Eric Lascelles, Managing Director, Chief Economist and Head of Investment Strategy Research:

What countries are expected to lead in economic growth over the next few years?

When we look at the economic outlook over the next few years, we're broadly fairly constructive. And so that is to say, we do see some important tailwinds. And of course, central banks have been cutting rates and there's a lagged benefit that accrues from that. And quite a number of countries are delivering fiscal stimulus, in some cases intentionally, in some cases as they build their militaries and so on.

And so, from that perspective and larding on some artificial intelligence type productivity gains that we think are starting to appear, we do believe the next few years can be fairly good in an aggregate sense. Now, when comparing emerging markets to developed markets and acknowledging massive, variation within each of those pools, we do think emerging markets can continue to outgrow and from a market perspective, perhaps a fairly attractive place to be on the equity side as well.

China is perhaps not in a perfect position right now. It's, in fact, stumbled a little bit recently, but we still think from a medium-term standpoint, there are exciting things happening there, including quite a lot of innovation going on. And so, still constructive even if growth may just be in the mid-fours for 2026. Just a small aside would be quite remarkably, it does appear that sub-Saharan Africa is set to potentially outgrow much of Asia.

And so that is not the normal state of affairs. And it does speak to the fact that a part of the world that maybe doesn't get its just attention is moving fairly quickly as well. And so just to flag that, even if many of those markets are still in the frontier, as opposed to the emerging space. And then pivoting to the developed world. Well, the U.S., we think, is becoming a bit less exceptional, but it is still seemingly on track for some pretty good growth and has some capital expenditures that are quite large coming from some of its hyperscalers and so on.

But maybe a smaller lead versus many of the other developed peers. And so broadly, we think a lot of those tailwinds are relevant for many of the developed countries out there. We have reasonably positive outlooks for each of Japan and the eurozone, and also for the UK. And when we turn to Canada. Obviously, some challenges there, and there is still a lot of trade policy uncertainty.

And similarly, we can say that without any real population growth, there is a certain cap on how fast you might realistically expect that economy to grow. But in the end, we think there's room for some acceleration over the second half of this year. And we believe in the end, it's an economy that can probably grow not too far from its potential over the next year.

Are we starting to see the effects of AI in the economy?

Artificial intelligence is becoming increasingly visible, we think, in the economic data. And so part of that is just that stock markets have gone up so remarkably in recent years, in part on excitement about AI, that there's a lot of wealth sloshing around. And we think that's somewhat supportive of consumer spending in the years ahead. More directly, though, there is a huge amount of money being spent to build out data centers and to develop these large language models.

And so, we are seeing capital expenditures that are surging, particularly in the U.S., to a lesser extent in China. But we think providing a material addition to economic growth, both in 2025 and looking forward, in 2026 as well. So that's absolutely visible in the data. A bit more speculative is whether we're getting productivity benefits already. That is sort of the goal of all of this AI innovation, and it seems reasonable to expect it over the long run. But we think we're starting to see it already. So we have increased our forecast to reflect that. Right now, we think even over the last year, perhaps the U.S. data benefited somewhat from that. And so that's a key element.

There are some concerns, on the other hand, about AI and the extent to which it displaces labour. And so we've seen, I would say, targeted and small-scale job losses. And that's not unusual with any new technology. The question is whether those people are able to find equal jobs or better jobs elsewhere in the economy. And it's a bit of an open question right now, but there have been some effects visible there.

Similarly, we are seeing investors and markets become a bit more discerning, and recognizing as much as maybe there are more winners than losers in the so-called AI trade. There are some losers, though. And so, some sectors are being somewhat disrupted. Software has attracted particular attention as one which these models are very good at coding in particular.

And so, there are some winners and losers. I think maybe the other theme that's come to the fore recently is one simply of concern that AI is moving so quickly that it could displace large numbers of workers and create big problems for business sectors and so on. In fairness, it really is an open question. We don't know exactly where this will go.

I would give at least two partial counter points though. One would be if we do find ourselves trending in a direction where businesses would like to lay off large numbers of workers and so on, governments can step in and tax AI, tax compute, make it a bit less attractive to completely displace your workforce, raise some funds to retrain workers or compensate workers.

And so it's not automatic that this veers in a purely negative direction, even if it is a remarkably powerful form of AI. And then the other thought is just it's not obvious that AI will get to that point. Most big, technological changes have been disruptive but ultimately haven’t permanently displaced labour, and we could still be on that sort of path as well.

How have U.S. tariffs reshaped global trade?

Tariffs certainly are visible in the economic data. And to the extent the U.S. was the main actor imposing tariffs, it's clear that some elements of the U.S. economy are weaker than they would have been as a result of that. Inflation certainly ran hotter, meaning that consumers were a bit poorer. Profit margins have been a little bit smaller than they would have been similarly. And certainly, trade flows have declined. U.S. imports are lower than they were a year ago. And it's particularly profound vis-a-vis China, which is the country that was targeted with the largest tariffs. So, it's clear that there have been tariff-related effects and tariff-related damage. I would say that maybe the damage has been a little lighter than some might have feared, and in part just because it's not practical to onshore manufacturing and so on over any kind of short period of time, in part because the tariffs came in and while significant, weren't quite as large as some of the numbers that had initially been threatened.

And so it's been a blow, but it's been a manageable blow. We have seen the rest of the world scrambling to work its way around this void that the U.S., to an extent, represents in the global trade landscape. So other countries, penning trade pacts and so on with one another. And so, in a sense, finding other markets.

And so the global trade numbers are actually still rising, even as the U.S. trade figures have been in retreat. And so, there's been some offset there as well. But I think the bottom line is there's been some damage, but it hasn't been a giant blow. It hasn't been a recessionary force. It never seemed like it should be. But there were some fears, I think, I can say to that extent.

And it's worth noting as well, from a U.S. perspective, that the U.S. did have a bit of good luck as well. It happened to be a year in which tariffs were hitting, but equally, artificial intelligence was a real boost to growth. And so it did paper over some of that initial damage.

What is your outlook on inflation?

Inflation was extraordinarily high in the early 2020s. And mercifully, we've seen a very significant decline from that point. But inflation never quite got back to those 2.0% numbers that central banks would ideally like to see. There was a little bit of a back up over the last year as tariffs, which are inflationary, had their effect on the numbers.

And so, the inflation numbers are not perfect. We were seeing, and “were” maybe the operative word right now. But we were seeing progress toward the end of 2025 and into very early 2026, as seemingly that tariff blow started to settle. And I will still say over the next year or so, certainly through the end of 2027, that there is room for some further progress toward more normal-looking inflation numbers, if may be still tending to be a little bit above target.

And we have economies that are loosely at their potential, which is fairly benign. Inflation expectations aren't too, too high. And the tariff blow itself is fading to some extent from the inflation numbers. And so, in general, we're feeling reasonably good about the inflation outlook from a medium-term perspective. The twist or the complication, and here's where I mention that I'm recording this in early March, is that of course, as I'm recording this, there is now a war with Iran.

The price of oil has gone up significantly. It is unclear how long this lasts. Betting markets would say perhaps a month or two, in which case, perhaps there is scope for this to retreat fairly quickly. But as it stands right now, at least in the very near term, we are going to see much less pretty inflation numbers. And the February figure, the March figure, and we will see beyond that is likely to be somewhat hotter.

And so, whereas we had been operating in what I would describe as a 2.5%-type inflation world, we might find ourselves temporarily more like in a 3% sort of inflation world. And so not quite where we'd like it to be. I do think central banks can look through much of this. They will recognize that core inflation is still likely running somewhat cooler and perhaps even trending in a favourable direction.

Classically, much as with tariffs, central banks are meant to look through one-time, price-level, exogenous shocks, which you could say that this is. And so, I think that it doesn't change the narrative too radically. But for a moment, we are going to see less pleasant inflation figures before hopefully returning to a more desirable course.

How is the global order changing?

We've been fairly consistent in our assessment of how the global order is changing. It is certainly now a multipolar world, having been a hegemonic U.S.-led world for a very long period of time. And so, China is now in some sense an equal power to the U.S. And that has fairly profound implications. And it's not unusual to see things like deglobalization, which we're witnessing in that kind of environment.

And we're likely to remain in this sort of environment for decades to come. I would say, equally, it's clear at this point that we are shifting from a rule-based order to a power-based order, and big countries are pushing their weight around, and international norms and rules don't apply quite to the extent that they once did. And part and parcel to that is therefore it is a more dangerous world.

And we see military spending rising and likely set to continue to rise, and very much a more assertive U.S. military in particular right now. And part of that is the so-called Monroe Doctrine, which is to say that the U.S. is prioritizing the Western Hemisphere, believes it has preeminence there, has taken out the leadership in Venezuela, and has perhaps other aspirations there as well of certainly great relevance. Perhaps slightly contradicting that comment about prioritizing the Western Hemisphere.

As I'm recording this in early March, the U.S. has also attacked Iran and is very much engaged there. And does again speak to both the uncertainty and the risk and the very real consequences of a more dangerous world in that context as well. And so, we think that some geopolitical risk premium, even after that war presumably settles in the coming months.

We think that some geopolitical risk premium may well endure going forward. It is just a more uncertain time. And it makes sense if that premium exists to some extent. I think another change to the global order is just U.S. exceptionalism, perhaps declining a little bit. Obviously still a great power. Very much asserting that in a military context right now.

But the rest of the world feels less favourably toward the U.S. than it has in a while. The U.S. is disengaging from global trade and is just less trusted in general. And so, we do believe that the U.S. is becoming a little bit less special on the global stage. And you can see some flows that are reducing, let's say, allocations to dollars and reserve managers picking up a bit more gold or diversifying to other currencies as well.

And so that's a trend that may well play out over an enduring period of time as well. And just to summarize then; a multipolar world, a power-based order. At the margin, this is usually associated with a little bit less economic growth with a little bit more inflation, with slightly larger risk premiums in markets as well.