The IMF expects a resilient economic growth of 3.3% in 2026 and at 3.2% in 2027, similar to the 3.3% projection for 2025.  Advanced and emerging/developing economies are projected to grow 1.8% and 4.2% in 2025, respectively up from 1.6% and unchanged from earlier.  Adaptation to U.S. tariffs, front loading of U.S.-bound exports, monetary and fiscal expansion underpinned the upgrade. Global inflation is projected to continue its decline, with headline inflation falling to 3.8% percent in 2026. Global trade volume growth is expected to decline from 4.1% in 2025 to 2.6% in 2026.

Labor market concerns trumped lingering upside risks to inflation, allowing the FED to lower the fuds rate by 25bps at the final December meeting.  Job gains has soften since June but the lack of layoffs has kept unemployment at 4.4%.  In an effort to shore up liquidity, FED Chair Powell ended USD480 billion annual quantitative tightening (QT) on 1^st December. In addition, a yield curve steepener, de facto QE program was announced through the purchase of short-term treasuries up to USD40 billion per month. U.S. Q3 GDP growth was 4.4%, the strongest in two years, as high-income consumers continue to spend and gave the FED the affirmation required to remain patient. Market expects two additional 25bps rate cuts starting mid-year after cumulative reductions of 75bps in CY25. FED Chair Powell is currently under criminal investigation by the DOJ which adds to the uncertainty regarding his replacement in May. 

After eight consecutive rate cuts, the ECB held rates unchanged for the fourth consecutive meeting. The ECB upgraded GDP growth forecast for CY25 to 1.4% from 1.2% and 1.2% from 1% for CY26.  The ECB signaled that policy rates are currently neutral as inflation has fallen back to around 2%. Earlier in December, the BoE slashed interest rate for the fourth time in CY25 by 0.25% to 3.75% marking the sixth cut for this cycle. The vote was contentious with a slim 5-4 majority voting for to ease. The divergence reflected elevated inflation which rose 3.4%YoY in December driven by services accelerating from November’s 3.2% pace. The BOE expects Q4CY25 GDP to show zero growth. Market expects two more 25bps cut for this cycle.

Earlier in December the BOJ voted to hike policy rates to 0.75%, the highest level in 30 years to combat inflation which stood above 2% since March 2022. Despite the hike, real rates remain firmly negative. The BOJ sees terminal rate for this cycle settling in at 1.25%-1.5%. The BOJ remains vigilant on the Yen weakness and surging yields with actions to follow should the moves threaten financial stability. The 10YR JGBs rose as much as 30bps to 2.3%, the highest level in almost 30 years. PM Takaichi’s vow to suspend Japan’s 8% food tax for two years, post Feb 8^th election spooked investors. 

Rengo, Japan’s largest labor union umbrella group, is seeking wage hikes of 5% or more in 2026. This matches what Rengo asked for in 2025 and resulted in the biggest pay hike in 34 years. The BOJ raised GDP forecast for the FY26 to 1% expansion from 0.7%. China’s Q4 GDP grew 4.5% in Q4CY25, slowing from 4.8% in the third quarter. Full-year CY25 economic output came in at 5%, meeting the official target of around 5%. Investment in property development continued to decline as a real estate crisis dragged on, falling 17.2% in CY25, deepening from the 10.6% drop in CY24.

The RBI has projected GDP growth at 7.3% for fiscal year 2026 ending March 31^st in line with IMF’s projection. In the next fiscal year, the RBI expects GDP growth of 6.7% and 6.8% for Q1 and Q2, respectively. The RBI has slashed policy rates by a cumulative 125bps since the start of 2025. A projected rise government spending, moderating inflation and tax relief has sparked optimism. Inflation dipped below sub-1% for both October and November and with real rates as high as 4-5% the RBI still has room to maneuver policy rate lower. India and EU have signed a FTA which covers 25% of global GDP, a reprieve for Indian exports which faces 50% tariffs from the U.S. The EU is India’s largest goods trading partner. 

Executive Summary by Arun Pawa, IP, FM, IA, Investment Strategist 

CIMB Thai Bank (CIMBT)

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