In the first ten months of the year, production levels here were 7.2 percent higher than in the same period the previous year, while industrial activity increased by a good one percent in the United States and 1.3 percent in the euro area and in Japan. The only downward trend in production was seen by the United Kingdom, with a drop of 0.5 percent year on year as of October. Industrial activity in the remaining advanced economies (excluding Asia) was one percent higher year on year.

In the further course of the year, the growth rate looks to have dropped down slightly. The most recent figures show that industrial activity in October was up on the previous month by a minimal 0.1 percent and 2.1 percent higher than in October the previous year. The purchasing managers’ index for this group of countries has been above the 50-point threshold above which the index indicates expansion since August 2025. In December 2025, it remained level with the previous month at 50.5 points

indicating a stable level of industrial activity in the fourth quarter. We therefore expect that industrial production will increase by 1.5 percent in 2025 overall (up from 0.5 percent so far).

Looking closer, industrial activity in the euro area increased by an estimated 1.4 percent, not quite as strong as in Japan (up 1.6 percent). We expect a decrease of 0.5 percent for the United Kingdom US industry is expected to expand its production by one percent compared to the previous year matching the level of growth in the remaining advanced economies. The advanced Asian economies excluding Japan are estimated to have increased production by a substantial seven percent.

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Emerging countries: China remains main driver of growth

In the first quarter 2025, industrial production in the emerging countries rose on the back of the fast pace of expansion in China. Industrial output was also up by just under two percent in the countries of Central and Eastern Europe and in Latin America. In the second quarter, industrial production among emerging countries increased by another 4.7 percent year on year with a higher pace of growth across all regions In the second half of the year, the upward trend continued in all regions apart from Latin America, with industrial production 4.4 percent higher as of October compared to the first ten months of the previous year China’s industry was the main driver of growth once again, expanding 6.1 percent, followed by Africa and the Middle East (up 2.5 percent), Central and Eastern Europe (up 2.4 percent) and the Asian emerging countries excluding China (up 2.2 percent). The countries in Latin America grew the least, with industrial production only up by one percent as of October

Momentum in industrial production among emerging countries also looks to have slowed down in the remaining months of 2025. The purchasing managers’ index for this group of countries was downward in the last three months but remained in expansionary territory of over 50 points, standing at 50.4 points in December 2025 We have therefore upwardly adjusted our growth forecast of spring from three percent up to 4.5 percent.

China’s industry is still the engine of growth among emerging countries. We expect the People’s Republic to have increased industrial production in 2025 overall by six percent compared to the previous year. In Central and Eastern European countries, industrial activity is also estimated to have increased by a substantial 2.5 percent. In the remaining Asian emerging countries, we expect production levels to have risen slightly less, by a good two percent. Latin America’s industry is estimated to have expanded by just under one percent, its fifth consecutive year of growth. Among Africa and the Middle East, industrial activity is anticipated to have increased by as much as three percent.

Emerging economies: Industrial production*, Purchasing Managers Index

Purchasing Managers Index seasonally adjusted (left axis)

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Global trade activity recorded a strong increase at the start of the year. In the first quarter 2025, the global trade volume rose by 4.8 percent compared to the previous quarter, according to figures from the Netherlands Bureau for Economic Policy Analysis (CPB). The sturdy increase was brought about in part by front-loading trade activity in anticipation of the US tariff increases. In the second quarter, the upward trend continued at a slightly slower pace (up 4.4 percent). As of October, the global trade volume was 4.7 percent higher than in the first ten months of the previous year.

Emerging countries exported a total of six percent more goods in the first ten months of the year compared to the same period the previous year. Among the individual groups of countries, exports from China grew the most, increasing 8.1 percent. The export activity of Latin American countries was also buoyant, growing by 7.8 percent. Asian emerging countries (excluding China) also saw exports rise by more than the global average, expanding 5.7 percent. Exports from Africa and the Middle East increased rather less, growing 2.3 percent. Going the other way, exports from the emerging countries of Central and Eastern Europe contracted 1.2 percent.

Exports from advanced economies were a total of 3.1 percent higher year on year as of October 2025, with very divergent trends. While exports from Japan increased 4.8 percent in the first ten months of the year, exports from the advanced Asian economies excluding Japan soared by 15.1 percent, recording the highest increase by far. The United States also contributed to growth slightly, with goods exports from this country rising 2.7 percent. Exports from the remaining advanced economies increased 1.1 percent. The trend in Europe went the other way, with exports down 0.5 percent. Goods exports from the United Kingdom were 1.8 percent down year on year.

According to the latest figures, trade activity has since decreased. Global exports were one percent down in October 2025 compared to the previous month. The export activity among advanced economies was down by 1.1 percent, a slightly more pronounced drop than exports among emerging countries (down one percent). Even if trade activity stagnated in the last two months of 2025, the global trade in goods in 2025 overall would have increased by more than four percent.

World: Exports according to region of origin

two-month average, after calendar and seasonal adjustments, in percent, year on year

Source: Macrobond

United States

A weak start to 2025 with stronger development in the middle of the year

US GDP increased at an annualised rate of 4.3 percent in the third quarter 2025, according to the first estimate of the Bureau of Economic Analysis (BEA). This growth stemmed from an increase in private consumption and government expenditure, curbed in part by decreasing investments. Imports decreased while exports increased, with net exports also contributing to growth (BEA 2025a).

The development of US GDP was very unsteady in the first three quarters of 2025. In the first quarter of the year, GDP contracted by an annualised rate of 0.6 percent before growing by 3.8 percent in the second quarter of the year. The OECD estimated growth of two percent for 2025 overall (OECD 2025a). The IMF also estimated growth at two percent in its World Economic Outlook of October 2025 (IMF 2025a) but upwardly revised this to 2.1 percent in its Update of January 2026. We also assume growth of 2.1 percent.

The unemployment rate increased throughout the year, rising from four percent in January to 4.5 percent in November 2025 according to the Household Survey1 of the Bureau of Labor Statistics (BLS), which is the highest level since October 2021. Unemployment dropped down slightly to 4.4 percent in December. There are no figures available for October 2025 due to the government shutdown. Employment in December was up in food services and drinking places, health care and social assistance but down in the retail trade (BLS 2026a).

US GDP growth, quarterly (annualised)

* initial estimate

Source: Bureau for Economic Analysis

1 The BLS collects data based on two different surveys. The unemployment rate is calculated based on the Household Survey and employment figures are based on the Establishment Survey, a survey of businesses and government agencies. For October 2025, the BLS only published data from the Establishment Survey

According to the BLS survey of businesses and government agencies, the labour market expanded by 50,000 jobs in December 2025 after seasonal adjustment Overall, 2025 was nonetheless the year with the lowest growth in employment since the pandemic. October was particularly weak with a net loss of 173,000 jobs, fuelled primarily by a loss of 174,000 jobs in the government. The steep drop in government staff in October was largely caused by the many employees that had accepted buyouts at the start of the year as part of Elon Musk’s drive to cut down the US government workforce and which were taken off the payroll at the end of the fiscal year 2025. The months of June and August also recorded fewer employees overall. In total, the number of jobs increased by 584,000 in the first year of Trump’s second term compared to around two million jobs the previous year (BLS 2026b; all BLS figures on unemployment and employment exclude the agricultural sector; Aranati 2026).

Tariffs had limited effects in 2025; consumers have recently become skeptical (again)

The effects of tariffs on prices were still limited in the first six months of 2025 because tariff increases partly came into effect later than originally announced and companies had filled up their stocks in advance of the tariff increases. The effects became more tangible in the second half of the year. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (All Urban Consumers, CPI-U) initially dropped, year on year and without seasonal adjustment, from three percent at the start of the year to 2.3 percent in April, then climbed back up to three percent in September before decreasing to 2.7 percent in both November and December. The BLS did not publish any figures for October on account of the government shutdown (BLS 2026cb).

The uncertainty of consumers in spring 2025 was reflected in the upward savings rate. The savings rate rose from 5.1 percent of disposable income in January to 5.5 percent in April, the month of Trump’s so-called ‘liberation day’. It then dropped back down to four percent in September (BEA 2025b). Private consumption spending was partly downward month on month in the first six months of the year (January 2025: down 0 6 percent, February down 0 1 percent) but inched up 0.1 percent from August to September (BEA 2025c).

Consumer assessments of the economic situation have deteriorated according to the latest surveys. The Consumer Confidence Index of the Conference Board dropped 3.8 points in December 2025 compared to the previous month, down to 89.1 points, which was its fifth consecutive drop. In particular, the Present Situation Index, which measures assessments of the current economic situation and labour market situation, deteriorated. The Expectations Index, which measures consumers’ assessments of short-term prospects on their income, the economy and the labour market, remained unchanged at a low level. This index has now been below 80, the threshold under which the index indicates an upcoming recession, for eleven months in a row (Conference Board 2025).

US foreign trade: trade deficit decreasing

One of the objectives of US President Trump’s expansionary tariff policy is to reduce the trade deficit of the United States, which has been a thorn in his side since his first term in office. This strategy appears to be showing initial signs of success. While the foreign trade deficit (goods and services) almost doubled in the first quarter 2025 (385 billion US dollars) year on year, also on account of the front-loading of imports in anticipation of the threatened tariffs, the deficit then turned down considerably from the second quarter 2025 onwards, after the general tariff of ten percent and countryspecific ‘reciprocal’ tariffs were announced in April 2025. In the third quarter, the trade deficit was at 178 billion US dollars which is almost 23 percent lower than in the same quarter the previous year.

Compared to the first quarter 2025, the deficit was around 54 percent lower and, compared to the previous quarter, around six percent lower.

US imports recorded a similar pattern, rising substantially in the first quarter before declining in the further course of the year In the third quarter 2025, imports reached a value of 1,040 billion US dollars, stagnating compared to the second quarter 2025 (down 0.18 percent) and slightly lower than in the same quarter the previous year (down 1 1 percent).

In the third quarter 2025, the United States exported goods and services worth 862 billion US dollars. Compared to the previous quarter, exports were up by a slim 1.1 percent. Year on year, exports were up by as much as 5.1 percent (BEA 2026).

The One Big Beautiful Bill Act (OBBBA) brings relief measures for individuals and companies but growing national debt

On 4 July 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA). The act includes tax relief measures, such as a permanent extension of the lower individual tax rates adopted in the Tax Cuts and Jobs Act of 2017, an increase in the state and local tax (SALT) deduction cap and a partial tax exemption of tips and overtime pay. It also includes relief measures for companies with generous tax incentives for R&D activities in the United States. Alongside decreasing tax revenues, the OBBBA also includes additional expenditure for the government in the form of new funds for border control and the military.

These components will be financed in part by amendments and cuts in social assistance programmes including Medicaid. The act also phases out many of the tax credits for clean energy introduced under the Inflation Reduction Act (IRA). The OBBBA further eliminated the de minimis exemption for commercial shipments worth less than 800 US dollars as of 1 July 2027; the de minimis exemption has since already been abolished by an Executive Order and terminated as of 29 August 2025.

The OBBBA also lifted the debt ceiling by five trillion US dollars.

The non-partisan Congressional Budget Office (CBO) estimates that the act will increase the budget deficit of the United States by 3.4 trillion US dollars between 2025 and 2034. Revenue will drop by 4.5 trillion US dollars while the cuts in spending will only amount to 1.1 trillion US dollars (CBO 2025a).

Transitional budget until end of January 2026

In the fiscal year 2025, which ended on 30 September 2025, the budget deficit dropped slightly according to the Congressional Budget Office (CBO). It amounted to 1.8 trillion US dollars which corresponds to 5.9 percent of GDP. Compared to the fiscal year 2024, the deficit decreased by 41 billion US dollars (down two percent). Overall, debt held by the public increased further and was at 99.8 percent of GDP at the end of the fiscal year 2025 compared to 97.4 percent at the end of the previous fiscal year Federal revenues increased by six percent, outlays by four percent (CBO 2025b).2

2 New estimates on the budget deficit that factor in the effects of the OBBBA will be published by the CBO in the middle of February

The increase in federal revenues is at least in part due to higher tariff revenues. In the fiscal year 2025, tariff revenues were up by 153 percent, up to 118 billion dollars which corresponds to 0.6 percent of GDP and is therefore well above the 50-year average of 0.2 percent (CBO 2025b). In November, the CBO estimated that the tariffs introduced between 6 January 2025 and 15 November 2025 will reduce the federal budget deficit by three trillion US dollars until the year 2036 if they remain in place in their current form (these estimates do not factor in any possible effects of the tariffs on economic output). These estimates of the CBO are lower than those of August 2025, reflecting the changes in the effective tariff rates (CBO 2025c).

The federal budget for the fiscal year 2026 has not yet been finalised. The longest government shutdown so far in the history of the United States lasted from 1 October 2025 until 12 November and ended with the adoption of a Continuing Resolution on the transitional financing of the federal budget. This transitional budget is in effect until the end of January.

Outlook 2026: complicated

The outlook for the development this year is complicated. In December 2025, the OECD estimated GDP growth of only 1.7 percent for 2026 while the IMF estimated 2.1 percent growth in October 2025 and even as much as 2.4 percent in January 2026. We expect the United States to grow by two percent in 2026. Many of the tariff negotiations have now been completed. Although uncertainty remains, particularly concerning the development going forward in the trade dispute with the EU in view of the latest threats, the US tariffs so far are slightly lower on average than feared at the start of 2025 (see also ‘Effects of US tariffs’). At the same time, the full effects have not yet played out on the level of prices in the United States. Regarding the US labour market, most banks and institutes believe that the unemployment rate could continue to rise slightly in the next few months or stagnate These developments on prices and the labour market are likely to curb private consumption a little, as signalled by the indicators on consumer expectations referred to above, but will be counterbalanced by the impact of the tax breaks for individuals introduced by the OBBBA. Private investment in AI and investment incentives under the OBBBA together with monetary easing will have a positive effect on growth in 2026. At the same time, Trump’s stringent immigration policy and mass deportations will dampen economic development in the medium term at least.

Alongside the introduction of general tariffs, President Trump is also implementing another of his key campaign pledges by starting to deport large numbers of illegal immigrants. A study by the Penn Wharton Budget Model has investigated the economic consequences of large-scale deportation based on two scenarios. The first scenario simulates the deportation of ten percent of illegal immigrants over a period of four years (2025-2028) without any new immigrants arriving which will bring illegal immigration back to its initial level in 2029. The second scenario stimulates the deportation of ten percent of illegal immigrants every year over a period of ten years (2025-2034) which would mean that all illegal immigrants are deported by the end of this period and no further illegal immigrants are allowed to enter the country. In the first scenario, the budget deficit would increase by around 270 billion US dollars until 2034, under the second scenario by just under 862 billion US dollars as this would require not only increased spending on mass deportations and border control but also reduce tax revenues (44 percent of illegal immigrants pay income tax or wage tax). National debt until 2034 would increase by 1.2 percent in the first scenario and by 2.5 percent in the second scenario. The study also estimates the negative effects on GDP: it would drop by one percent until 2034 in the first scenario and by 3.3 percent in the second scenario (Penn Wharton Budget Model 2025).

China

Robust growth with ailing growth model

Fuelled by strong exports, China will officially again have reached its target of ‘around five percent’ growth for the year in 2025 (GDP figures for Q4 have not yet been published). This is a surprisingly good result in view of the dramatic escalation of tariffs in the trade dispute with the United States in the first half of the year, the renewed flare-up of the property crisis and the persistent weakness in demand.

There are grounds to question the validity of the figures from the National Bureau of Statistics (NBS) this year again. The Rhodium Group has pointed out irregularities in the GDP calculations of China’s statistical office and has estimated real GDP growth for the year overall at between 2.5 and 3.0 percent based on its own calculations.

The past year has accentuated the imbalances in China’s economy. Growth was robust in the first half of the year (5 4 percent in Q1 and 5.2 percent in Q2), fuelled by the front loading of exports in anticipation of the threatened US tariffs, consumer subsidies and fiscal impetus. With the termination of several consumer subsidies, China’s economy increasingly lost momentum in the further course of the year (4 8 percent in Q3). Furthermore, the situation on the property market also deteriorated in the second half of the year.

The property sector remained the largest downward force on growth in the economy in 2025. The number of new buildings according to the NBS dropped by more than 20 percent. The value of property sales fell by 11.1 percent and the funds of property developers by almost twelve percent. Reports emerging towards the end of the year on crises among large property developers such as Vanke clearly show why the property sector continues to stifle the confidence of investors, the finances of local governments and the risk propensity of banks. The IMF estimates that the stabilisation of the property sector may require resources amounting to around five percent of GDP over a period of several years This shows that the problem is a medium-term structural adjustment rather than a short-term cyclical slump. Despite the difficulties in the property sector, weak consumer spending and declining investment, Beijing did not initiate any large-scale debt-financed measures to stimulate the economy.

Export industry is a stabilising anchor with growing risks

Exports were once again a key stabilising force for the Chinese economy in 2025 and were a major reason why the Chinese leadership was able to pursue a relatively restrained economic policy last year. Front-loading effects in view of the uncertainties in trade, the diversification of markets outside of the United States, and the robust global demand for goods all enabled net exports to make a solid positive contribution to growth. Year on year, China’s exports increased by 6.2 percent between January and November, according to the General Administration of Customs (GAC). Looking at the most important trade partners and regions shows how successful China has been in diversifying its exports in response to the tariff dispute with the United States. While exports to the United States declined by 28.6 percent, exports were up substantially to Japan (up 4.3 percent), South Korea (up 1.9 percent), Taiwan (up 12.8 percent), Australia (up 35.8 percent), ASEAN (up 8.2 percent) and the EU (up 14.8 percent).

Imports, on the other hand, stagnated, creeping up 0.2 percent last year overall. China’s trade surplus thus exceeded the one trillion US dollar mark in the first eleven months of 2025, climbing to a record

level of around 1.08 trillion US dollars which is already more than the trade surplus recorded in the whole of 2024.

While exports remain the stabilising anchor of China’s economy, the limitations and risks of its current export model are becoming increasingly apparent. China’s trade partners in Europe, North America and parts of Asia and Latin America are becoming increasingly critical of China’s high trade surplus and the market distortions caused by its economic policy, and they are responding with industrial and trade policy measures of their own. Although these measures do not yet amount to a definite external shock for China, they are restricting the potential of exports to remain the economy’s engine of growth. The uncertainties for Chinese exporters caused by trade protection measures particularly by the United States and the EU are mounting. The response from Beijing so far has largely taken the form of trade policy countermeasures (including tariffs and export controls) rather than correcting its economic policy course to focus on structurally strengthening domestic demand.

Upward industrial production and downward investment

China’s dynamic industrial modernisation and strong exports have resulted in robust growth in industrial production this year as well. According to the NBS, industrial production in China increased by six percent in 2025. Looking at the individual industries shows a familiar picture: industries closely related to the property sector such as cement and steel are contracting further while high-tech industries continue to record high growth. The production of motor vehicles with alternative drives (new energy vehicles) rose by around 17 percent. Overcapacities remain a problem. In the first three quarters of 2025, capacity utilisation averaged 74.2 percent, which corresponds to a decrease of 0.4 percentage points year on year. Aggregate capacity utilisation is only a rough indicator though, with capacity utilisation much lower in individual sectors such as solar, batteries, chemicals and mining

Despite robust growth in industrial production, the purchasing managers’ index showed a mixed picture underlining the weak level of demand. China’s purchasing managers’ index for manufacturing fluctuated around the 50-point threshold throughout the year, indicating stagnating production going forward. In December, the index climbed above the 50-point threshold for the first time in eight consecutive months, moving back into expansionary territory. China’s statistical office interpreted the astonishingly good performance primarily as an indication of increasing demand at home. It remains to be seen whether this will amount to a longer-term trend

Investments ceased to be a pillar of growth for the Chinese economy last year. From January to November 2025, net fixed capital formation fell by 2.6 percent year on year with private investment dropping 5.3 percent. A large share of the drop was caused by the resurgence of the property crisis in the second half of the year. Property investments plunged 15.9 percent from January to November year on year. Excluding the property sector, fixed capital formation only increased by a marginal 0.8 percent. Infrastructure investment and investment in the service sector also recorded negative growth, decreasing 1.1 percent and 6.3 percent respectively. Despite industrial policy support, investment in industrial production only increased by 1.9 percent (increasing by a total of 3.9 percent in the secondary sector). The fixed capital formation of foreign invested enterprises decreased 14.1 percent in the same period according to the NBS.

Demand and prices remain weak

Domestic consumption remains the key weakness of China’s growth model. Last year, the termination of consumer subsidies, weak income expectations and high youth unemployment (at 16.7 percent according to NBS) considerably curtailed the willingness of households to spend money. In the first eleven months of 2025, retail sales increased by four percent year on year.

In 2025 overall, inflation was at zero percent and was therefore well below China’s central bank target of ‘around two percent’. This is a sign that economic measures such as trade-in programmes for consumer goods have only served to moderately improve consumer sentiment and contain deflationary pressure. However, these measures seem to have mainly pulled purchases forward rather than structurally strengthening domestic consumption for the long term. The producer price index was 2.6 percent down on the previous year in 2025. Producer prices in China have been in a deflationary phase for over three years now.

After decreasing 4.7 percent in 2024, the corporate earnings of industrial companies stagnated last year. Between January and November 2025, earnings inched up 0.1 percent compared to the previous year, according to NBS. The profits of state-held enterprises declined by 1.6 percent while private companies only saw their profits nudge down 0.1 percent. The low level of corporate earnings and persistent deflation in producer prices indicates that Beijing has not yet had much success in its agenda to combat ‘involution’, as it describes the problematic situation of excessive competition and overcapacities.

Contradictions and a lack of momentum in the first year of the 15th five-year plan

China’s economy has started out the new year without momentum. Cyclical factors such as the termination of political support packages and a high baseline could weigh growth down in the first quarter, while structural factors such as the recession in the property market and weak consumption continue. The baseline scenario for 2026 is relatively weak growth in the first few months which is likely to force Beijing to initiate further measures to fuel growth in the second quarter and beyond.

The Chinese economy should grow by 4.5 percent this year. The IMF is also expecting growth of 4.5 percent for 2026. The OECD is anticipating growth of between 4.4 and 4.5 percent and the World Bank growth of 4.4 percent. The estimates of Goldman Sachs are slightly higher at 4.8 percent, justified by the bank with comparatively high anticipated fiscal and monetary support and a robust development of exports, among other factors. The Rhodium Group, in contrast, expects growth of only two percent. At the National People’s Congress in March, a growth target of ‘around five percent’ is likely to be set once again for this year.

In the first year of the 15th Five-Year Plan the exact growth rate will be much less relevant than the question of which priorities Beijing will set. In an article late last year in Qiushi (求是), the main theory journal of the Communist Party, General Secretary Xi Jinping stated that expanding domestic demand was a top priority for China’s economic policy. While this is a clear signal on the part of the leadership, doubts that a corresponding turn in economic policy and substantial structural reforms will ensue are justified. The government is expected to focus largely on expanding its current approaches to strengthening domestic demand, which have only shown moderately effective results so far. More fundamental structural reforms to strengthen the purchasing power of private households are complex,

longwinded and expensive. In the short term, at least, they could also curb Beijing’s current agenda of attaining technological independence and global industrial dominance.

The government must strengthen domestic demand while further reducing surplus capacities, the indebtedness of local governments and the dependency on the property sector. How the government choses to navigate between its conflicting goals of strategic geoeconomic objectives, short-term economic stabilisation and long-term structural readjustment will not only determine its growth profile for 2026 but also the credibility of extensive economic transformation in China during the 15th FiveYear Plan

Euro area

The European economy continues to face substantial challenges in an increasingly fragmented global environment. Although the tariff deal with the United States in the summer eased tensions slightly, Trump’s latest threats of penalty tariffs have rekindled uncertainty. The pressure on foreign trade remains high. Effective tariffs are currently at around thirteen percent and further trade policy measures going forward remain a possibility. Further exacerbating the tense situation is the steep appreciation of the euro since early 2025 which has additionally lowered the price competitiveness of European industry. Diversion effects of global trade have intensified the pressure additionally, particularly on account of competition from Asia.

There are also positive factors supporting the economy. The monetary easing of the ECB has improved financing conditions, labour markets are proving robust overall and rising real wages are supporting consumption. Higher public expenditure is also contributing to stabilisation in some countries. However, these positive factors are not enough to compensate for the weaknesses. Investment activity remains subdued, also because fiscal momentum is largely coming from Germany and will only unfold effects gradually while other member states are under pressure to consolidate. Weak net exports and structural problems of the euro area as a business and production location are additional restraints on growth.

In this environment, the recovery of the euro area is sluggish. Growth is close to the reduced, moderate potential which is too low to secure competitiveness and prosperity in the long term.

The latest quarterly figures indicate slowdown in growth

The most recent figures indicate low underlying growth momentum. In the third quarter 2025, the euro area economy grew by 1.4 percent compared to the previous year, after growing 1.5 percent in the second quarter and 1.6 percent in the first quarter of the year. Quarter on quarter figures clearly show a slowdown in momentum. After rising 0.6 percent in the first year, GDP was only up 0.1 percent in the second and 0.2 percent in the third quarter. Growth in the first six months of the year was generated mainly by private consumption and higher public expenditure while net exports pulled down growth, particularly in the second quarter.

Looking at the different sectors, services displayed a much higher momentum than industrial production in 2025. Although industrial production recovered slightly from its downtrend between spring 2023 and the end of 2024, it remains subdued overall. The low momentum is also reflected in capacity utilisation, which increased to 78.2 percent in the fourth quarter 2025 but was still well below its long-

term average of 80.7 percent since 1985. This is a clear indication of the muted level of industrial activity overall.

Gross domestic product* of the euro area

* year-on-year change, calendar and seasonal adjusted

Source: Macrobond

Euro area outlook marked by high political uncertainty despite pick-up in early indicators

The economic policy uncertainty in Europe, and particularly in Germany, has only decreased slightly since its extremely high level in spring 2025 and remains much higher than the long-term average. The Economic Policy Uncertainty indicator (see following figure) continues to display pronounced spikes which indicate a persistently volatile economic policy environment. This uncertainty encumbers the short-term investment decisions and planning of enterprises The high degree of volatility most likely reflects both the geopolitical uncertainties and the ongoing debates on fiscal and structural policy measures.

On a positive note, leading indicators for the euro area have picked up slightly at last count. S&P Global’s HCOB Purchasing Managers’ Index climbed to its highest level since the second quarter 2023, averaging 52.3 points in the last three months of 2025 despite nudging down in December. The upward momentum came from the services sector, while production slowed down.

As things stand, we expect the euro area to grow by around 1.1 percent in 2026 overall, following growth of about 1.2 percent the previous year. This puts growth slightly below the average rate of the last ten years of 1.5 percent (Eurostat 2025). The main upward factor for the euro area economy will be domestic drivers. Private consumption is being buoyed by rising real wages while public expenditure is also supporting growth slightly. Net exports are set to pull down growth, with higher US tariffs and the appreciation of the euro deteriorating price competitiveness. Corporate investments are also likely to remain subdued and well below the structural requirements set out in the Draghi Report.

Sources: Macrobond Economic Policy Uncertainty Index

Selected EU countries and the United Kingdom

The French economy is only set to recover gradually in 2026. After estimated growth of around 0.7 percent in 2005, we expect a slight acceleration up to around 0.9 percent in 2026 which matches the forecast of the European Commission (2025a). The IMF (2026) forecasts slightly higher growth of one percent. The main positive drivers will be private consumption and exports, while the necessary fiscal consolidation and challenging political situation will curb upward momentum. This situation will weigh down on the propensity to invest and make budgetary planning more difficult. The Commission expects France’s government deficit to decrease from 5.5 percent of GDP down to 4.9 percent, but its debt ratio to continue to increase up to around 118 percent. Inflation is set to remain low at around 1.3 percent mainly on account of the drop in regulated electricity prices in February 2025. The risks for growth are largely downside.

The Italian economy is only in for muted growth in 2026. After a weak performance in 2025 with growth of around 0.5 percent, we expect a slight acceleration up to around 0.8 percent, which corresponds to the forecast of the European Commission (2025a). The IMF (2026) anticipates growth of 0.7 percent. The upturn will be driven largely by private consumption, buoyed by rising real incomes and investments stimulated by the remaining funds of the National Recovery and Resilience Plan (NRRP) and more favourable financing conditions. Exports, on the other hand, will remain under pressure with the appreciation of the euro and higher US tariffs keeping foreign demand low. Net exports are likely to pull growth down by 0.3 percentage points Additional points of concern are structural weaknesses and high energy costs and industrial production, which has been downward for the last few years. Growth remains fragile with mainly downside risks.

The Spanish economy is likely to lose a little steam in 2026 but remain relatively robust compared to the rest of the euro area. After an unusually strong performance in 2025 with growth of around 2.8 percent, we expect a slowdown to around 2.1 percent for 2026. This estimate is slightly lower than the 2.3 percent growth forecast by both the IMF and the European Commission. The upward momentum will continue to be driven by consumption and investment but will not be as remarkably

high as it has been in the last few years. Downward factors are the dwindling strength of the tourism sector and weaker global demand bringing down exports. Added to the mix are the risks of a less favourable international environment, particularly regarding energy prices and exchange rates. Overall, Spain is still one of the most resilient economies in the euro area even though growth will be tangibly weaker here this year.

Following estimated growth of 1.4 percent in 2025, the OECD (2025) and the European Commission (2025a) expect growth in the United Kingdom to drop down to around 1.2 percent in 2026. Growth will be lower largely on account of the continued fiscal consolidation and the burden of global uncertainty. Private consumption will remain subdued, investment activity moderate and net exports are set to make a negative contribution to growth, according to the Commission, with goods exports remaining weak and only partially compensated for by services exports. Inflation is expected to stay well above target at 2.5 percent. At the same time, the labour market will cool down tangibly with the OECD expecting unemployment to rise from 4.7 to 4.9 percent. The outlook overall remains muted with risks largely downside.

Germany

The year 2025 saw the start of Donald Trump’s second term in office as president of the United States and, in Germany, the relaxation of the debt brake and the approval of a 500-billion-euro special fund shortly after the federal elections and before the constituent session of the new Bundestag. This special fund hardly triggered any economic momentum last year but should make a tangible contribution to growth in 2026. The increase in GDP of 0.3 percent in the first quarter of 2025 was caused by frontloading effects in anticipation of the protectionist US tariff policy which caused a temporary uplift in global trade and the first export-driven growth impetus Germany has experienced in a long time. This was followed by a rebound effect in the second quarter with negative growth of 0.2 percent compared to the previous quarter, followed by stagnation. In 2025 overall, German GDP increased by 0.2 percent compared to the previous year according to a preliminary estimate by the German Federal Statistical Office. It was only thanks to the relatively strong domestic demand that the German economy did not contract for the third consecutive year despite downward investment in plant and equipment for the third successive year, downward construction investment for the fifth successive year and no growth impetus from foreign trade in the last three years.

In 2026, the German economy is set to grow slightly more than last year. As in the past few years, consumption expenditure should continue to rise as should investment in other assets (R&D, patents). Investment in plant and equipment is on track to rise slightly following two years of contraction, even though investment here will largely comprise replacements initially. Construction investment is poised to recover gradually following four downward years, supported both by the special fund for climate and infrastructure and by residential construction, where building permits rose slightly at last count. At the start of the year, the bad weather may well have kept the lid on construction investment but, judging from the past, this will be compensated for in the further course of the year. A negative factor for growth in 2026 will once again be foreign trade. Although exports should increase by slightly more than 0.5 percent in real terms following three years of contraction, imports will increase by a substantially larger 2.5 percent. Additional US penalty tariffs of ten percent from 1 February and 25 percent from 1 June 2026 have not yet been factored into these forecasts but could pull down growth in Germany by up to one percentage point. Overall, we expect GDP to increase by one percent in 2026 compared to the previous year.

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(2025b). Monthly Budget Review: Summary for Fiscal Year 2025 10 November. Washington, D.C.

--(2025c). CBO’s Updated Projections of the Budgetary Effects of Tariffs as of November 15, 2025 20 November. Washington, D.C.

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Imprint

Federation of German Industries e.V. (BDI)

Breite Straße 29 10178 Berlin

T: +49 30 2028-0 www.bdi.eu

German Lobbyregister Number R000534

Authors

Dr. Klaus Günter Deutsch

T: +49 30 2028 1591 k.deutsch@bdi.eu

Julia Howald

T.: +49 30 2028 1483 j.howald@bdi.eu

Thomas Hüne

T: +49 30 2028 1592 t.huene@bdi.eu

Anna Kantrup

T: +49 30 2028 1526 a.kantrup@bdi.eu

Frederik Lange

T: +49 30 2028 1734 f.lange@bdi.eu

Ferdinand Schaff

T: +49 30 2028 1409 f.schaff@bdi.eu

Editorial / Graphics

Marta Gancarek

T: +49 30 2028 1588 m.gancarek@bdi.eu

This report is a translation based on „Globaler Wachstumsausblick, „Wachstum 2026 schwächelt weltweit | KI-Boom überdeckt strukturelle Eintrübung“, as of 21 January 2026