Global Economic Risks Highlighted for 2026

Consumption Slowdown and Trade Tensions Pose Major Threats

The global economy is facing significant risks in 2026, primarily driven by declining consumption in major economies such as the United States and China, according to Bruce Kasman, Chief Global Economist at J.P. Morgan. These two economies combined contribute approximately 45% to global GDP, with the US accounting for about 26% and China around 19%. The anticipated slowdown is further complicated by persistently high inflation resulting from potential escalation in trade tensions, often referred to as Trade War 2.0.

Economic Projections and Recession Risks

Despite the challenging outlook, J.P. Morgan projects that the probability of a recession in 2026 stands at 35%. This relatively moderate risk assessment is attributed to the expected implementation of fiscal stimulus measures in both developed and emerging markets to boost consumption. The global economic landscape remains sensitive to various factors, including trade policies and inflation trends.

Trade Policies and Inflation Concerns

The global economy is also navigating through a phase of new protectionism, characterized by rising trade tariffs and emerging trade blocs. The US and European Union are potentially forming one bloc, while China and Russia are aligning in another. This geopolitical development is expected to significantly impact global trade growth, which is projected to slow down from 2.4% in 2025 to 0.5% in 2026 on a year-on-year basis.

Monetary Policy Implications

High inflation, particularly in developed economies like the US, is likely to limit the ability of central banks, including the Federal Reserve, to continue their monetary policy easing cycle. The global economy in 2026 is expected to remain in a high-interest-rate regime. According to calculations by the Fed, a 10% increase in global trade costs due to higher tariffs on intermediate goods could raise Consumer Price Index (CPI) inflation by 0.3%. For final goods, a similar tariff increase could lead to a 0.5% rise in CPI inflation. If both intermediate and final goods are subject to a 10% tariff, CPI inflation could increase by 0.8%.