Quarterly Economic Outlook: First quarter 2026

Summary

Uncertainty remains a pervasive issue globally. Whereas it had seemed like some tariff-related uncertainty was lessening with the conclusion of various trade agreements, more recent events have thrown some of these into doubt. In addition to trade policy, geopolitical events have resurfaced as a source of potential instability. A number of sources of potential economic policy concern in major economies have also surfaced.

Our core theme of “global rewiring”—including improving emerging market (EM) fundamentals, US dollar (USD) weakening and geopolitically-induced shifts in global supply chains—remains supported by more recent developments.

Economic and market prospects

Where we stand now: The change in tariff and trade policy from the United States, following President Donald Trump’s re-election to a second term starting in January 2025, was possibly the most significant shift in the global economic landscape for some time. While initial growth and inflation outcomes performed better than some of the more pessimistic initial expectations, reverberations from the policy change are still evident and, as illustrated by events in January 2026, the situation remains fluid. In addition to economic outcomes, geopolitical events, too, have been a renewed source of uncertainty. The recent capture of former President Nicolas Maduro in Venezuela by the United States has raised some concerns about possible further unilateral actions around the globe. The Trump administration’s attempts to bring Greenland under US control have further exacerbated geopolitical uncertainty, including shifting statements on what kind of policies the administration might employ to try to bring about its goals. The situation thus remains very fluid. In the Middle East, protests in Iran were notable; oil prices have risen in their wake but remain below the peaks seen in 2025.

Geopolitical considerations continue to be significant in the trade agreement sphere. The US administration’s stance over Greenland (and threats about increased tariffs over the issue) have had direct outcomes in this regard. The European Union (EU) has indefinitely paused its ratification of the trade agreement with the United States. Canadian Prime Minister Mark Carney’s speech at the World Economic Forum in Davos linked US attempts at economic pressure to Canada’s efforts to enter agreements with a number of other trading partners. Trade tensions also remain fraught with China. We also see opportunities for various countries against this background, including a number of EMs that can take advantage of changes in supply chains and trading relationships and step into the gaps. 

Strategy and portfolio positioning

Diverging inflation and interest rate outcomes around the globe imply divergence in asset performance and underscore the need for careful country-by-country analysis to discern trends and position appropriately.

Tariff policy is changing trade patterns; in this sense, rewiring means that globalization is still proceeding, but in a different way from the past couple of decades. We are seeing bilateral and multilateral trade agreements between EMs and between non-US developed nations and EMs. In other words, the trend of deepening global trade networks mostly remains in place, but even as the United States concludes more of its own deals, we see a tendency for other agreements to exclude it; a recent example here is the agreement between Canada and China slashing tariffs on electric vehicles and canola. Nevertheless, trade volumes overall are suffering in the new environment. The IMF expects world trade volume growth to decline from 4.1% in 2025 to 2.6% in 2026, before rebounding slightly to 3.1% in 2027. These dynamics reflect patterns of front-loading and trade flow adjustments to new policies.

While there are risks for EMs arising from the US tariff and policy outlook, we think the asset class in general remains more resilient and robust. Sounder policies and reforms in a number of EMs have led to improved economic fundamentals, as illustrated by their resilience against repeated stresses of the past few years (including the pandemic and the rising US interest rate cycle). They are also less directly exposed now to trade with the developed world than a couple of decades ago. Furthermore, we expect various EMs to benefit from reshoring initiatives. Thus, while tariffs will undoubtedly have some cost for EMs, we also believe that many EM countries are well-positioned to navigate this new environment. In addition, we expect that the deteriorating relationship between the United States and China will open up opportunities for other EMs. As the face of global trade shifts more toward regional and bilateral relationships, aimed at ensuring security in supply chains and ensuring security between allies, those EMs that can pivot to align with these objectives should benefit from the global trade rewiring currently underway. In general, we think the imposition of tariffs should further underpin the current global trend of regionalization and reshoring. We closely monitor idiosyncratic factors in different countries, noting that while some will benefit, others have become more vulnerable to weaker fundamentals and/or the effects of changing US policy.