Global Economy Risk Assessment
The BiggestStories Heading into 2026: AI, Possible Equity Bubble and the Prospect of Peace
By The Better Policy Project | January 1, 2026
A Mounting Storm for the Global Economy
The global economy enters 2026 at an inflection point where familiar policy frameworks are increasingly strained by structural change. Rapid advances in artificial intelligence, shifting geopolitical dynamics, and persistent uncertainty around inflation and financial stability are reshaping growth prospects in ways that traditional models struggle to capture. While headline economic outcomes remain resilient in many regions, underlying imbalances are quietly building, raising the risk that policy calibrated to the past may prove ill-suited for the future. This report assesses the evolving global landscape and highlights the key risks policymakers must confront as the world transitions into a new economic era.
Global Economy Risk List
Higher Interest Rate Risks
US tariffs rise by more than expected.
Retaliatory tariffs.
Expansionary fiscal policy in the US, Germany and China.
Restrictive immigration in the US reduces labor supply.
Global equity prices reach new highs, spur a wealth effect.
Inflation expectations may not be well anchored.
Geopolitical tensions reduce global oil supply.
Countries with low unemployment pre vents wage disinflation.
OPEC spare capacity falls to historic lows.
Countries allow their currencies to depreciate to partially offset US tariffs.
Fed independence questioned.
Underestimating r star that is on the rise due to AI.
Lower Interest Rate Risks
Global trade slows and the global economy slips into a severe growth recession.
Rerouting China’s exports to the rest of the world at a discount.
Restrictive immigration in the US lowers housing demand.
Crisis in confidence in equity markets from the US economic agenda leading to stagflation.
US fiscal sustainability concerns reach a breaking point.
Consumers lose confidence due to high levels of uncertainty leading to precautionary saving.
Increasing non-performing loans in Russia causes a banking crisis.
China’s property market worsens threatening financial stability.
AI raises potential output and higher un employment.
Global Economy
Global growth expectations heading into 2026 have been revised modestly higher, driven primarily by resilience in the U.S. and continued AI-related investment across advanced economies. Trade wars, while still a prominent geopolitical risk, have not yet delivered the material drag on activity that many feared, allowing global output to remain near trend. Looking ahead, the balance of risks is increasingly asymmetric: while AI investment continues to lift demand and productivity expectations, miscalibration of monetary policy in a structurally changing economy could amplify financial volatility rather than dampen it.
Global real GDP growth projections under different scenarios and corresponding forecast changes (percentage points).
United States
The U.S. economy continues to grow at a pace that appears strong relative to revised estimates of potential output, but the underlying drivers are increasingly complex. Immigration dynamics are exerting a supply-side drag through reduced labor force growth, while AI investment is simultaneously supporting aggregate demand and reshaping labor markets—particularly for entry-level workers. Wage growth remains elevated but not accelerating, suggesting that slower employment gains reflect a mix of supply constraints and early AI displacement rather than a sharp collapse in demand. This ambiguity leaves policymakers vulnerable to misinterpreting cyclical strength as overheating.
Source: BLS, ADP
Euro Area
In the euro area, inflation has moved closer to target, but the disinflation process remains fragile due to persistently high services inflation and tight labor markets. While headline inflation has stabilized near 2 percent, wage growth and low unemployment suggest continued domestic price pressures, particularly in services. Fiscal policy—most notably Germany’s large infrastructure and defense spending—provides near-term support to growth, but risks creating uneven conditions across member states. The ECB faces a narrow path: tightening too much risks deepening structural weakness, while easing too soon could entrench inflation persistence.
Source: Eurostat
Russia
Russia’s economy is operating at binding capacity constraints, with historically low unemployment masking an underlying stagnation in real activity. The ongoing war has redirected labor and capital toward non-productive uses, limiting the private sector’s ability to expand and leaving growth close to zero. As households’ debt servicing capacity deteriorates, financial stability risks are rising, reflected in increasing non-performing loans. Future growth prospects hinge critically on external factors—oil markets, sanctions, and the possibility of peace—where resolution could unlock resources and restore potential growth, while continuation raises the probability of recession.
Source: Federal State Statistics Service
China
China’s growth model remains vulnerable to external shocks as exports continue to shoulder a disproportionate share of economic momentum. Elevated U.S. tariffs—still covering nearly all bilateral trade—pose a persistent drag on external demand, while weak household consumption limits domestic buffers. Credit growth to the private sector has slowed sharply, consistent with financial stability objectives but constraining near-term growth. Against this backdrop, China’s aggressive investment in AI stands out as a potential medium-term offset, offering productivity gains that could help rebalance growth if global trade conditions deteriorate further.
Source: BIS, BPP