U.S. economic outlook
How robust can 2026 forecasts be, given the delay in economic data due to the government shutdown?
Vito Sperduto: The longer this data gap extends, the more it risks distorting the inflation picture at a time when the Federal Reserve is setting the pace for additional rate cuts.
Frances Donald: We have enough to feel confident that the job market in the fourth quarter has been on the softer side, but certainly still stable and far from cracking. We have less data to inform inflation forecasts.
Will the stagflation that characterized much of 2025 change in the year to come?
Donald: Unfortunately, I think the concept of ‘stagflation lite’ will persist and maybe worsen in 2026. Growth is likely to be too low and inflation too high for comfort.
Growth in 2026 is going to look fairly similar to 2025, below 2%. We see core inflation rising as high as 3.5% by the middle of 2026.
This is going to be a challenge for the Federal Reserve heading into 2026. Like many developed economies around the world – Europe, Canada, Australia – this is an economy that's going to need to lean more on fiscal policy.
“We see core inflation rising to as high as 3.5% by the middle of 2026 – way outside everyone's comfort zone.”
Frances Donald, RBC Chief Economist
What is sentiment like among different consumer segments?
Mike Reid: Over the past couple years, consumer confidence has declined notably. We’re seeing wage growth slow while prices shift higher.
Sperduto: The consumer has not weakened in a broad sense, but the distribution of spending power has changed. Household wealth has become concentrated in older and higher income Americans, whose liquid asset gains are supporting consumption.
Reid: In our recent research, the bottom 10% in wealth terms actually look okay, because that group is heavily reliant on government transfers and benefit from COLAs.
It's really the middle folks, the 40th to 80th percentiles, that are seeing the biggest pinch. They tend to get the least amount of government support, and at the same time their wage growth just hasn't kept up.
“Household wealth has become more concentrated in older and higher income Americans whose liquid asset gains are supporting consumption.”
Vito Sperduto, Head, RBC Capital Markets U.S.
How should companies be thinking about labor strategy in light of retirement trends?
Reid: There will be some notable shifts over the coming years, but a 4.5% unemployment rate is still quite low.
As the trend in retirements continues to accelerate, and when you take into account the immigration story, with a slowdown of inflows into the U.S., you could see a case where by 2027 or 2028 you could have a negative payroll print and yet the unemployment rate won't rise.
What does the persistence of big governments since the pandemic signify for the economy?
Donald: By the very nature of an aging population, we see a greater reliance on social security. Pair that with the focus on infrastructure development, defense, and productivity enhancements, and governments are likely to stay big or get bigger.
When government is as large as it is, this is a U.S. economy that's probably going to have growth numbers that fluctuate less, that are stuck between smaller bands.
This is a structural trend facing the United States in 2026 and probably over the next five years.
What other factors should we be watching?
Donald: The enormous trade shock from tariffs is likely only going to start materializing in 2026. Some companies are clearly shedding some jobs in response; others are raising prices. So far this seems relatively well managed, but we don’t want to take our eye off the ball of tariff risks just yet.
Reid: A pullback in spending by the upper 10% of income earners could be caused by something like a 10% correction in the stock market. It has serious consequences for the labor market as well as consumption, if folks who are thinking about retiring look at their portfolio and decide to work another year or two.
Sperduto: I think an underappreciated risk is the impact of the 2026 election cycle, and how that could come into play in terms of decision making, if it collides with a fragile macro hand-off.
Reid: AI investment in buildings and equipment is making a notable contribution to U.S. growth right now. That helps support jobs and the communities in which datacenters are built. But keep in mind, a lot of that value is transitory.
“A pullback in spending by the upper 10% of income earners could be caused by something like a 10% correction in the stock market.”
Mike Reid, Senior U.S. Economist, RBC
Canadian economic outlook
How is the Canadian economy placed for 2026?
Lindsay Patrick: This past year has brought its share of curveballs. We saw a historic trade shock, a change in federal leadership, and rate cuts from the Bank of Canada, coupled with ongoing issues in affordability and productivity.
Frances Donald: Technically speaking, Canada is going to avoid a recession this year. The data heading into 2026 shows an economy that’s improving.
In the labor market, layoffs have been extraordinarily low: the unemployment rate has been rising, but because we’re not hiring, and that’s disproportionately hurting young people.
Mortgage renewal pressures are starting to ease. Household balance sheets are rising. Even business confidence is starting to improve.
There are still pockets of this economy that are really struggling, and we're still worse off than we would have been absent a trade war. But the trade hit from U.S. tariffs has been far less than the general consensus believed.
“This past year has brought its share of curveballs. We saw a historic trade shock, a change in federal leadership, and rate cuts from the Bank of Canada, coupled with ongoing issues in affordability and productivity.”
Lindsay Patrick, Chief Strategy and Innovation Officer
What areas of the economy are feeling the effects of tariffs?
Donald: Steel, aluminum, and many segments within the auto sector are still being substantially tariffed, as is softwood lumber. Canada is also suffering under the weight of Chinese tariffs on canola and aquatic products.
The 10% of trade affected by tariffs is predominantly focused in southwestern Ontario. The unemployment rate there is around 9 to 11%, while areas such as Quebec City, Thunder Bay, and Victoria BC have very low unemployment.
As we head into 2026, that regionalization is going to become even more acute. For policymakers, it is a very difficult situation, because cross-country application of policy is going to be difficult.
How is consumer sentiment?
Donald: We believe that what we’ve termed the K-shaped economy – where different household segments are operating in very different economic cycles – will be a semi-permanent theme.
Canadian consumer confidence continues to move lower and lower. Yet debit and credit card data shows spending at the top end remains high, driven by wealth accumulation and spending by the best off Canadians.
What can the central bank do in these circumstances?
Donald: Monetary policy is not the right medicine for an economy that is becoming fragmented to this extent. Lower interest rates are not going to do much to help those who are really suffering from the trade war.
The Bank of Canada would step in if we saw unemployment rise because of layoffs, or the demand side of the economy falter. But it has been clear that it doesn’t want to add an inflation problem to a trade problem.
This is not just a Canada story. The U.S. has a very fragmented, K-shaped economy; Europe is wrestling with the same factors. This is a new era for central banks.
“Monetary policy is not the right medicine for an economy that is becoming fragmented to this extent.”
Frances Donald, RBC Chief Economist
What will be the impact of the latest federal budget?
Donald: This government is moving away from consumption-driven to investment-led spending. The advantage is it's stickier and lasts longer. But the disadvantage is it takes a lot longer to play out.
The elements of this budget that we will see impacting us now are the tariff relief measures and the middle-class tax cuts.
The focus on defense spending and acceleration of major projects will probably have a three-year horizon, while AI and productivity initiatives could take five years to see results. More action will be needed on deregulation and tax to get the private sector moving.
How will the reversal on Canada’s immigration policy play out?
Donald: After a remarkable surge in population growth between 2022 and 2024, we are now reversing course, so population growth is probably going to decline below 1% or even to 0%.
We were witnessing the economy grow, but the economy per person getting smaller. That's going to turn around now. As the population starts to shrink, GDP per capita will rise.
That also means we’ll need to create far fewer jobs. We now believe the Canadian economy will only need to produce zero to 5,000 jobs per month. Going into 2027, we could actually see job growth go negative and still not see the unemployment rate rise.
“As the population starts to shrink, GDP per capita will rise. That also means we’ll need to create far fewer jobs.”
Frances Donald, RBC Chief Economist
European economic outlook
What are the key themes shaping the economic outlook for Europe in 2026?
Peter Schaffrik: The trend growth level in the euro area has declined to around 1.25% - a little higher in the U.K. at 1.5%. The main reason is falling productivity growth.
Among the international forces at play, U.S. trade tariffs have been surprisingly well managed from the European perspective: import prices into the U.S. haven't dropped all that much, and our economic performance hasn't been really dented.
China has been a more important force. It has increased production capacity and is now competing in products that European companies tended to be good at. That’s one of the reasons why our trend growth is low.
Can the euro area consolidate its modest growth comeback of 2025?
Schaffrik: Domestic demand has been quite strong. There has been very low unemployment and decent wage growth, and people have been spending. The saving rate is relatively high, but coming down. Private sector investment has been tepid, but we’re optimistic about that going forward.
Germany is the largest European economy and the one that’s not fiscally constrained. The German budget is going to expand, and we think that will really drive growth in 2026 both in Germany itself and the euro area.
We're probably still seeing the positive impact of reduced rates in mortgage approvals or in other lending data. Our view is that the ECB is done cutting rates and will be on pause through 2026.
“The German budget is going to expand, and we think that will really drive growth in 2026 both in Germany itself and the euro area.”
Peter Schaffrik, Chief European Macro Strategist
What are the growth prospects for the U.K.?
Cathal Kennedy: The diminished ability to grow is a big similarity between Europe and the U.K. productive investment in both areas has been weakened by the financial crisis.
The big change in the U.K. economy over the last year has been the loosening in the labor market. The unemployment rate is now 5%, up from a little over 4% a year ago. On the flip side, we've not seen mass redundancies. Digging deeper, what you see is a genuine improvement in labor supply.
We see that feed into slowing wage growth now. That should affect services inflation, which has been the Bank of England’s focus now for a couple of years. It means the Bank can feel more confident going forward.
What will be the impact of the recent U.K. Budget?
Kennedy: It was primarily about stabilization. The Chancellor has built in more headroom into her fiscal plans, so we can escape the cycle of uncertainty we’ve seen in the U.K., which has kept household savings high and business investment low.
There are tax increases of £26bn, but the near-term growth impacts are fairly marginal. The government is trying to correct long-term underinvestment, but the impact is fairly modest – 1% of GDP per annum – and the payback is also longer.
Gilt issuance has already dropped by about a quarter, so that’s another positive from the Budget.
We saw U.K. inflation kick back up last year, even as it came down in the euro area, but a lot of the drivers of inflation drop out into April next year. Together with Budget measures, that should clear the way for the Bank of England to cut rates twice more in the first half of 2026 to 3.25%.
“The Chancellor has built in more headroom into her fiscal plans, so we can escape the cycle of uncertainty we’ve seen in the U.K., which has kept household savings high and business investment low.”
Cathal Kennedy, Senior U.K. Economist
What’s the outlook for bonds?
Schaffrik: Despite central banks cutting rates in ’25, we have seen essentially a bearish duration environment. That's probably going to continue, particularly in the euro market, where the ECB is probably going to pursue quantitative tightening for years to come.
Fixed income investors who want to buy yield are going into short duration assets with credit spreads. These are probably going to stay tight or even tighten further.
For corporates, that's a good environment, because it improves their funding position. But it’s probably going to be another very difficult year for duration assets.
What are the FX prospects for euro and sterling?
Schaffrik: Our attractiveness to outside capital is probably not strong enough to warrant big inflows into these markets in 2026.
While it’s not a particularly strong euro story, people who are still over-invested in U.S. markets will try to diversify a little, and that should put some downward pressure on the dollar and lift euro/dollar. We also do think the euro is probably going to do better than sterling.
Also, the renminbi and other Asian currencies are relatively weak, and we think a depreciation of European currencies against Asia would absolutely be warranted.
Asia Pacific economic outlook
What will be the impact of U.S. trade tariffs on APAC?
Abbas Keshvani: Most of the region has incurred a tariff rate of 15 to 20%. Because the rates are so similar across the region, tariffs should not lead to a transfer of U.S. market share between countries.
China is a notable exception, because it has incurred a 47% tariff. Exports in 2026 will probably no longer contribute as much to Chinese growth. That will likely radiate out into the region via reduced demand for Asian goods in general, from Indonesian coal to Korean electronics.
Rob Thompson: The 10% tariff on Australia affects a few industries more than others – some meat, gold and medicines exporters. But in a macro sense, it's quite far down the list of our worries.
What’s the growth outlook for major APAC economies in 2026?
Keshvani: We are projecting a growth rate in China of 4.5%, a notable miss from its 5% growth target.
The PBOC have already cut interest rates a fair amount over the years, so the onus is increasingly on fiscal stimulus to lift growth. Measures like consumption support have the greatest ability to goose growth in in the near term.
Thompson: We’re predicting Australian growth of around 2.5% next year. While we have factored in some Chinese weakness, a further 1% undershoot in Chinese growth would probably mean about a quarter-point drag on Australian growth.
What’s the likely impact of currency pressures?
Keshvani: The yuan is still very weak, especially against others like the euro, despite China's notable trade surplus with Europe. China has to be careful here, because the US-China truce is being reevaluated in 11 months, and the E.U. is being more vocal about CNY weakness.
If – more likely, when – China announces a fiscal stimulus that will boost stocks and encourage foreigners to pile into Chinese equities, which remain relatively cheap, that would result in the next round of CNY appreciation.
Thompson: A softer US dollar should be unambiguously helpful for strengthening the Aussie dollar, and a stronger CNY should be the same. If we see volatility in CNY as opposed to strength, that could be a less positive story for the Aussie dollar in a spot sense.
How will the economic picture translate to interest rate moves?
Thompson: In Australia we’ve seen a pick-up in private sector demand, adding to pretty strong spending from the public sector. Supply and demand are not in perfect balance. We expect the Reserve Bank to keep rates on hold through 2026 but given this inflationary backdrop, the risk of a fresh hiking cycle is climbing fast.
Keshvani: For most countries in Asia, inflation is tracking around or below the official target. A lot of central banks probably have another one to two cuts left in them. What's holding them back is financial stability, including defending the currency and some macro prudential considerations like soaring property prices.
“We expect the Reserve Bank of Australia to keep rates on hold through 2026 but given the inflationary backdrop, the risk of a fresh hiking cycle is climbing fast.”
Rob Thompson, Macro Rates Strategist
How will the housing and property markets develop?
Thompson: Long-term population growth in Australia is averaging 1.5% to 2%, well above most other countries. This is adding to demand. On the housing side, things remain very, very tight. It’s very hard to see a situation where the housing market doesn't continue to appreciate in price terms.
Keshvani: China's property market is proving to be a real drag on growth, with new home prices down 7% over the last few years and 18% in the resale market. That leads to less spending and less property construction and investment. Even if buyers return to the market, it will be some time before property investment recovers.
“China's property market is proving to be a real drag on growth – even if buyers return, it will be some time before property investment recovers.”
Abbas Keshvani, Asia Macro Strategist
What external forces will be significant?
Keshvani: The E.U. sounds increasingly protectionist lately. So there's a risk that in 2026 China deals with another trade war – the European edition.
Thompson: The trajectory of Australian growth remains deeply impacted by what happens to the China story and by U.S. Fed policy. We will be very much a follower of the broader direction of longer-term interest rates set by the U.S.
