Paul Diggle, Chief Economist, at Aberdeen comments on the specialist asset manager’s Q1 2026 outlook.
We forecast slightly above consensus US GDP growth of 2.2% in 2026 and 1.9% in 2027, supported by an ongoing tailwind from AI capex spending and stock market wealth effects, and fiscal easing. But there is a clear risk of an AI bust driving a recession. While not our base case, this downturn would look more like 2001 than 2008.
The US labour market has moderated. But, with the headwinds from trade uncertainty and tight interest rates reducing next year, we don’t expect this softening to spiral into a larger downturn.
Should the Supreme Court rule US President Donald Trump does not have tariff powers under IEEPA, trade uncertainty may spike again. We think the president would find alternative means to re-build tariff levels to around 15%. But any loss of tariff revenue could trigger concerns about the fiscal trajectory.
The tariff impact on prices has not yet peaked, and we expect US inflation to reach 3.4% in Q1 2026. But with underlying inflation pressures contained, the tariff hit looks like a one-off increase to the price level.
Inflation should ease to 2% by the end of 2026. Fed policymakers are divided about the appropriate policy path given this backdrop. We expect the Powell Fed to deliver one more cut, before the next chair takes over in May 2026 and cuts twice more. But the uncertainty bands are wider than usual given the various potential appointees to that role.
The trade détente removes some of the downside risks to the Chinese growth outlook in 2026, but we still expect challenges to activity. The housing market remains a headwind, the anti-involution campaign may introduce a new drag on investment, and consumer confidence is subdued.
So, we forecast further stimulus but this will remain focused on investing in strategically important sectors on the supply- rather than demand-side. Therefore, it won’t do much to boost ingrained low inflation. All told, we have raised our 2026 Chinese GDP forecast to 4.5%. That would still be a step down from this year, and we are forecasting a further deceleration in 2027. We’ve lowered our inflation forecasts.
European growth will be supported by easier fiscal policy for the next several years, including a fiscal impulse of 1.5% of GDP in Germany. Headline inflation will drop below the ECB’s target in early 2026, but we think it will look through this and keep policy on hold given fiscal support. Indeed, we expect the ECB to resume rate hikes by late 2027.”
Peter Branner, Chief Investment Officer, at Aberdeen adds: Geopolitical risk has become a structural feature of markets and challenges long-held assumptions. For the coming year our core message remains to prioritise diversification in portfolios. We believe amid uncertainty opportunities will continue to emerge.
At this late stage in the cycle it is increasingly important to be mindful that risky asset classes could move in tandem hence important to see how less likely scenarios could erode multiple asset classes.
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