Will 2026 be worse for the world economy?

 Gita Gopinath, Harvard prof and former Deputy MD of IMF, thinks it will.

She gives her reasoning:

So why hasn’t the world felt the sting of tariffs yet? The answer lies partly in actual tariffs being around half of what the US announced thanks to numerous exemptions. Yet at 14 per cent this remains a sharp escalation, the consequences of which had two offsets. First, AI spending and the stock market surge powered by AI optimism have propped up US growth and buoyed economies like Taiwan and South Korea that export AI-related goods. Second, fiscal policy has been more expansionary, not only in the US, but even more so in Germany and China. These forces masked the drag from American tariffs and Chinese retaliation. They also made 2025 look far more stable than it actually was. 

These favourable factors will not operate in 2026, she says. The AI boom is not sustainable. Importers cannot absorb 95 per cent of the higher costs, as they did in 2025. China cannot continue with its export-led strategy. The EU needs deep reforms that aren't happening.

Well, we'll see. Current inflation forecasts do not show a marked increase in inflation in the US for 2026. Stock market valuations for AI companies may get corrected but investment in AI is proceeding apace, particularly on the part of tech companies with large hoards of cash. China has diversified its exports away from the US and is growing exports to low-income countries at a much higher rate than before.

The thing is that many economists and commentators don't like the Trump administration. They want it to fail with its economic policy reset which includes protectionism, Buy American, Hire American etc. They disapprove of the massive fiscal deficit implied by Trump's Big Beautiful Bill for taxes passed last year.

It's not just that the real economy was not impacted as badly as experts had forecast- Gopinath's explanations may hold for the  real economy. But what about financial markets which are said to be forward looking? They should be factoring in the implications for next year and the years ahead? 

The aren't. Neither the US stock market nor the US bond market reacted anywhere as harshly as the commentators had forecast in 2025. Okay, stock market valuations may be influenced by AI stocks. But why have bond market yields hardly budged? 

2026 could be the year of reckoning for the experts and not President Trump!  

 

 

Anti-Indian rhetoric hits US firms

American firms are beginning to feel the impact of the anti-Indian rhetoric now current in the Maga community, says an FT report. 

FedEx CEO, Raj Subramaniam, faces charges of laying off  American workers and replacing them with lower-cost Indian workers. Walmart, Verizon and Dish Network are among the other companies targeted by those who believe the H 1-B visa has been misused to let in low-cost Indian workers. There is also a clamour to kick out Green Card holders of Indian origin.

The rise to prominence of Indians in the American corporate world is clearly evoking a backlash. Indians are also prominent in educational institutions: an estimated 60 or more schools have Indians as dean. At HBS and Stern School, Indian succeeded Indian as dean. The hard work and success of Indians in the US, once touted as a tribute to American society, is beginning to now working to the detriment of the Indian community.

Unfortunately, negativity towards Indians in the US seems to be spilling over into US policy stance towards India. 

Experts got it wrong in 2025!

My latest piece in BS on some of the great misses of forecasters in 2025. Which, of course, means you have take the forecasts for 2026 with more than the proverbial pinch of salt.

Pundits stumbled badly in 2025

A New Year has begun. With it come forecasts for what we might expect this year. We need to view these forecasts with more than ordinary scepticism. 

Forecasters, in general, have a terrible record; in 2025, they stumbled badly in multiple areas. Just look at what the pundits —economists, military analysts, foreign policy experts and others —predicted during the year or what they failed to foresee. What follows is a limited sample.

Trump’s tariffs and US economic growth

Last April, the International Monetary Fund (IMF) forecast growth of 1.8 per cent for the United States’ gross domestic product (GDP) in 2025 and 1.6 per cent in 2026, down from 2.8 per cent in 2024. Last October, it revised its forecasts to 2.0 per cent and 2.1 per cent, respectively. As everybody now acknowledges, the apocalypse that was forecast for the US ain’t happening.

 Economists are now trying to explain away their misses. The increase in tariffs has not been as high as feared earlier — as though an increase in the weighted average tariff from just under 3 per cent to around 17 per cent is not bad enough. Exporters frontloaded their exports to the US —surely, this should have been anticipated and built into forecasts? The artificial intelligence (AI) boom has obscured weaknesses in the economy —well, US GDP growth of 4.3 per cent in the third quarter of 2025 was driven by consumer spending and exports, not business investment. 

 The real shocker for economists is that the setbacks to the US economy as a result of Donald Trump’s tariffs don’t seem to be materialising in 2026 either, going by current forecasts. Goldman Sachs forecasts US GDP growth of 2.8 per cent for 2026!

India’s GDP growth in FY26

President Trump announced his Liberation Day tariffs last April, with a “reciprocal tariff” of 25 per cent on India. In August, he slapped an additional 25 per cent punitive tariff in response to India’s imports of oil from Russia. Last April, the Reserve Bank of India revised its gdp growth forecast for FY26 downwards to 6.5 per cent from the 6.7 per cent forecast earlier. Following the punitive tariff of August 2025, some private agencies said India’s GDP growth could fall below 6 per cent.

Nobody could have imagined that in a year in which Indian exports to the US faced tariffs of over 50 per cent for more than half the financial year, India’s GDP growth would be 7.4 per cent, higher than the previous year’s 6.5 per cent. Now, many agencies see growth momentum being maintained in FY27 at 7-7.5 per cent. 

Note that no economist or agency had given India any chance of attaining growth of over 7 per cent over a four- or five-year period without it meeting the well-known laundry list of reforms: A fiscal deficit close to 3.3 per cent, privatisation, speedier land acquisition, an overhaul of agricultural laws, hire and fire on a much bigger scale than even the latest labour Codes promise, among others. 

Anti-Indian sentiment in the US

When Mr Trump won the elections in 2024, it was assumed that the India- US relationship would move to an even higher trajectory. The way the relationship has unfolded since has come as a shock to the establishment.   

Pundits used to say that, whatever the equations between the two governments at any point, the people-to-people relationship between India and the US was an underlying positive. That no longer seems true. It appears that that anti-India sentiment in the Trump administration is an aspect of a wider anti-Indian sentiment in the Maga (Make America Great Again) community.  

Several elements have contributed to the souring of sentiments towards Indians.  The misuse of H-1B visas intended for highly skilled persons to ferret out low-cost labour is one factor. The very success of Indians in different walks of life is another: On social media, Americans ask whether the US needs Indians to head corporations such as Microsoft, Google and IBM; and whether a Vivek Ramaswamy is American enough to run for high office Non-resident Indians flaunting their religiosity has evoked angry responses: An 85-foot statue of Hanuman in Texas, the noisy celebrations of Indian festivals in prominent suburbs, etc.  No pundit saw the negativity towards India or the Indian community in the US coming.

Pakistan’s resurgence on the international stage

Pakistan was in the doghouse when Mr Trump returned to office last January. Its resurgence in the world of diplomacy in 2025 was truly remarkable.  

 Following the Pahalgam massacre and the Indo-Pak skirmish of last May, Pakistan did not quite draw any international condemnation. On the contrary, it used the skirmish to restore itself in Mr Trump’s favour by, among other things, repeatedly giving Mr Trump credit for bringing the hostilities to an end. Thereafter, Pakistan’s army chief, General Asam Munir, was welcomed twice to the White House, perhaps a unique first for any serving general. 

In late 2025, the US approved a $686 million package for Pakistan for maintenance of F-16 aircraft sustainment and upgrades of F-16 aircraft. Pakistan also signed a mutual defence pact with Saudi Arabia, something that could not have happened without Washington’s blessings. Pakistan’s Prime Minister Shehbaz Sharif claims with some justification that Pakistan is on good terms with three major powers, namely, China, Russia and the US. The turnaround in Pakistan’s international standing has left foreign policy experts bewildered.

Israel’s dominance of West Asia 

 On October 7, 2023, Hamas launched a surprise attack on Israel. A brutal response from Israel followed. In late 2024, Israel extended its operations in a bigger way in Lebanon. Commentators warned that Hezbollah was not Hamas; it had more than 100,000 missiles at its disposal and had the capacity to raze Israel’s cities. PM Benjamin Netanyahu was leading Israel towards disaster. 

 What the pundits did not know was that Israel had accumulated intelligence on Hezbollah hideouts for its personnel as well as its missiles. Israel proceeded to decapitate the Hezbollah leadership and decimate 80 per cent of Hezbollah’s missile capabilities. The militia is today a pale shadow of its former self. 

 In December 2024, a new front opened in Syria with a rebel outfit moving to topple the Assad regime in days, with the help of Israel and Türkiye. Last June, Israel and the US attacked and substantially incapacitated Iran’s nuclear facilities. Pundits, who had warned that Israel’s PM Netanyahu had over-extended himself, had to eat their words. Israel’s dominance of West Asia increased in 2025. 

There is no dearth of forecasts for 2026. The Epstein files will prove Mr Trump’s undoing (perhaps already proved wrong). Venezuela will turn out to be Mr Trump’s quagmire (looking dicey even now). The Republican Party will lose badly in this year’s US polls, the AI bubble will burst, the full effect of tariffs on inflation in the US will be felt in 2026 (hmmm).  

In Intellectuals, a lengthy diatribe against the cerebral types, historian Paul Johnson writes, “A dozen people picked at random on the street are at least as likely to offer sensible views on moral and political matters as a cross-section of the intelligentsia…. beware intellectuals.” For “intellectuals” one might well substitute “experts”.

 

                   

US third quarter growth stumps analysts

 The US economy grew at 4.3 per cent in the third quarter on top of the 3.8 per cent growth in the second quarter.

And no, it's not fuelled entirely by AI investment. Consumer spending and exports contributed significantly to the surge. Nevertheless, the index of consumer confidence tracked by the Conference Board is at its lowest since President Trump announced his Liberation Day tariffs! 

Let the pundits figure out whether the gdp growth data is misleading or whether the consumer confidence index is flawed. President Trump is entitled to his moment of exulting:

The TARIFFS are responsible for the GREAT USA Economic Numbers JUST ANNOUNCED…AND THEY WILL ONLY GET BETTER!

India's ambitious plans for its navy

I have said this before: very often, you have to look to western media for serious news about India.

FT has a fascinating story on how India's plans to beef up the navy to cope with China's expansion in the Indian ocean.

The statistics are impressive. About  66 per cent of the world's oil supply of 50 per cent of container traffic passes. An estimated 95 per cent of India's own trade happens via the Indian Ocean. For China, 95 per cent of its $6 trillion trade is sea borne and most of its passes through the Indian Ocean.

India wants a powerful navy that will safeguard its maritime interests and act as a powerful level in the event of tensions with China.

Thus far, India has fallen behind on plans for the navy:

Few things capture India’s sluggish modernisation of its navy better than its vacillating plan to build up its submarine fleet. In 1999 New Delhi laid out a blueprint for building 24 new submarines over 30 years, to add to its existing fleet.  But 25 years later, only six have been built, meaning India has less than half the planned number of new conventional submarines. It has two nuclear ballistic submarines, though two more are under construction, and last year it decided to build two nuclear attack submarines, and will lease one from Russia. Of the 17 conventional submarines, 11 are over 25 years old.   

It is now making up for lost time:

India has 55 ships under construction at an approximate cost of Rs1tn ($11bn). The navy has got the government’s nod to build another 64 and hopes to get a third aircraft carrier — the second to be built within the country — but has not got a green light from the government yet. 

There is now way India can match China's naval capability: China boasts of some 250 ships at the moment and is still building frantically.

India's naval strategy, the article indicates, hinges on a few key elements.

First, China can deploy only 35 per cent of its naval assets in the Indian Ocean, so India needs to have only 1 ship for every three that China has. Secondly, India will use airbases in Mauritius and Seychelles as a counterweight to China. Thirdly, India is fortifying its position in the Nicobar islands which is close to the Malacca Straits through which 80 per cent of China's sea traffic passes.

Experts are clear about one thing. The Indian navy will strictly defend Indian interest, it will not be drawn into the conflicts of others, such as a confrontation between China and the West over Taiwan.

A paradigm shift in US economic policy in 2025

 

America’s economic policy changed in four ways in 2025.

·    -  The Trump administration effectively ended the free trade regime

·      - It revamped immigration policy to make it far more restrictive

·      -   It withdrew from the Paris Agreement on climate change

·     -    It passed a tax bill that ensures that America’s public debt remains at a high level in the foreseeable future, if not at a record level

To me, the astonishing thing is that these dramatic shifts have failed thus far to unsettle the world economy or the financial markets. Analysts have been coming up with numerous explanations for why this is so- after predicting economic apocalypse.

In 2025, we will know who was right: Mr Trump or the pundits.

More in my article in Business Standard.

 

Four US economic policy shifts of 2025 

 

In 2025, the world saw one tectonic shift in US economic policy and at least three others that are consequential. These shifts will not be easy to reverse even if there is a change in administration in the United States (US) down the road. How exactly they will impact the US and the world is unclear at the moment. What is clear is that the rest of the world will have to adjust to them.

First, the tectonic shift. The US under President Donald Trump has decisively upended the free trade regime that has underpinned the world economy for decades.  The world has to live with a US base tariff level of 10 per cent plus an element that will vary from country to country and from time to time, depending on how the US perceives its trade relationship with that country. 

This will be reinforced by even higher tariffs for sectors, such as steel and aluminium, which are perceived to be of strategic importance to the US economy. The weighted average tariff under President Trump has risen from below 3 per cent to around 19 per cent.

 During the year, major nations settled for deals with the US that are hopelessly one-sided. The European Union (EU), for instance, faces a tariff of 15 per cent (with higher tariffs on steel and aluminium) while US exports to the US EU face zero tariff. For the privilege of doing business with the US, the EU has committed to spending an additional $750 billion on US energy products (over three years), investing $600 billion in America, and buying US military equipment worth “hundreds of billions of dollars”. 

Japan too will face a baseline tariff of 15 per cent and will invest $550 billion in the US. The United Kingdom gets away with a tariff of 10 per cent because of the “special relationship” with the US.  China has secured a one-year truce with the US that allows tariffs to settle at a staggering 47 per cent for one year. In return, China has agreed to lift restrictions on export of rare earths to the US and buy more soyabean from the US. 

Switzerland was hit with a tariff of 39 per cent. Its President rushed to the US to negotiate a lower tariff but was rebuffed. Two months later, the US agreed to reduce tariffs to 15 per cent in return for $200 billion investment from the Swiss. India’s refusal to be rushed into a trade deal looks very brave in comparison with the abject surrender of nations that are incomparably richer.

The second shift has to do with immigration policy. The US administration has clamped down on border crossings, deported thousands of illegal immigrants, paused asylum applications, and attempted to limit birthright citizenship. 

Kevin Hassett, one of Mr Trump’s economic advisers and now a frontrunner for the post of Chairman of the Federal Reserve, has argued that the issue is the quality of immigration. He notes that the United States admits only 12 per cent of its immigrants on the basis of employment and skills, whereas 63 per cent of those admitted by Canada and 68 per cent of those admitted by Australia are selected for the skills they bring to these countries.

Mr Trump himself has lately spoken of the importance of H1B visas and foreign students in US universities. But the National Security Strategy document released by the White House recently makes the basic stance clear: “The era of mass migration is over”. There will be no retreat from the view that migration strains domestic resources, undermines social cohesion and threatens national security. 

A third shift is the Trump administration’s rejection of climate change and green energy as priorities. One of Mr Trump’s first acts after taking over as President in January 2025 was to withdraw from the Paris Agreement that committed all signatories to time-bound emission reduction plans. Mr Trump often calls climate change a “hoax” or a “con job”, renewable energy a “joke” and talks of “clean, beautiful coal”. 

The Trump administration is actively working to dismantle subsidies for renewable energy and electric vehicles, instead opening up more land and waters for oil drilling — “drill, baby, drill” is the motto.  The National Security Strategy document declares emphatically, “We reject the disastrous ‘climate change’ and ‘Net Zero’ ideologies that have so greatly harmed Europe, threaten the United States, and subsidize our adversaries.”

Mr Trump’s actions will mean higher costs for the rest of the world in battling climate change. It will also mean fewer resources with which to battle it as the Trump administration axes billions of dollars that support climate change projects. It could result in other nations withdrawing from the Paris Agreement as they view the burdens imposed on them as unfair.

A fourth shift is the rise in the level of public debt in the US as well as in other advanced countries. Public debt in the US and other advanced countries has risen relentlessly since the global financial crisis of 2007, and had averaged 104 per cent of gross domestic product (GDP) even before the pandemic struck in 2020. Mr Trump passed his Big Beautiful Bill that retained the tax cuts of Trump-1 and boosted defence expenditure. The International Monetary Fund projects US government debt to rise from 122 per cent of GDP in 2024 to 143 per cent by 2030. The corresponding figures for advanced economy debt are 109 per cent and 119 per cent, respectively.  

Commentators worry that rising public debt in advanced countries poses a threat to macroeconomic instability in the global economy. Mr Trump’s economic advisors, however, believe that faster economic growth, tariff revenues and lower interest rates will cause government debt to fall to 94 per cent by 2034. That is one forecast that will be watched closely. But clearly, the dogma about the unsustainability of high levels of public debt that advanced countries preached to the developing world has gone out of the window.

As the year draws to a close, the astonishing thing is that these massive shifts in economic policy have thus far failed to seriously unsettle the US economy or the world economy or the financial markets. The IMF projects growth in the world economy for 2025 at 3.2 per cent, just 20 basis points below last year’s. The US will grow at 2 per cent, compared to 2.8 per cent last year. US inflation is running at 2.8 per cent, which is way below what was feared following Mr Trump’s Liberation Day announcements. 

The US equity market touched an all-time high during the year, with a return of 13 per cent over the year. The yield on the one-year G-Sec in the US is a full 50 basis points below its level when Mr Trump assumed office. Pundits, who predicted economic apocalypse, are trying to find reasons why their forecasts went wrong. 

Has the moment of reckoning been merely deferred? Or is Mr Trump on to something? We should know for sure in 2026. 

 

US National Security Strategy document is hawkish on China and soft on India

The US National Security Strategy document was released a few days ago by the White House. I read media reports that said the document regarded China merely as an economic competitor, not an existential threat. And that India did not seem to matter.

The reports are wrong. The report is  hawkish on China and - this will gladden Indian hearts- it does see India as a counter-weight to China in the region.

Let me first highlight the positions the document takes with respect to China:

1. China has emerged as a threat to the rules-based international order.

President Trump single-handedly reversed more than three decades of mistaken American assumptions about China: namely, that by opening our markets to China, encouraging American business to invest in China, and outsourcing our manufacturing to China, we would facilitate China’s entry into the so-called “rulesbased international order.” This did not happen. 

2. No change in the US policy of preserving Taiwan's independence

 Given that one-third of global shipping  passes annually through the South China Sea, this has major implications for the U.S. economy. Hence deterring a conflict over Taiwan, ideally by preservingmilitary overmatch, is a priority. We will also maintain our longstanding declaratory policy on Taiwan, meaning that the United States does not support any unilateral change to the status quo in the Taiwan Strait.

2. Restrictions on trade with China will continue, both through tariffs and through export controls.

Since the Chinese economy reopened to the world in 1979, commercial relations between our two countries have been and remain fundamentally unbalanced. .......Going forward, we will rebalance America’s economic relationship with China, prioritizing reciprocity and fairness to restore American economic independence.Trade with China should be balanced and focused on non-sensitive factors.

 If that is not hawkish, I don't know what is.

The tone towards India is distinctly friendly.  

1. India remains an important partner in preventing  China's dominance in the Indo-Pacific region.

We must continue to improve commercial (and other) relations with India to encourage New Delhi to contribute to Indo-Pacific security, including through continued quadrilateral cooperation with Australia, Japan, and the United States (“the Quad”).

2. The economic partnership with India too is important 

President Trump’s May 2025 state visits to Persian Gulf countries demonstrated the power and appeal of American technology. There, the President won the Gulf States’ support for America’s superior AI technology, deepening our partnerships. America should similarly enlist our European and Asian allies and partners, including India, to cement and improve our joint positions in the Western  Hemisphere and, with regard to critical minerals, in Africa.

Not exactly effusive about India but friendly in tone. At least India is spared the harsh comments the document for America's allies in Europe. 

Key Supreme Court rulings awaited in the US

 In the months ahead, the US Supreme Court will pronounce on some truly important matters:

i. Trump tariffs: Is President Trump justified in using emergency powers to impose tariffs? Or is that the remit of the US Congress? If the Court rules against the Trump adminstration, the US  government will have to return billions in tariffs imposed so far. Legal experts say the President has recourse to several statutes for imposing tariffs, so he will prevail even if the Court rules against him.

ii. Birthright citizenship: Does being born in the US confer citizenship automatically? The Trump administration says it doesn't apply to illegal immigrants nor children born of those temporarily visiting the US.

iii. Can Trump fire officials of the Federal Reserve?: Trump fired Fed Governor Lisa Cook on the ground that she had committed mortgage fraud without such fraud being proved in a court of law.  A lower court judge blocked the order. The administration then sought to prevent Cook from attending office until the case was decided but the US Court of Appeals ruled against it. The Court has indicated that it is inclined to treat the Fed differently from other government agencies that enjoy autonomy.