Executive Summary

AI-Concerns Resurface Despite Robust Outlook 

The IMF expects 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 descent, 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.

President Trump has nominated Kevin Warsh, a former Federal Reserve Governor under both the Bush and Obama administrations, as the next Fed Chair. While markets were initially rattled by the transition's uncertainty, the choice of Warsh has since provided 'cautious relief'; he is viewed as a seasoned pragmatist rather than a political loyalist. However, his confirmation faces a significant hurdle in the Senate Banking Committee, where Senator Thom Tillis has vowed to block all Fed nominees until the DOJ concludes its criminal investigation into current Chair Jerome Powell. The probe, which Powell has labeled a "pretext" to undermine Fed independence, centers on alleged misinformation regarding a USD2.5 billion renovation of the central bank's headquarters.

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 necessary affirmation to remain patient in loosening policy. Market expects two additional 25bps rate cuts starting mid-year after cumulative reductions of 75bps in CY25.

The ECB held rates unchanged for the fifth consecutive meeting. The ECB pegged GDP growth forecast at 1.2% and 1.4% for CY26 and CY27, respectively. The ECB signaled that policy rates are currently neutral as inflation has fallen back to around 2%. The ECB expects inflation to hover at 1.9% in 2026 and 1.8% in 2027.  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. While the BoE initially expected zero growth for Q4 2025, official data confirmed the UK economy barely grew at 0.1%. Market participants now anticipate two additional 25bps cuts over the remainder of 2026.

In December, the Bank of Japan (BOJ) unanimously voted to raise policy rates to 0.75%—a 30-year high—to combat persistent inflation, which has exceeded the 2% target since March 2022. Despite this hike and a deceleration in headline inflation to 2.1% YoY in December, real interest rates remain significantly negative. The BOJ projects a terminal (neutral) rate for this cycle between 1.25% and 1.5%, with some analysts expecting this level to be reached by mid-2027. However, heightened Yen volatility and surging sovereign yields continue to threaten financial stability, potentially necessitating BOJ intervention. Notably, the 10-year Japanese Government Bond (JGB) yield recently spiked to 2.3%, its highest level in nearly three decades. Following her reelection, Prime Minister Sanae Takaichi has vowed to suspend Japan’s 8% food tax for two years, a move expected to further strain the nation’s substantial public debt.

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.

India’s real GDP has been estimated to grow by 7.4% in FY 2025-26 against the growth rate of 6.5% during FY 2024-25. The RBI has slashed policy rates by a cumulative 125bps since the start of 2025 but held rate steady at the latest meeting. A projected rise government spending, moderating inflation and tax relief has sparked optimism. After a series of declines, India annual inflation read has risen from 0.25% in October to 2.75% in January. RBI sees inflation accelerating into the next fiscal year. India and the EU have signed a FTA which covers 25% of global GDP, a reprieve for Indian exports was pressured by U.S. tariffs. Shortly after, the U.S. reached an interim trade deal with India, slashing tariff on Indian exports from 50% to 18%. 

Executive Summary By

Arun Pawa, IP, FM, IA, Investment Strategist 

CIMB Thai Bank (CIMBT)

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