Market Update: We break down the business implications, market impact, and expert insights related to Market Update: Global economic outlook 2026 | Deloitte Insights – Full Analysis.
Eurozone
– Pauliina Sandqvist
The eurozone economy has shown resilience amid a complex mix of global and domestic challenges this year. While its post-pandemic recovery was disturbed by multiple challenges, the region has avoided recession, supported by a robust labor market, easing inflation, and selective fiscal measures. In 2026, moderate growth will hinge on domestic demand and national as well as EU-level investment initiatives, but geopolitical uncertainty and trade tensions pose key risks.
Real economic growth in the eurozone is projected to reach 1.4%38 in 2025, a modest improvement over 2024 (0.8%), driven by robust private consumption and a slight rebound in investment. Private consumption benefited from labor market strength and improved purchasing power. The labor market has been a key stabilizer, with unemployment standing at 6.3%39 in September, very close to its lowest level (6.2%) in over a decade. Real incomes have recovered further as wage growth remains buoyant—even if it is softening slowly—and inflation levels have moderated.
Overall, headline inflation is likely to average 2.1%40 in 2025, with core inflation easing due to declining wage pressures and a stronger euro, which makes imports into the euro area more affordable. In line with these inflation developments, the European Central Bank announced a 25-basis-point rate cut four times this year, bringing its deposit facility rate to 2% in June. Thus, the monetary policy stance has become significantly less restrictive.
However, geopolitical and trade tensions continue to weigh on growth. The imposition of new US tariffs on European exports—particularly autos and steel—has disrupted supply chains and dampened export growth, after positive front-loading effects at the beginning of the year. Although a new US-EU trade agreement has reduced some risks, the situation remains unclear and is evolving.
Looking ahead to 2026, the eurozone economy is expected to keep expanding moderately, supported by various factors. First, sustained consumer spending growth, driven by slightly expanding purchasing power, a still-robust labor market, and a minor decline in the household savings rate, is likely to contribute positively to economic activity.
Second, fiscal stimulus related to defense and infrastructure is also expected to boost investment activity in countries like Germany. In addition to national actions, there are also multiple EU-level actions contributing to this. The “ReArm Europe/Readiness 2030” plan, introduced in March 2025, outlines a broad strategy to finance increased defense expenditures.41 The NextGen EU funds are also expected to provide a moderate boost to investment growth in 2026, particularly in southern eurozone economies.42
On the other hand, export growth is likely to be weak next year: Besides higher tariffs and a strong exchange rate, competitiveness-related challenges and strong competition from China will drag on demand for European exports. The European Union will likely try to diversify its export markets through further trade agreements. The push behind initiatives under the Competitiveness Compass, if undertaken as planned, should make Europe more economically resilient and future-proof. However, both of these actions will take time, and it is unclear how significant their positive effects will be.
Overall, the eurozone economy is projected to grow by 1.1% next year.43 Even though the annual figure is slightly lower than in 2025, underlying growth dynamics are expected to strengthen slightly.
These forecasts are surrounded by relatively high uncertainty, especially regarding US trade policy, the Russia-Ukraine war, and possible financial-market corrections driven by AI investments.
France
– Olivier Sautel and Maxime Bouter
After a modest economic rebound in 2024 (1.1%), French economic growth is expected to slow to 0.7% in 2025, according to the Banque de France, with a moderate recovery to 0.9% in 2026 and 1.1% in 2027.44 This subdued trajectory mirrors a larger global slowdown,45 as most major economies (the United States, China, Germany, and the United Kingdom) are also experiencing below-trend growth.
2025 growth levels will rely heavily on inventory rebuilding,46 particularly in the aeronautics sector, which will account for roughly two-thirds of GDP growth next year. Sustainable momentum should come from other drivers in 2026. The contribution of net exports, which was strongly positive in 2024 (1.3 points), will turn negative in 2025 (−0.8 points) and nearly plateau in 2026, due to persistent competitiveness challenges for European exporters (high energy costs, strong euro).
Household consumption should gather pace slightly (0.5 points in 2026 versus 0.4 points in 2025) but will remain constrained by a historically high savings rate (almost 19%) and weak consumer confidence amid ongoing political uncertainty. Private investment should finally pick up again, although likely only modestly (with a 0.3-point contribution to GDP), after three consecutive years of decline.
Fiscal consolidation remains at the heart of French economic policy: The public deficit is projected to reach 5.4% of GDP in 2025 (unchanged from June estimates), with further structural adjustments planned for 2026 (0.6% of GDP).47 This involves spending cuts and increases in fiscal revenues,48 limiting the scope for public sector support for growth.
On the monetary front, the ECB has lowered its key rates over the past year (from 4.5% in September 2023 to 2.15% by June 2025) but is now adopting a “wait-and-see” stance due to global uncertainties. The positive impact on investment and private demand may take time to materialize fully.
Despite economic headwinds, France’s labor market has proven resilient: Unemployment should hover around 7.5% by the end of 2025.49 However, some increase is likely due to slower job creation outside export-oriented sectors as economic activity moderates.
Inflation is expected to drop sharply to an average of 1% in 2025 (compared with 2.3% in the euro area), mainly due to lower energy prices and moderate core inflation (1.9%). With nominal wages rising faster than prices, household purchasing power will be supported in 2026.50
Political uncertainty remains a key risk: Recent events such as the dissolution of parliament and budgetary tensions have dampened both business sentiment and household confidence. While third-quarter numbers for 2025 showed an unexpected acceleration in GDP (0.5%, driven by strong industrial exports),51 this boost is cyclical rather than structural, and France’s fiscal outlook remains fragile, requiring deeper reforms.
A more robust recovery hinges on restoring collective confidence. A high household savings rate provides potential fuel for investment and consumption if uncertainty abates. However, until political stability returns and external conditions improve, the French recovery may remain hesitant.
France enters a delicate phase in which private sector confidence should replace fading public support as the primary engine of growth. While there are resources available for a rebound, namely a high savings buffer among households, their deployment depends on reduced political risk and a more favorable environment.
The fiscal adjustment necessary to reduce the public deficit below 3% of GDP will require either higher taxation or cuts in public spending. However, in an environment where private demand needs to take over from public demand, an increase in the tax burden risks weighing on household purchasing power and corporate investment capacity, thereby hindering economic recovery. The choice of path vis-à-vis fiscal consolidation will thus represent a delicate trade-off between fiscal discipline and growth.
Germany
– Alexander Börsch and Pauliina Sandqvist
After two consecutive years of contraction, Germany entered 2025 in a fragile but gradually stabilizing position. Currently, the economy is caught between cyclical tailwinds (fiscal policy) and headwinds (tariffs). At present, it seems most likely that tailwinds will outweigh headwinds, resulting in a minor recovery in 2025 and stronger growth in 2026, supported by fiscal measures.
Following GDP declines in 2023 and 2024, 2025 began surprisingly well, with modest economic activity.52 Front-loaded exports to the United States, in anticipation of tariffs, supported growth, while private consumption provided a positive impulse too. In the following quarters, economic activity slowed again, mainly due to headwinds from international trade and sluggish investment.
However, there are also some encouraging developments in 2025. One such development is the continued normalization of price pressures. Headline inflation is expected to ease to 2.2%53 in 2025 from 2.3% in 2024, improving real incomes and supporting household spending. Also, the labor market has remained robust by historical standards.
Overall, GDP is projected to grow by around 0.2%54 in 2025. The main drivers are private consumption and government spending. Nevertheless, US tariffs continue to dampen exports, limiting the scope of recovery. Even if uncertainty has partly cleared since the US-EU trade deal, it is still dragging investment levels and consumer sentiment.
Next year, economic conditions are expected to improve modestly, with fiscal policy playing a pivotal role. A moderate portion of the 500-billion-euro multiyear infrastructure package (mainly flowing into public construction investments) and substantial additional defense spending (visible in public equipment investments and government consumption) will likely boost the pace of growth.
However, implementation delays and bureaucratic hurdles mean that the full impact will only materialize gradually. Yet additional investments alone are not enough for sustainable impact; structural reforms remain necessary to strengthen Germany’s long-term competitiveness. Next to the fund, planned energy price relief (starting Jan. 1, 2026), alongside the investment booster for businesses introduced in mid-2025, will further support economic activity, especially in the industrial sector.
Private consumption should continue to contribute positively, supported by robust, albeit moderating, wage growth and a slightly improving labor market. Export activity remains subdued but should begin to recover gradually, as structural challenges in Germany’s industrial sector presumably persist, but the drag from global trade tensions eases slightly.
Altogether, the German economy is projected to grow by 1.2%55 next year. However, the pace of improvement hinges on effective policy implementation and progress in addressing long-standing challenges in bureaucratic burden, energy, and social security systems. A worsening of the geopolitical context and renewed trade policy turmoil pose further risks to this forecast. On the other hand, a peace agreement between Russia and Ukraine would likely lead to stronger growth momentum.
While the downturn appears to be over, Germany’s path to a self-sustaining and dynamic recovery will likely require political reforms and strategic investments.
Italy
– Marco Vulpiani and Claudio Rossetti
The Italian economy continued to slow down in 2025, with very moderate growth. The year was characterized by an unstable international context, due to the deterioration of diplomatic and trade tensions. Italian goods exports contracted outside the euro area, especially to the United States and for the so-called “Made in Italy” industries (such as food, leather goods and textiles, mechanical products, fashion, and jewelry, which form the basis of the Italian economy), because of the effects of higher tariffs and uncertainty over their implementation.
Moreover, a mild expansion in the construction sector contrasted with weakening activity in services and most industrial sectors. Consumption stagnated, and the propensity to save increased. Although future scenarios are subject to considerable uncertainty, stemming largely from potential new developments in trade policies and ongoing conflicts, Italian GDP is expected to grow moderately next year (0.6%), and consumer price inflation is expected to remain low (1.5%)56 and below levels expected in the euro area.
After accelerating in the first quarter of 2025, Italian GDP contracted slightly from the second quarter onward, owing to a sharp decline in exports; production growth remained lower than in the euro area. This economic volatility is mainly attributable to foreign trade. In fact, the international context remained unstable throughout 2025. The imposition of US tariffs and the appreciation of the euro against the dollar are leading to a significant loss of competitiveness for European exporters. In this context, Italian companies are facing significant export obstacles, especially affecting the northeastern regions of the country and the “Made in Italy” sectors.
Italian export volumes began to decline from the second quarter of 2025, following a sharp increase in the first three months of the year, mainly driven by sales of maritime transport equipment and a front-loading of trade before the new tariffs came into effect. Not surprisingly, goods exports contracted primarily outside the euro area, with the sharpest drop observed in exports to the United States because of the effects of higher tariffs and uncertainty over their implementation. The decline was especially marked for motor vehicles (subject to higher tariffs), food and beverages, textile and clothing products, and machinery.
On the contrary, exports of pharmaceuticals expanded in 2025, driven by the exemption of these products from tariff increases. Sentiment among Italian exporting companies57 also shows a growing perception of export barriers, rising pressure on margins, and increased operational complexity, suggesting a specific vulnerability to tariffs and geopolitical tensions outside the European Free Trade Area.
On the supply side, the cyclical weakening of GDP in 2025 is attributable both to services and to some industrial sectors, with a mild positive contribution from the construction sector due to projects under the National Recovery and Resilience Plan (NRRP). In the first half of 2025, investment continued growing at a sustained pace, supported by high liquidity reserves of firms, declining interest rates, the availability of tax incentives, and the implementation of a few NRRP measures.
Household spending remained cautious throughout 2025, and real disposable income grew at slightly higher rates than consumption, translating into a strengthening of the propensity to save.58 Employment has remained broadly stable, while the participation rate has continued to rise among older workers and to decline among younger ones. Thus, households’ purchasing decisions are partly sustained by the resilience of the labor market and expectations of moderate inflation, but the propensity to save remains higher than it was before the pandemic.
Inflation was higher in 2025 than in the previous year. Deflationary pressures from the energy component were offset by increases in food prices and stronger growth in services. In 2026, consumer price inflation in Italy is expected to decline and remain below the levels expected in the euro area.59
As a final note, there is growing concern about the economic consequences of an aging population—a phenomenon particularly notable in Italy. These include risks of slower economic growth and increased pressure on public finances. Slower growth can result from a shrinking workforce, which may also lead to lower productivity, requiring actions to sustain participation and labor productivity. For example, companies are required to increase the level of digital maturity of their business processes and to explore new technological opportunities (such as AI) to support worker productivity in high–value-added activities. Another area for strong improvement is the reduction of the geographical gap in productivity.
Research from the Deloitte Observatory on Italian regions confirms that a significant gap in productivity and efficiency between the north and the south of the country remains in most sectors of the economy, linked to persistent institutional and infrastructural differences. From another perspective, a Deloitte Italy economic research study60 shows that sport and sports practice, in addition to health, social, and behavioral benefits, also play a strategic role in the country’s economic development. Sports form a beneficial factor that can help counteract the aging of the population, capable of triggering large-scale economic and social benefits, such as increased productivity and higher labor-force participation, thus contributing to GDP and employment.
Ireland
– Kate English
Ireland is a small open economy on the edge of Europe, with a population of 5.46 million.61 The country has achieved remarkable economic expansion in recent years, with the economy growing by 27% (65 billion euros) from 2019 to 2024.62 This stemmed from a robust multinational sector (tech, manufacturing, and pharmaceuticals) and steady, albeit lower, growth in the domestic economy.
Although multinationals represent only 3% of firms in Ireland, they contribute over 70% of gross value added and 27% of employment.63 Within this group, US companies play a pivotal role, accounting for nearly 32% of goods exports in 2024 64 and serving as Ireland’s largest bilateral trade partner. They have a significant fiscal impact, generating an estimated 75% of all corporation tax receipts and directly employing almost 220,000 people.65
A more fragmented trade environment or slower global economic growth, therefore, poses a significant risk to the Irish economy. However, to date, the economy has displayed resilience. The front-loading of exports by firms seeking to preempt the introduction of tariffs by the US administration has led to significant “noise” in macroeconomic data, resulting in projected GDP growth of 10.8% this year.66 A more accurate representation of domestic activity comes in the form of modified gross national income, which is still expected to increase by 3.3% this year and in 2026.67
The labor market continues to operate at record levels, although the rate of employment growth is slowing. A total of 2.8 million persons were employed as of the third quarter of 2025—a rise of just 1.1% year on year.68 This is the lowest level of growth since Q4 2012 (excluding 2020 to 2021, when the pandemic distorted the market). Employment growth is forecast to be 1.5% in 2026. The rate of youth unemployment has come into focus in recent months, standing at 12.2% as of September 2025—an increase of 1.7 percentage points year on year.
Buoyed by a strong labor market and continued moderation in inflation, consumer spending is forecast to grow by 2.9% this year. This comes as households continue to save 1 euro out of every 8 euros of disposable income.69 Indeed, households continue to accumulate record levels of savings, with deposits standing at over 168 billion euros as of September 2025 (up 6.8% year over year).70
Ireland’s strong fiscal position is eye-catching: The ratio of debt to gross national income is forecast to be just 61.7% this year, falling to 58.6% in 2026. This compares favorably with other countries such as the United Kingdom, the United States, and France, all of which have debt-to-GDP ratios surpassing 100%.
However, as this fiscal strength is heavily exposed to the multinational side of the economy, Ireland’s focus has turned to competitiveness and addressing its infrastructure constraints. Despite ranking seventh in the IMD World Competitiveness Rankings, Ireland ranks 44th for basic infrastructure.71 This gap is evident in capacity constraints across housing, water, energy, and transport. In housing, the deficit is resulting in sustained high price growth (7.4% annually in August 2025),72 decreasing affordability for many households. Just 32,990 new residential units were completed in the 12 months to the second quarter of 2025,73 compared with an estimated annual demand of 50,000 new homes each year.74 Addressing these challenges is key to sustaining growth in the future.
In the 2026 budget, the government allocated 19.1 billion euros for capital expenditure, representing 16% of total expenditure.75 This marks a significant increase compared with previous years, when capital spending as a share of government expenditure fell from a peak of 14% in 2003 to just 3.4% in 2013.
As 2026 approaches, Ireland will continue to monitor the global economic landscape while focusing on addressing domestic risks: infrastructure and housing shortages, productivity, and planning for demographic changes. As a small, open economy, Ireland’s future will likely be shaped by both external headwinds and tailwinds, making adaptability and strategic planning important.
Spain
– Ana Aguilar
Spain is expected to maintain significant economic momentum in 2026, growing at about 2.3%—1 percentage point above the eurozone average.76 Spain continues to benefit from households shifting preferences toward services. Its outlook is supported by purchasing managers’ indices anticipating ongoing expansion in the coming months. Services purchasing managers remain optimistic about 2026 (the November PMI for services stood at 55.6). The country’s manufacturing sector is also expected to continue expanding in 2026, supported by domestic demand (the November PMI for manufacturing stood at 51.5).77
In this dynamic environment, inflation will likely converge toward the ECB target of 2% but will remain slightly above eurozone levels.78
Growth in 2026 is expected to be driven by internal demand. Consumption will be the main growth driver, supported to a large degree by employment growth. The unemployment rate is expected to inch slightly below 10%, although it will remain markedly above the EU average. Wage growth will likely converge toward inflation levels (wage cost grew by 3% in the second quarter of 2025 compared with 4% in the second quarter of 2024).79
There is scope for the savings rate to fall somewhat in the stable interest rate environment, as it stood at 12.4% in the second quarter of 2025 (above its historical average of 9.6% between 1999 and 2025).80 However, households may retain a preference for saving to enable house purchasing or further debt repayment amid persistent uncertainty.
Investment is expected to maintain significant expansion in 2026 (after growing by 3.9% between the last quarter of 2024 and the third quarter of 2025), driven by moderate business indebtedness and interest rates, NextGen EU funds reaching their end date, and significant transformational challenges. Households and nonfinancial-corporation debt ratios stood at their lowest levels since the beginning of this century, and below (households) or at (nonfinancial corporations) eurozone levels.81
External demand is not expected to contribute to growth in 2026 as export expansion might be offset by import growth in a landscape characterized by barriers to trade, further euro or dollar exchange rate appreciation, and strong internal demand. The Spanish economy is less exposed to US tariffs than other European economies, as its goods exports to the United States represent about 5% of its total goods exports.82 Its exports to Europe are expected to benefit from economic recovery in the region.
Despite strong headline growth, Spain should continue to address its structural challenges, including productivity, housing, and public finances. Productivity per hour worked has grown by only 2.6% between the third quarters of 2019 and 2025, while headline GDP grew about four times faster during the same period.83
There is a severe housing shortage that will likely persist in the short term because supply has not kept pace with the growth in households, and house prices have continued to accelerate in the second quarter of 2025 (rising by 12.7% year on year, compared with 7.8% a year earlier).84
Finally, Spain’s public deficit is expected to continue on its downward trajectory (2.5% in 2025 and 2% in 2026), contributing to a mild decrease in the elevated debt-to-GDP ratio (from 100.3% in 2025 to 99.1% in 2026), according to the estimates by the Spanish Authority for Fiscal Responsibility.85
Poland
– Aleksander Łaszek and Rarał Trzeciakowski
Poland is projected to be the fastest-growing large economy within the European Union in 2025 and 2026, according to Deloitte and comparable IMF forecasts. Deloitte Poland forecasts indicate Poland will grow 3.4% and 3.2% in 2025 and 2026, respectively.
Furthermore, it is the only economy in the region whose GDP projection was revised upward and whose inflation projection was revised downward in the October IMF forecast compared with the previous April outlook. These positive outlooks extend into the mid-term horizon through 2030, sustaining a more than 35-year pattern in which annual GDP growth has been positive every year except during the pandemic.
The drivers of Poland’s economic growth are undergoing a gradual transition. In 2023 and 2024, strong domestic consumption—bolstered by significant wage increases and expansionary fiscal measures—supported growth despite sluggish performance among key trade partners, notably Germany. As external demand improves, export activity is expected to increase, accompanied by rising investment. As consumption growth moderates, GDP growth will become more balanced.
EU funds and defense spending currently serve as prominent catalysts for GDP growth, particularly in the short and medium term. However, these are not the primary contributors to Poland’s longer-term economic trajectory.
Access to the EU single market remains far more significant than financial transfers from the Union. The cyclical nature of the European Union’s multiannual fiscal framework and the upcoming conclusion of the NextGen EU initiative may lead to a concentration of spending in 2026, temporarily boosting GDP. Historical precedent shows that such surges are often followed by slowdowns. While highly visible cash flows attract attention, the impact of single market access—estimated to have increased long-term Polish GDP by at least 10%—is often overlooked.
Increased defense expenditure enhances national security, though its benefits to economic performance are less clear. In response to the escalation of the conflict in Ukraine, Poland substantially increased its defense budget. According to NATO estimates, defense spending reached 3.79% of GDP in 2024, marking the highest share within the alliance. NATO expects expenditures to increase further to almost 4.5% of GDP in 2025, and while specific plans remain unpublished, a recent Deloitte Poland (2025) report anticipated them to remain close to 4% of GDP in the coming decade. While short-term, debt-financed spending may stimulate demand and boost GDP, the literature suggests that the long-term effect of heightened military expenditure is generally negative for economic growth. Military spending should therefore be viewed as a necessary precaution rather than a driver of sustainable growth.
Economic convergence continues to underpin Poland’s development. Although discussions often focus on the role of EU funds, defense spending, or other tangible factors, the principal engine of growth remains Poland’s convergence with Western Europe. Integration into the single market and ongoing institutional alignment driven by EU membership foster capital inflows, knowledge transfer, and greater participation in global value chains. This openness enables Polish enterprises to specialize and enhance productivity—a core driver of growth over the last 35 years and one that is expected to persist as further opportunities for growth remain across various sectors.
The United Kingdom
– Debapratim De
Economic growth remains subdued in the United Kingdom. Following a strong start to the year, momentum has faltered, with output effectively flatlining over the summer and autumn months. This makes 2025 the second straight year of stop-start growth for the United Kingdom.86 It has been nearly four years since Russia’s invasion of Ukraine and the subsequent inflationary shock, but growth remains erratic.
A number of factors have contributed to this. The primary culprit is consumer spending, which accounts for nearly two-thirds of GDP and has barely grown since the summer of 2022.87 Inflation is now well below its peak after the Russia-Ukraine conflict, but enduring “sticker shock” and the lagged effect of earlier interest-rate rises have cast a long shadow on demand.
Consumer confidence also remains below pre-pandemic levels. Recent upside surprises in headline inflation and constant speculation over tax rises this year have fanned worries about the economy and depressed sentiment. More than two years of real wage rises have bolstered household finances, but British consumers remain cautious, saving more than the pre-pandemic norm.88
Business sentiment, as measured by the Deloitte CFO Survey, remains weak. Energy prices and supply chains may have stabilized, but cost pressures persist for corporates, now driven by higher employment and financing costs. Add to that recent geopolitical uncertainty and rising protectionism, and you have the ingredients for a squeeze on capex and hiring.
Manufacturing activity remains particularly weak. The sector seemed to have finally recovered from a prolonged post-pandemic slump last summer, but business surveys suggest it fell back into contractionary territory in autumn and has continued to shrink since. The services sector remains a bright spot, with activity expanding in all but one of the last 12 months.
Strong services output and one-off factors—such as rises in exports and housing-market activity before US tariffs and stamp duty changes took effect earlier in the year—have driven output in 2025. We expect UK economic growth to decelerate from a forecast 1.5% this year to a below-trend 1.1% in the next.
This slowdown partly reflects persistent external headwinds. With the full impact of US tariffs likely to be felt over the coming months—as US importers deplete their stockpiles and adapt their business models to the new trading environment—we expect a slight weakening in global demand.
But the key domestic driver of this deceleration is a softening labor market. With job vacancies now below pre-pandemic levels and surveys pointing to weaker private sector hiring as labor costs bite, a margin of slack is opening up in the labor market. The unemployment rate was 5% between July and September, and we expect it to rise to 5.5% by next summer. Wage growth should also edge lower and, together with rising unemployment, hold back demand and a broad-based recovery in consumer spending.
Falling inflation and monetary easing should offset this somewhat. Given cuts to energy bills, fuel duty measures, and rail fare and prescription charge freezes announced in the latest budget, we expect headline inflation to fall faster than previously forecast—to 2.5% by next spring and to approach the Bank of England’s 2% target in autumn.
This, alongside slowing wage growth and higher unemployment, should ease underlying price pressures, creating room for further interest rate cuts. We expect three 25-basis-point cuts between now and the end of next year, taking bank rate down to 3.25%—a significant reduction in borrowing costs for households and businesses.
We are forecasting sluggish growth over winter and spring, followed by a slow pickup in activity in the summer months as lower inflation and interest rates take hold, alongside a gradual recovery in global trade.
As ever, there remain sources of uncertainty. Developments in geopolitics or trade could change the course of growth. On domestic policies, the expanded fiscal headroom announced in the budget should provide greater certainty on tax policy in the face of gilt-market movements. Yet recent weeks have seen growing speculation over a potential Labor leadership contest. Were this to continue, it could introduce substantial uncertainty over the direction of future government policy, with implications for regulation, taxation, and the overall business climate.
We are forecasting a modest slowdown for the UK economy next year. If it emerges from this period with low inflation, lower interest rates, and having shaken off this stop-start pattern of growth, that would be a positive outcome.
Israel
– Roy Rosenberg
In 2025, the Israeli economy continued to be affected by the Israel-Hamas war, though the impact was more moderate compared to the previous year.
Government expenditures remain elevated, resulting in a deficit of 5%. While this figure is still high—particularly compared with real GDP growth—it is an improvement from the 6.9% deficit recorded in 2024.
Real GDP growth for 2025 is projected at 2.5%, translating to approximately 0.5% growth in per capita GDP. This represents a recovery from 2024 but remains below the average growth trajectory of 3% to 4%, primarily due to the ongoing effects of the war. Notably, in the second quarter, the economy contracted at an annual rate of 3% following a temporary shutdown of multiple sectors due to conflict with Iran.
Inflation in 2025 stood at about 3%, with roughly 0.6% attributed to a one-time effect from a 1% VAT increase at the start of the year. The shekel strengthened significantly against both the dollar and the euro, helping to restrain inflation. In the housing market, prices declined moderately but consistently for seven consecutive months—a rare and notable trend, with similar trends observed only twice in the past 15 years.
The Israeli capital market reflects positive expectations for the economy. Although rapid real GDP growth has not yet resumed, the capital market has outperformed leading global indices. For example, the Tel Aviv 35 index grew by 43% in 2025, outperforming the S&P 500 by approximately 27% (and if we factor in the increase in the exchange rate, the gap is even higher).
While none of the major rating agencies have restored Israel’s credit rating to prewar levels (or even to the levels in effect until the second-level downgrades seen in fall 2024), the country’s risk premium declined steadily throughout the year, particularly in recent months. Most of the excess risk premium generated by the geopolitical situation has been erased, with credit default swap contracts now trading below 70 basis points—almost approaching prewar levels (40 to 60 basis points) and significantly lower than the peaks in 2024 (over 140 basis points). The yield on Israeli government bonds also reflects this improvement, with the 10-year yield dropping from about 4.5% at the end of 2024 (with peak levels above 5% throughout 2024) to approximately 3.8% at the end of 2025. This decline was observed across the yield curve, indicating both expectations of a base-rate cut and a reduction in Israel’s credit risk.
The economic forecast for 2026 remains sensitive to geopolitical developments. If the ceasefire holds, Israel may experience significant recovery, which could be further enhanced if the Abraham Accords are expanded to additional countries. However, several factors may continue to restrain growth. First, the deficit rate is expected to remain high due to ongoing defense and reconstruction spending and the upcoming 2026 elections, which typically result in less fiscal restraint. Second, the election year may hinder the advancement of significant economic reforms and create uncertainty regarding future economic policy.
Conversely, several factors are expected to support economic recovery and a return to rapid growth. Declining inflation is likely to prompt a reduction in the central bank’s interest rate. Lower bond yields will enable the government to raise debt at reduced costs, improving the fiscal balance. A sustained decline in the risk premium will likely foster a favorable environment for foreign investment and further reduce government financing costs.
Assuming continued geopolitical stabilization and no major disruptions in global trade, we expect real GDP growth to reach 4.5% in 2026, inflation to stand at approximately 2%, and the deficit rate to be around 4.5%. The current debt-to-GDP ratio is projected to be 71% and to remain at a similar level through the end of 2026.
Ethiopia
– Tewodros Sisay
Ethiopia’s economy has shown remarkable resilience in recent years, but it has not been without challenges. Following strong real GDP growth of 7.3% in 2024, economic growth is projected to remain steady at approximately 7.2% in 2025.89 This moderation reflects the lingering effects of political instability in some regions, a weakening currency, and inflation, which soared to 20.8% in 2024,90 eroding household purchasing power. Yet there are signs that the tide is turning. As inflation is projected to fall to 13.2% in 2025, purchasing power should recover, setting the stage for a rebound in private consumption.91
In 2026, GDP is expected to accelerate to 7.6%. This will likely be fueled by reforms in key sectors like telecom and banking, which are attracting new investment, government spending on infrastructure and election-related activities, and the country’s strong agricultural exports.92 However, risks remain. The aftershocks of civil conflict, persistent inflation, and exchange rate volatility could still pose headwinds, and Ethiopia’s reliance on agricultural exports leaves it exposed to external shocks. Achieving the government’s ambitious medium-term growth target of over 9% will require navigating these uncertainties with care.
On the fiscal front, Ethiopia’s public-sector debt is largely owed to official multilateral creditors, who account for 82.4% (US$23.81 billion) of the total, while private creditors hold the remaining 17.6% (US$5.09 billion).93 The country is managing its debt obligations, with regular payments to the World Bank and continued support from the IMF, which disbursed US$262.3 million in July 2025 as part of a broader US$1.873 billion arrangement.94 These efforts have helped ease financial pressures and bolster investor confidence, though the benefits have yet to trickle down to Ethiopian households. Meanwhile, negotiations with private creditors are ongoing, with hopes that restructuring the US$1 billion eurobond and other debts due between 2025 and 2028 will likely provide further relief.
Monetary policy is equally dynamic. In September 2025, the National Bank of Ethiopia raised the annual credit-growth ceiling for commercial banks from 18% to 24%,95 a move designed to encourage lending and support economic activity while keeping inflation in check. The central bank has maintained its policy rate at 15%, signaling its commitment to price stability even as liquidity and exports improve. Inflation is expected to remain elevated at 13.2% for the 2025/26 fiscal year,96 driven by high food and fuel costs, currency depreciation, and increased government spending ahead of elections. Supply chain imbalances are also contributing to food inflation due to the ongoing Russia-Ukraine war and the ongoing internal conflicts in the northern region of Ethiopia.97 Over the longer term, as supply chains stabilize and economic reforms take hold, inflation is expected to moderate.
To help address ongoing foreign exchange shortages and a widening gap between official and parallel market rates, the central bank has introduced measures to cap banks’ foreign exchange fees and increase limits on foreign currency–denominated sales for imports and travel.
The Ethiopian birr is likely to continue its gradual depreciation, moving from 144.4 per dollar in September 2025 to a projected 163 per dollar by the end of 2026.98 This trend reflects the country’s current account deficit, high public debt, and ongoing inflationary pressures. The National Bank of Ethiopia is also evolving its approach, shifting from direct controls on the money supply to using the policy rate as its primary tool for guiding monetary policy to balance credit growth with price stability and enhance the transparency and effectiveness of its framework.99
Ghana
– Damilola Akinbami
The Ghanaian economy recorded a real economic growth of 6.3% in the second quarter of 2025, mainly driven by fishing, which grew 16.4%, followed by information, communication and technology at 13.1%, and finance and insurance at 9.3%.100
Ghana’s GDP is expected to grow 5.5% in 2025 and 5.7% in 2026,101 driven by improved exports from the expansion of the Bibiani gold mine in western Ghana and ongoing government initiatives like the 24-hour Economy Program and the Accelerated Export Development Program. However, several factors like fluctuations in cocoa production due to climate events, the spread of the swollen shoot virus, smuggling activities, and volatility in commodity prices could impede these forecasts.
Ghana has finally achieved a single-digit inflation rate of 6.3% as of November 2025, after about four years in double digits,102 driven by a strong cedi, falling nonfood prices, and reduced supply-side pressures. Inflation is projected to average 14.9% in 2025 and moderate further to an average of 9.7% in 2026.103 Potential risks to Ghana’s inflation outlook include higher tariffs on utilities such as electricity and water, and persistently high domestic food prices.
The Bank of Ghana (BoG) has resumed adjusting interest rates, implementing a 1,000-basis-point cumulative cut to its monetary policy rate in 2025.104 Further rate cuts are anticipated toward 17% by end-2026.105 While these reductions are expected to ease financing constraints and stimulate credit and domestic demand, excessive easing may jeopardize progress made in inflation control.
The cedi has strengthened notably—by over 40% in the first nine months of 2025—to an average of around 13 cedi per US dollar, driven by higher gold revenues, frequent BoG interventions, successful debt restructuring, and initiatives like the Ghana Gold Board.106 The government is also on track to receive another IMF disbursement of US$385 million, following five successful staff-level reviews. The cedi is projected to average 12.92 per US dollar in 2025 and 13.01 in 2026.107 However, potential monetary policy easing could reverse some of these recent gains, especially if the demand for gold diminishes along with declining global uncertainty.
Improved fiscal discipline and lower interest payments have contributed to the decline in the Ghanaian government’s actual spending, which was 14.3% below the target in the first half of 2025.108 The public debt stock has fallen by 15.6%, reaching 613 billion cedi, while the debt-to-GDP ratio is currently at 43.8%, down from 61.8% in December 2024,109 signaling an improvement in Ghana’s debt sustainability. However, lingering risks remain to ongoing debt-sustainability efforts. To address these, capital spending should grow as the government continues with its fiscal consolidation. Effective resource planning and mobilization, and better collaboration between the public and private sectors, are also important for building a resilient foundation and sustaining economic recovery.
Kenya
– Tewodros Sisay
Kenya’s real GDP grew by 1.2% in the third quarter of 2025,110 largely due to strong performance in the services sector, particularly accommodation and restaurants, as well as finance and insurance. Elevated electricity, cement, and vehicle production also contributed to this growth, reflecting investment activity in both the construction and industrial sectors. Visitor arrivals increased notably, boosting tourism-related services, although rising imports slightly offset gains from exports.
Overall, Kenya’s economy is expected to record real GDP growth of 5.0% in 2025, underpinned by continued expansion in services, moderate household consumption, and infrastructure investment. Growth is projected to strengthen further to 5.4% in 2026, driven by ongoing investment in energy, construction, and public-private partnership projects, alongside a sustained recovery in tourism and broader services activity.111
In the third quarter of 2025, inflation was mainly driven by rising food and alcoholic-beverage prices, resulting in an average annual rate of 4% for 2025. Inflation is projected to increase to 4.8% in 2026 as interest rates decline.112 Extreme weather may impact food insecurity and add further inflationary pressure, while elevated commodity prices could erode purchasing power and tighten financial conditions. In response, the central bank is expected to lower interest rates to help boost liquidity and encourage lending.
Kenya’s lending rate has fallen from 16.6% in 2024 to 15.4% in 2025,113 as the central bank trimmed interest rates in anticipation of US Federal Reserve rate cuts, aiming to ease borrowing costs for households and businesses, support economic activity, and maintain inflation and currency stability. In July 2025, the central bank introduced a risk-based credit-pricing model, enabling banks to set rates based on interbank rates. This will offer relief to borrowers and businesses as it eases access to private credit, consequently boosting the economy. The rate is expected to drop to 14.5% in 2026114 as the central bank adopts a more accommodative monetary policy.
On the external front, the Kenyan shilling appreciated from an average of 134.8 per US dollar in 2024 to an estimated annual average rate of 129.3 per US dollar in 2025.115 This was due to government intervention to prevent the shilling from appreciating further, such as the eurobond refinancing in February 2025, which eased external financing pressures and stabilized investor confidence.
The exchange rate is projected to weaken to 132.1 per dollar in 2026 due to rising inflation and narrowing interest-rate differentials amid a changing global environment.116 This could potentially lead to slightly increased import costs. Going forward, stability will likely be underpinned by easing inflation.
Fiscal indicators point to a moderate rise in Kenya’s public debt from 65.1% of GDP in 2024 to 66.2% of GDP in 2025117 due to the issuance of a new US$1.5 billion eurobond, which was used for the partial buyback of an older US$900 million eurobond.118 The debt-to-GDP ratio is expected to rise further to 67.2% in 2026119 due to a continued budget deficit, given the ongoing gap between expenditure and revenue collection. The government approved the 2025 to 2026 finance bill to reduce the deficit from 5.7% of GDP between 2024 and 2025 to 4.8% of GDP between 2025 and 2026,120 mainly through better tax collection and the closure of tax loopholes. Rising public debt may lead to interest-rate pressures, to the detriment of private borrowers.121
Nigeria
– Damilola Akinbami
Nigeria recorded a real GDP growth rate of 3.98% year over year in the third quarter of 2025—the fastest third-quarter growth rate since the same quarter of 2021—following a recent rebasing exercise.122 Nigeria’s economy is expected to average 4.1% year-on-year growth in 2025 and 2026.
Key factors driving this include increased activity at the Dangote Refinery, a recovery in consumer demand as prices stabilize, improved dollar liquidity, and expansionary fiscal policy. The announcement of recent reforms123 like the new Tax Acts will also open Nigeria to more investment, improving the prevailing business climate. Nigeria is also preparing for elections in 2027, and the anticipated fiscal stimulus from campaign activity will likely boost growth, despite inflation concerns.
Despite this positive outlook, Nigeria continues to face structural challenges hindering its growth potential. A significant infrastructure gap—particularly in critical sectors such as power, transportation, and agriculture—is affecting business. Additionally, the prevailing tight monetary policy environment, despite the 50-basis-point rate cut, is limiting credit growth and dampening business expansion plans and overall profitability.
Nigeria has seen a steady decline in inflation to 16.05% in October 2025, from 33.8% a year earlier,124 largely driven by base effects, improved food supply, tight monetary policy, lower fuel prices, and a stable currency. Disinflation is expected to continue, with inflation projected to average 20.6% in 2025 and 12.7% in 2026.125 Upcoming election-related activities could increase money supply, while also undermining some of the progress made in reducing inflation and raising concerns about potential foreign-currency demand and naira volatility.
The Central Bank of Nigeria (CBN) cut its benchmark interest rate by 50 basis points to 27% per annum in September 2025—the first cut in five years—as it continues to address cost-of-living pressures. The CBN’s contractionary policy stance has partly helped to limit the growth in money supply, boost capital inflows, and stabilize the naira.
Despite a projected decrease in inflation, the CBN is expected to maintain its tight policy stance in 2026, as anticipated fiscal pressures next year are likely to prompt cautious monetary policy. This leaves a slim likelihood of further interest-rate cuts in the short term, or at best, modest cuts in 2026.
Nigeria’s external position has improved notably, with gross external reserves rising to over US$44 billion in November 2025—the highest level since September 2019—which covers around eight months of imports.126 The naira has also stabilized between 1,440 and 1,500 per US dollar in the first 11 months of 2025. The naira is expected to remain stable for the rest of 2025 and into 2026. Increased refining activities will help further strengthen net exports and enhance Nigeria’s current account position. However, renewed naira volatility is anticipated in 2026, driven by rising demand pressures and a slowdown in investment flows as elections approach. Soft global oil prices and a major shock to domestic oil output also pose risks to the outlook. As a result, the naira is forecast to weaken to an average of 1,579 per dollar in 2026.127
Nigerians are expected to go to the polls in 2027, but political realignments have already begun and are likely to intensify in 2026. The current government will be judged on the state of the economy and how market reforms affect consumer welfare. 2026 will be a year of uneven halves characterized by defections and potential disputes among leaders as parties decide on their leading candidates.
South Africa
– Hannah Marais
South Africa entered 2025 with optimism, but the first half of the year quickly revealed challenges: a delayed and disputed national budget process, instability within the coalition Government of National Unity, and the imposition of 30% reciprocal tariffs by the United States. These factors contributed to a decline in both business and consumer confidence.
Real GDP growth figures for the first half of 2025 were disappointing, with only 0.1% growth in the first quarter and 0.8% in the second, resulting in a year-on-year increase of just 0.7% for January to June. While eight industries expanded quarter on quarter in Q2, only three—agriculture, forestry and fishing; trade, catering and accommodation; and finance, real estate and business services—showed growth compared with the previous year. On the expenditure side, household and government consumption rose modestly, but gross fixed capital formation (GFCF) declined by 1.4% and exports dropped by 3.2%.128
Many forecast agencies expect South Africa’s real GDP growth to be around 1% in 2025,129 with the National Treasury revising its forecast down to 1.2% for 2025 in November. Thereafter, it expects real GDP growth to reach 1.5% in 2026 and increase to 2% by 2028.130
With some forecasters projecting medium-term growth reaching 2%, the IMF has cautioned that the country is unlikely to exceed 2% real GDP growth before 2030.131 The main constraint is the lack of significant investment, particularly in infrastructure. Although public-sector infrastructure spending has increased, GFCF is expected to decline for a second year in 2025, even as infrastructure remains a policy focus.132
But there are positive developments. Lower demand has led to a subdued inflation environment and improved consumer purchasing power. Since September 2024, the South African Reserve Bank (SARB) has cut the repo rate by a cumulative 150 basis points.133 Consumer price inflation averaged 3.1% from January to September 2025 and is expected to settle at 3.3% for the year, at the lower end of the SARB’s 3% to 6% target band.134 The SARB has signaled a shift to a point target of 3% (with a 1% tolerance band),135 a move confirmed by the minister of finance in the November 2025 Medium-Term Budget Policy Statement (MTBPS).136
With a lower inflation target rate, the SARB expects that the repo rate could fall to 6% by 2027.137 This could support business confidence and consumer activity from 2026, though risks remain, especially in anchoring inflation expectations at 3% given historically higher public-sector inflation.138
Reforms are also progressing. A significant milestone was South Africa’s exit from the Financial Action Task Force “gray list” in October, after implementing a 22-point action plan to address deficiencies in anti–money laundering and counter-terrorism financing. This achievement is expected to lower transaction costs, boost investor confidence, and unlock investment.139
Further momentum in structural reforms is visible in the energy and logistics sectors. The electricity market is being restructured, with the establishment of the South African wholesale electricity market and the continued unbundling of Eskom. The National Transmission Company of South Africa is preparing to operate as a market operator, and a significant pipeline of private renewable energy projects is in development.140 The Independent Transmission Project aims to expand transmission infrastructure by 14,000 kilometers over the next decade.141
Logistics reforms include opening rail networks to private operators and improving port performance. These changes are reversing declines in freight-rail volumes and reducing port congestion, with 200 billion rand in potential investment anticipated over five years.142
Fiscal governance is improving. The MTBPS projects a wider primary surplus for 2025, with tax revenues exceeding estimates. This is attributed to reduced VAT refunds, better commodity prices, and improved collections. The primary surplus is expected to grow from 0.9% of GDP in 2025 to 2026 to 2.5% by 2028 to 2029, while the budget deficit narrows. However, debt-servicing costs still outpace GDP growth, posing long-term risks. Nevertheless, prudent fiscal management and a stabilizing debt-to-GDP ratio (below 78%) could prompt credit-rating upgrades, lower borrowing costs, and restore confidence.143
Despite progress, crime and corruption remain significant obstacles, often undermining trust and deterring investment. Strengthening local government governance will likely need to be an ongoing priority, with the World Bank providing a US$925 million loan to support reforms in eight major cities.144
Externally, South Africa faces global trade uncertainties, especially after the imposition of US reciprocal tariffs effective from Aug. 8, 2025, and the end of the African Growth and Opportunity Act, which have hurt export competitiveness and market access in sectors such as agriculture and manufacturing.145
As 2025 concluded, South Africa’s hosting of the G20 Summit was a diplomatic milestone, offering a platform to showcase reforms and attract investment. The event underscored the country’s commitment to multilateralism and development, both domestically and across Africa. And while persistent challenges remain, the country has seen notable reform momentum and improved fiscal management. Its ability to sustain reforms, anchor inflation, and attract investment will be crucial for breaking out of its low-growth trap and achieving long-term prosperity.
Tanzania
– Tewodros Sisay
Tanzania’s economy continues to demonstrate resilience, with real GDP growth projected at 6% in 2025, increasing to 6.3% in 2026.146 This is driven by strong performance in the transport and trade sub-sectors, which continue to benefit from expanding regional connectivity and rising domestic demand. Agriculture, mining, and construction are also expected to make substantial contributions to growth, driven by higher output, renewed investment activity, and the spillover effects of ongoing infrastructure expansion.147 Nevertheless, the outlook remains subject to downside risks, including disruptions from anti-election protests in October 2025 and reduced agricultural output due to adverse weather conditions.
Government investment in infrastructure has largely driven Tanzania’s increasing public debt—from US$40 billion in 2024 to US$44 billion in 2025 (48.6% of GDP), and it is projected to reach US$46 billion in 2026 (48.4% of GDP).148 Rising debt-service costs and election-related spending could strain public finances. To help address these challenges, the government, with IMF support, is implementing tax reforms to boost revenue. However, the rising debt burden may lead to increased interest payments and place further pressure on economic stability.
In addition, Tanzania is expected to maintain a modest current-account deficit. However, political uncertainty around the 2025 elections may lead to a gradual depreciation of the Tanzanian shilling, with the currency projected to trade at 2,555 per US dollar by the end of 2025 and further weaken by 0.3% to 2,563 per US dollar in 2026.149 While the Bank of Tanzania may intervene to slow the shilling’s decline, such actions could deplete foreign reserves.
Inflation has remained relatively stable, averaging 3.1% in 2024. Nonetheless, rising food prices are anticipated to push inflation to 3.4% by the end of 2025—its highest level since June 2023—before easing to 3.3% in 2026150 as fuel and transport costs decrease due to lower crude oil and global commodity prices. Despite these favorable trends, inflation remains susceptible to global commodity-price changes, geopolitical tensions, and supply chain disruptions linked to climate change.
In response to the moderate inflation environment, lending rates have been declining, falling to 15.2% in 2025 from 15.5% in 2024, with further reductions projected in 2026.151 This trend is largely due to the Bank of Tanzania lowering its benchmark rate from 6.0% to 5.8% in 2025.152 If inflation remains subdued, there is scope for additional rate reductions, potentially reaching 5.5% by the end of 2026.153 Lower lending rates are likely to encourage borrowing and stimulate economic activity, but they may also contribute to further depreciation of the shilling and add to inflationary pressures.