- From China to the US, economic activity is holding up better-than-expected.
- Trade is flourishing, despite the US push toward protectionism.
- Other than in Japan and the US, inflation is benign.
- High sovereign debt burden notwithstanding, long-term rates are also on a stable footing for now.
- Key risks are over-reliance on AI-spending and ever escalating US hegemonic assertiveness.
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Commentary: Upward momentum
We expect the late-year positive momentum characterising the global economy to spill over to the early part of 2026. We consider four key metrics of positive momentum:
First, economic growth. China and the US are tracking around 5% and 3% growth presently. China’s long list of headwinds, from property market slump to trade war, industrial overcapacity to a paucity of jobs, are well recognised, but it gets insufficient credit for decent consumption growth, a revitalised capital market, and a steady stream of innovation and tech adoption. As for the US, its investment dynamic may well be disproportionately reliant on AI spending, the balance sheets of its consumers and firms are in sound health on aggregate, laying the foundation for strong retail sales and service sector activity. Here in south-east Asia, trade, tourism, events, and domestic demand have also held up rather well. We expect more of the same for the time being.
Second, trade. All EM and DM economies we track had moderate to excellent expansion in trade in 2025, defying the staunchly protectionist stance undertaken by the Trump administration. Looking ahead, the latest PMI reading bode well for demand, with almost all the economies in our coverage reporting expanding order books.
Third, inflation. With exception of Japan and the US, all EM and DM economies under our coverage are tracking trend or below-trend inflation, with food, fuel, and core prices stable. Among a long list of potential spoilers in 2026, we don’t think inflation will be one. Even in the US, inflation turning sticky won’t cause much consternation, in our view, as markets already take for granted the dovish push coming from the Trump administration.
Fourth, rates. The global economy is characterised by a mountain of debt, with little sign of movement toward fiscal consolidation. This should cause long-term interest rates to rise, but there are several mitigating factors at play. Since the 2007/08 global financial crisis, central banks have supported public debt issuance. Holders of US treasuries, for instance, don’t see much risk in the horizon, as they expect the US Fed and Treasury doing whatever it takes to cap long-term yields. The long-term ramifications of such practice are negative, we are sure, but short-term manifestations will likely be muted. From central bank credibility to the value of the dollar, the erosion would take place gradually, not in a seismic manner.
Now, for the risks. The first is clear—the lopsided nature of the investment cycle in the US, which is presently being driven almost entirely by AI-related spending. If the sector faces revenue disappointments or some its promises fall short, a major downturn in investments would ensue, causing growth to slow. The selloff in AI stocks would have a substantial international dimension, we fear.
Second, geopolitics. The first few days of the new year has already shown evidence of matters heating up, from central America to the Middle East. The US asserting its hegemony repeatedly hurts the global rules-based order and compounds the already-heightened sense of geoeconomic uncertainty. From now till the November US mid-term elections, there won’t be any respite in this arena, we suspect.
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