As we start 2026, the economic debate has shifted from crisis management (of high inflation and global tariffs) to structural adjustment. Inflation has come down from its post-pandemic peaks, interest rates are well off their highs, and growth in the US has proved more resilient than many feared.
Beneath this economic stabilisation lies a deeper transformation, driven not by cyclical forces, but by structural changes. It is impossible to write any outlook for 2026 without mentioning AI. Its influence is felt not just in the macroeconomic environment, but in corporate strategy, investment and dealmaking.
Global growth in 2026 is expected to remain modest, around the mid-2% range. The US continues to outperform, supported by flexible labour markets, deep capital pools and faster technology adoption. Europe’s outlook remains constrained by demographics and energy transition costs. The UK sits, mostly uncomfortably, between the two: resilient, but underpowered.
AI, for all the reservations currently being voiced, offers a potential upside to this otherwise subdued growth outlook, particularly in economies able to deploy it at scale. For now, it seems that only the US is really harnessing the benefits. The UK and Europe face a more mixed outlook. While the broader European market has strengths in research, fintech and AI-adjacent services, weak business investment and infrastructure constraints limit diffusion. Without sustained capital investment, AI seems more likely to exacerbate existing productivity gaps rather than close them, with the US the winner once again.
Central banks across the US, UK and Europe remain anchored to 2% inflation targets, despite prolonged periods of overshoot in both the UK and the US, where inflation has remained stubbornly above that target far longer than expected.
This year, inflation should continue to ease, but will not decisively undershoot the target. This matters not only for interest rates, but for the credibility of central banks. As the Federal Reserve approaches a chair transition, amid lingering concerns over political pressure from Washington and a wider perception that central banks are less insulated from the impact of markets than they once were, 2026 could mark a turning point in how independence is tested and perceived.
Monetary policy in 2025 was defined by expectations that ran ahead of reality. Despite widespread forecasts of rate cuts, both the UK and the US delivered less, and the cuts arrived later than markets maybe hoped. Markets enter 2026 still pricing in a gradual easing bias, but with far less conviction than a year ago.
In the US, futures imply modest Federal Reserve cuts of around 50–100bps over the course of 2026, reflecting expectations of slower growth rather than a sharp downturn. In contrast, ECB pricing is far more restrained, with little easing assumed and some commentators suggesting that rates might rise. The Monetary Policy Committee of the Bank of England is expected to deliver 50-75bps of further cuts, but that is heavily dependent on inflation hitting the target level.
AI is reshaping value-creation plans, with companies that can clearly articulate how AI improves margins, resilience or growth – rather than those pursuing it as a generic narrative – the chief beneficiaries.
Corporate dealmaking rebounded in 2025, with global M&A volumes exceeding $4trn in value. At the same time, private equity faced a continued fundraising squeeze and a frayed exit market, with LPs reluctant to commit fresh capital as hold periods lengthened. Fundraising for traditional PE vehicles was meaningfully down, and with dry powder declining from prior highs, GPs found themselves under increased pressure to deploy creatively.
Exits proved ‘challenging’, leading to further surges in continuation funds. Roughly one-fifth of PE sales in 2025 went to continuation vehicles. In addition, there was a marked increase in dividend recapitalisations, as sponsors sought to return cash in the absence of robust trade and IPO exits.
The outlook for this year remains mixed. While lower rates and improved financing conditions may help stimulate dealmaking and broaden exit opportunities, fundraising is likely to stay constrained and alternative liquidity solutions will continue to play a central role in managing legacy portfolios.
M&A and private equity backed deals will become increasingly strategic this year, with AI capabilities acting as a central driver. AI is reshaping value-creation plans, with companies that can clearly articulate how AI improves margins, resilience or growth – rather than those pursuing it as a generic narrative – the chief beneficiaries. AI readiness is likely to become a standard component of due diligence, just as digital capability was a decade earlier.
This year will be defined less by cyclical swings and more by structural choices. Inflation is easing, but not vanquished. Interest rates are falling, but not returning to historic lows. Growth is slow, yet stable. Against this backdrop, AI emerges as a defining force – not as an immediate macro cure, but as a determinant of competitive advantage.
