The OECD said the world economy proved resilient in 2025, but remains fragile – Image: Rupert Oberhäuser/picture alliance
From trade tensions and high debt burdens to fears of an AI stocks bubble, the global economy will face an array of risks that could dampen growth in the new year.
The global economy has weathered a whirlwind of challenges in 2025, including sharp trade tensions, uneven yet moderate growth and rising concerns over elevated inflation and debt levels in many parts of the world.
As the year draws to a close, many of these problems are expected to continue into 2026.
Global growth will moderately slow, from 3.2% in 2025 to 2.9% in 2026, the Organization for Economic Cooperation and Development (OECD) estimates.
The organization, comprising the world’s 38 most advanced economies, said the world economy proved resilient in 2025 but remains fragile.
US President Donald Trump shocked the world in April by imposing a sweeping new tariffs regime aimed at reshaping global trade flows and slashing large US deficits.
The move sparked market turmoil, business uncertainty and supply chain adjustments.
US-China tariff tensions to persist
The US Supreme Court is expected to hand down its decision next year on whether the president can bypass US Congress to impose tariffs by invoking a national emergency.
Many observers expect the apex court to affirm the lower courts’ findings that the Trump tariffs are not lawful.
Even if the judges strike down the tariffs, the administration might resort to other legal means to reimpose some of the duties. Hence tariffs will likely remain a major issue in 2026.
Trade friction between the US and China, the world’s top two economies, is also likely to persist. Tensions have eased somewhat since Trump and Chinese President Xi Jinping met in October and agreed to a 12-month truce in their trade war.
The US-China trade deal “is similar to a ceasefire rather than a long-lasting peace accord that would end the US-China trade war,” Rajiv Biswas, chief executive of risk analytics firm Asia Pacific Economics, told DW.
The trade truce between Trump and Xi remains fragile, with the underlying economic and strategic issues still unresolved – Image: Andrew Caballero-Reynolds/AFP/Getty Images
“The US and China remain locked in geostrategic competition, which drives rivalry in key areas such as defense technology and advanced manufacturing industries like [artificial intelligence] AI, quantum computing and robotics,” he pointed out.
Biswas stressed that the fight for tech dominance between the US and China is likely to extend into 2026.
There will be “increasing use of tariffs, sanctions and other economic measures in key areas of technological rivalry such as advanced defense equipment, AI chips, quantum computing and robotics,” he noted.
Trade imbalance between China and the rest
Still, China’s economy is expected to remain resilient next year, expanding by roughly 5%, in line with the government’s recent targets.
But the country’s deep-seated structural challenges persist, such as “demographic aging, the declining marginal productivity of capital, and excess capacity in many industrial sectors such as steel, shipbuilding and chemicals,” said Biswas.
Neil Shearing, chief economist at the London-based Capital Economics, said in a note
that China’s growth model “continues to prioritize supply over demand, resulting in chronic excess capacity and persistently weak consumer spending.”
persistently weak consumer spending.”
To tackle the issues, Chinese leaders recently pledged to boost domestic consumption, and stabilize the vast and troubled property market, among other measures.
“Policymakers are pledging to address the problem, but the imbalance will remain a defining feature of China’s economy in 2026,” Shearing noted.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, believes Trump’s tariffs will hit Asian nations harder in 2026. Speaking with DW, she blamed it on continued geopolitical tensions, growing trade fragmentation and the lack of further regional integration to offset tariffs.
Inflation and high debt levels
Inflation, meanwhile, has stayed elevated in many parts of the world, including the US and the euro area, partly due to the tariffs.
Further increases in trade barriers or supply chain disruptions could accelerate price rises, presenting a dilemma to central banks over whether to hike interest rates to fight inflation or keep them low to support growth.
Rising interest rates could hurt growth and cause a spike in the debt-servicing costs of heavily indebted and financially weaker countries.
Many eurozone nations like France are particularly vulnerable as their governments have struggled to push through unpopular spending cuts to rein in deficits and soaring debt.
“The fiscal strains that rattled investors at various points this year will continue to stalk markets in 2026. It is now widely accepted that the public finances of several major advanced economies are on an unsustainable path,” Shearing wrote.
Germany’s economy, the EU’s largest yet struggling to emerge from a long downturn, is expected to get a boost next year from increased government spending on defense and infrastructure.
But German business sentiment remains gloomy. Leading economic institutes recently cut their 2026 growth forecasts, with the Munich-based ifo institute, for instance, now predicting just 0.8% expansion next year, down from 1.3% at its previous forecast.
The German government, however, is more optimistic, expecting growth of 1.3% in 2026.
As the race for global AI dominance intensifies, most large language models (LLM) have yet to carve a profit – Image: Jaque Silva/NurPhoto/picture alliance
What if AI boom crashes?
The boom in artificial intelligence (AI) is also expected to continue into 2026.
The big US tech firms have earmarked hundreds of billions of dollars to build and expand AI infrastructure such as data centers.
These investments are projected to contribute significantly to GDP growth in the US, compared to other regions of the world, given the low levels of spending elsewhere.
But investors are increasingly nervous over the lofty valuations of US tech firms, as it’s still uncertain whether the huge spending in AI infrastructure will ultimately be profitable.
Some fear it has become a bubble that may burst and cause a market rout.
Garcia-Herrero told DW that the “AI revolution is structural,” and that the technological transformation and adoption will continue in 2026.
She cautioned, however, that if the AI stocks bubble bursts and spending falls abruptly, then the US economy and households will take a big hit, likely plunging the world’s largest economy into recession and dampening global growth.
DW.com/NAN 5-1-26
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