January monthly market update 2026

The US economy is set to enter 2026 with growth supported by strong investment, easing monetary policy and resilient domestic demand.

Where is the US economy heading in 2026?

Despite a turbulent year since President Donald Trump's return to the White House and his attempt to reshape world trade, recent growth has exceeded most analysts’ expectations. After modest expansion in the first half of 2025, output accelerated in the third quarter, rising at an annualised rate of 4.3%.

Consumer spending remained strong, rising by 3.5% in the third quarter after a 2.5% increase in the second. Increases in exports and government spending have also helped boost growth.

The US economy is expected to maintain positive, but moderating, momentum in 2026, driven by strong AI-related investment and consumer spending. Capital expenditures on AI infrastructure is expected to continue boosting business investment and potentially enhance long-term productivity.

However, consumer spending, the backbone of the US economy, is expected to decline in 2026. A softening labour market may also dampen growth. The Fed’s recent downward rate path has helped stimulate the economy, but most experts are forecasting only one to two cuts this year. Inflation is also forecast to stay above target.

While the worst of the recent trade tensions may have passed for now, tariffs continue to pose a risk. These could yet rekindle inflationary pressures, as businesses start passing the additional tariff costs on to consumers.

Forecasters have mixed views on the direction of US growth in 2026. The Organisation for Economic Co-operation and Development (OECD) is relatively downbeat on the US economy, expecting growth to be 1.7% in 2026. It expects a slowdown in net immigration, tariffs finally feeding through to prices, and cuts to government spending to all weigh on output. Meanwhile, the International Monetary Fund (IMF) expects the US economy to post stronger growth of 2.1% this year.

What's next for interest rates?

Leading economies are expected to end their rate-cutting cycles by the end of 2026, according to the OECD. Forecasts suggest most central banks have little room for looser monetary policy despite an expected slowdown in growth.The US Federal Reserve (Fed) cut interest rates three times in 2025.

It lowered rates by a quarter percentage point in September, October and December, bringing the benchmark rate down to a range of between 3.5% to 3.75%.

The Fed is currently being pulled in two directions. US inflation remains elevated, which explains why Fed policymakers have been reluctant to approve rate cuts. At the same time, a weakening labour market and rising unemployment require rate cuts to help boost the economy.

Most policymakers at the Fed see at least one more rate cut in 2026 and one in 2027. This is below market expectations, which see two cuts for the Fed this year.

The Bank of England cut rates to 3.75% from 4% in December, taking borrowing rates to their lowest in three years. After a narrow vote by policymakers, it signalled that the already gradual pace of lowering borrowing costs might slow further.

Markets believe that another cut will arrive in the first half of 2026, taking the rate down to 3.5%. Beyond this the picture remains uncertain, but falling inflation has increased the odds of another.

With growth expected to modestly increase, most economists expect the European Central Bank (ECB) to keep borrowing unchanged throughout 2026, barring an economic shock. Meanwhile, Bank of Japan Governor Kazuo Ueda has said that the central bank will raise interest rates if wages, growth, and inflation continue to move in line with its forecasts. Canada is also expected to keep interest rates on hold.

Is the Eurozone economy about to turn a corner?

Despite ongoing headwinds, the eurozone economy has proved more resilient than expected. Activity is showing signs of improvement and stability, with forecasts pointing to steady, modest growth in 2026, driven largely by Poland and Spain.

Recent growth figures have exceeded expectations, prompting the ECB to lift its outlook once again. The central bank forecasts the region’s output at 1.4% in 2025, up from a previous estimate of 1.2%.

Business activity in the eurozone is expanding, bolstered by a robust service sector that has more than offset weakness in the manufacturing sector. Industrial activity remains weak, but is gaining momentum. Energy costs are still a competitive drawback, though less so than before as oil and gas prices have fallen. Construction is also starting to recover.

Inflation has been hovering around 2% and is expected to fall below target this year, while wage growth is moderating and energy prices are declining. Meanwhile, the labour market remains strong, with near-record low unemployment.

The German government’s planned increase in spending on defence and infrastructure after lifting the debt brake is also expected to provide further economic stimulus.

The region has proved resilient in the face of rising tariffs from the US, despite initial uncertainty. While tariffs posed challenges, a new EU-US trade deal helped stabilise things, with growth expected to gradually improve this year.

Looking ahead

Markets faced fresh geopolitical risk after the US capture of Venezuelan President Nicolas Maduro. Global equity and bond markets took the events in their stride as investors mostly shrugged off the impact. Trump said US oil companies were ready to spend billions to revive Venezuela’s oil output, but experts have warned it could take years to get the country’s oil industry back up and running.

The Fed is widely expected to hold rates steady at its January meeting. There is also concern about the incoming replacement for Fed Chair Jerome Powell when his term expires in May. It is expected that nominees will favour rate reductions pushed by Trump, setting up conflict with the committee, which would prefer to keep rates at current levels.

UK unemployment could climb to an 11-year high in 2026, according to a survey of economists by The Times. Amid a labour market weakened by the chancellor’s £25bn payroll tax increase and slow consumer spending since the pandemic, 67% said unemployment would stand between 5% and 5.5% by the end of 2026.