Global Growth: More Resilient Than Ever

A new Citi Research report from a team of economists led by Nathan Sheets looks at the state of the global economy and finds that resilience remains the unifying theme. 

The available data now point to 3% global growth last year, in line with our estimate of trend and slightly stronger than we’d projected. We expect this performance to remain solid, with the global economy growing 2.9% this year and 2.8% in 2027. If our forecast materializes, it would mark six consecutive years of stable, near trend global performance — an achievement all the more striking given the shocks the global economy has absorbed, from the Russia Ukraine conflict to rapid monetary tightening, renewed U.S. tariffs, and a variety of other stresses.

Across countries, we see growth remaining close to trend. The major developed market economies should continue to expand at around 1.9%, supported by ongoing strength in the U.S., a pickup in Germany driven by fiscal stimulus, and continued outperformance in Spain. Emerging markets should grow at a pace just above 4%, with moderating momentum in China and India but rebounds in Mexico and South Korea. With growth firm, inflation subdued, and monetary policy generally supportive, we continue to view the global environment as a “Goldilocks” scenario. If anything, our confidence in this assessment has deepened over the last few months.

The key observation driving our outlook is that global growth has remained solid and stable in spite of ongoing stresses. We believe this resilience reflects technological advances that have transformed the economy’s supply side, allowing firms to source inputs, monitor competitors and communicate globally in real time. We find little evidence that AI driven productivity gains are already boosting output — those improvements remain largely ahead — but current technologies have clearly enhanced flexibility. A complementary hypothesis is that repeated shocks have effectively trained and stress-tested firms, leaving them well positioned to respond to new pressures. Rather than being fatigued, the production side of the global economy is operating like an athlete in peak condition.

Even so, we caution against overstatement. Challenges will persist, and while growth should remain solid, we see limited prospects for it to rise meaningfully above trend. Against this backdrop, we turn to three issues: the inflation and central bank outlook; Japan’s evolving economic trajectory; and global risks that could still disrupt performance.

Inflation and Monetary Policy

Inflation’s quiescent performance has supported global activity. Headline inflation has retreated to 2%, and core inflation, while slightly higher, has also been subdued. With growth near trend and labor market pressures limited, we expect inflation to remain contained. Our earlier concerns about a broader global trade conflict haven’t materialized: Most countries opted to negotiate rather than retaliate against new U.S. tariffs, and U.S. firms have absorbed roughly half the toll. As a result, inflation from tariffs has been more muted than we had feared.

Commodity markets bear watching. Geopolitical developments, particularly in Venezuela, have pushed Brent crude to around $70 per barrel, but strong supply fundamentals should pull prices back toward $60 in coming months. Industrial metals have risen sharply, driven by data center and grid investment as well as tightening supply conditions. Historically, such increases can signal building global demand, so we see this as an upside risk to both growth and inflation.

Given this backdrop, we expect global monetary policy to remain supportive. Most central banks have already shifted to easing, unwinding the post pandemic tightening cycle. In 2026, we anticipate that the Fed and Bank of England will continue cutting, while the European Central Bank remains on hold. Only four notable central banks — Colombia, Australia, Japan, and Taiwan — are likely to hike, each due to idiosyncratic domestic pressures. Overall, policy rates should drift downward in both developed and emerging markets, with emerging-markets rates approaching pre pandemic levels and developed-markets rates settling slightly above their pre-pandemic levels.

Japan’s Post Deflation Environment

Japan has emerged as an area of heightened global attention. Inflation has remained above the Bank of Japan’s 2% target, supported by yen depreciation and a tight labor market, enabling the central bank to take gradual steps toward policy normalization. Core inflation remains near 3%, and we expect at least one more rate hike this year.
Markets have also focused on Prime Minister Sanae Takaichi following her decisive snap election victory. Although she identifies as a protégé of former Prime Minister Abe, Japan’s environment is now markedly different, as extricating Japan from deflation looks like a goal largely achieved. Investors worry that implementing Abe style stimulus today could worsen Japan’s debt burden or further weaken the yen. While such concerns fueled initial market volatility, we expect Takaichi to offer measured fiscal support — no more than half a percentage point of GDP annually — and anticipate that she will allow the Bank of Japan space to continue normalizing policy. We also see room for structural reforms in technology and defense that could bolster Japan’s global competitiveness.

Global Risks

While our baseline forecast is constructive, we recognize several risks that could yet derail global performance. A sharp retrenchment in the AI sector could exert meaningful drag, given stretched valuations and heavy capital needs. Geopolitical stress points remain sources of potential disruption, particularly through oil markets. The U.S. labor market still shows signs of softness, and the upcoming midterm elections could generate policy proposals with uncertain consequences. High public debt levels across major economies pose a formidable longer term challenge, especially given the volume of future sovereign issuance.

Yet not all risks are downside ones. AI and other emerging technologies could deliver stronger than expected productivity gains, supporting investment and growth sooner than assumed. Across communications, information processing, medicine and other fields, transformative technologies could support growth in the near term and beyond.