Goldman Sachs Exchanges: Outlook 2026 | Episode 2: Regional Perspectives

Episode Summary

Executive Summary: Goldman Sachs economists outlined a generally constructive 2026 outlook: the U.S. should grow near 2.5% as tariffs stop worsening, fiscal stimulus boosts demand, and inflation eases; China is expected to grow above consensus despite a deep property slump and weak consumption, supported by manufacturing and export strength; Europe sees modest improvement from German fiscal spending and softer trade tensions, while the U.K. likely gets more BOE cuts as unemployment rises and inflation falls.

Main Topics: U.S. growth outlook and policy mix (Priority: 5/5): The U.S. is expected to sustain solid growth in 2026, helped by front-loaded fiscal stimulus, prior easing in financial conditions, and a likely pause in additional tariff increases. U.S. inflation, Fed cuts, and labor-market risk (Priority: 5/5): Inflation should continue falling and the Fed is expected to cut twice more, but the labor market is the key uncertainty and could force earlier, larger cuts if it softens further. China’s two-speed economy (Priority: 5/5): China faces a large property-sector drag and muted consumption, but manufacturing competitiveness, technology gains, and export growth remain powerful tailwinds. Regional spillovers from China to Asia (Priority: 4/5): China’s export strength creates pressure for other Asian exporters to find niche advantages or rely more on domestic demand. Europe’s cyclical rebound vs. structural weakness (Priority: 4/5): Europe remains constrained by structural issues, but German fiscal expansion, easing trade tensions, and resilient consumption support a modest 2026 pickup. UK outlook and Bank of England easing (Priority: 4/5): The U.K. is expected to see further BOE rate cuts toward a 3% terminal rate as unemployment rises, inflation improves, and policy remains restrictive.

Key Arguments: The U.S. tariff drag is likely mostly a 2025 story; with no further tariff escalation, the effective tariff rate should fall slightly in 2026, limiting growth damage. A large fiscal impulse in the U.S. should add more than 0.5 percentage points to GDP in the first half of 2026 before fading later in the year. Easing financial conditions, especially from the stock market rally, should continue to support U.S. growth gradually. The Fed is likely to converge on two additional 25 bps cuts, landing near 3.0%-3.25%, because inflation is falling while growth stays resilient. The main downside risk for the U.S. is labor-market deterioration, amplified by corporate layoff chatter and AI-driven cost reduction efforts. China’s property slump remains a major drag, cutting nearly 1.5 points from 2026 growth, while household wealth destruction keeps consumption subdued. China’s manufacturing sector has major cost advantages and is gaining global market share, supporting 5%-6% annual export volume growth. Europe’s outlook is better than its structural backdrop suggests because German fiscal spending, lower trade-policy uncertainty, and healthy consumption should offset some weaknesses. The Euro area should grow about 1.3% in 2026, with Spain, Portugal, and Greece remaining relative outperformers. The ECB is likely to stay on hold at 2% unless growth weakens materially or inflation reaccelerates. The BOE is more likely to cut than the ECB because UK unemployment is rising and policy remains restrictive, bringing rates toward a 3% neutral level.

Data Points: U.S. GDP growth forecast: ~2.5% (Q4/Q4) - Goldman Sachs view for 2026 U.S. real growth U.S. tariff increase since Trump took office: ~11 percentage point increase - Cumulative increase referenced as the starting point for the effective tariff rate Expected 2026 effective tariff increase: ~9.5 percentage point increase - Forecast after assuming no further tariff hikes and possible tariff replacement under a capped authority U.S. fiscal impulse: More than 0.5 percentage points of GDP - Expected boost to growth in the first half of 2026 U.S. household budget impact from tax cuts: $100 billion - Estimated federal tax-cut support in the first half of the year Fed cuts expected: 2 cuts of 25 bps each - Forecast for the Fed funds rate to move toward 3.0%-3.25% Fed funds rate stopping point forecast: 3.0% to 3.25% - Expected compromise outcome for the FOMC China GDP growth forecast: 4.8% - Goldman Sachs forecast for 2026, above consensus China property-sector drag in 2025: Almost 2 percentage points - Estimated impact on Chinese GDP growth through housing and related channels China property-sector drag in 2026: Almost 1.5 percentage points - Expected to remain material though smaller than in 2025 House price decline in China: 25% to 30% - Decline cited as a major hit to household balance sheets Household wealth share in housing: About two-thirds - Housing’s share of household wealth in China Chinese household savings rate: Above 30% - Official data showing high precautionary saving Chinese household deposits: Around 100 trillion RMB - Large pool of excess household deposits Chinese export volume growth outlook: 5% to 6% annually - Expected growth in coming years from competitive manufacturing Cost advantage in Chinese mid- to high-tech sectors: 20% to 40% - Equity analysts’ estimate versus key global competitors Japan real GDP growth forecast: Just under 1% - Expected 2026 growth, steady but modest Bank of Japan policy rate: 0.75% - Highest level in 30 years after a recent hike Japanese government bond yields: Around 2% - Noted as above China government bond yields Euro area growth forecast: 1.3% - Goldman Sachs 2026 forecast, slightly above consensus German public spending increase: About 2% of GDP - Expected rise over the next couple of years ECB policy rate: 2% - Expected to remain on hold through the year UK Bank Rate forecast: 3.75% to 3.0% - Expected path for BOE easing in 2026 UK unemployment change: Up about 1 percentage point over the last year - Used to support the case for BOE cuts

Pivotal Quotes: "Our forecast is that FOMC participants will compromise by meeting in the middle at about three to three and a quarter." — David Miracle: On the likely Fed stopping point after inflation cools and growth remains solid "The biggest tailwind, in our view, is the extraordinarily competitive manufacturing sector." — Andrew Tilton: On why China can keep outperforming despite property and consumption weakness "We think the hurdle here is a little higher, and it would really require demand-led inflation in services and wages to be moving up for them to hike." — Yari Stein: On why the ECB is likely to stay on hold rather than tighten

Implications: Investors should expect a mixed but broadly supportive global backdrop in 2026: U.S. growth remains resilient, China stays export-led, Europe improves modestly, and the U.K. eases further. The key watchpoint is labor-market weakness, especially in the U.S. and UK.