Policy Outlook 2026: Fiscal Strain and Monetary Divergence

In this paper, we discuss:

• Advanced economies entering 2026 with high deficits and rising debt, increasing reliance on monetary backstops;
• The US combining growth resilience with severe fiscal strain, as deficits and interest costs surge;
• Europe’s fiscal expansion driven by defence and infrastructure spending, with uneven capacity across countries;
• Diverging monetary paths, with cautious Fed easing, an ECB on hold, gradual BoE cuts, and slow BoJ normalisation.

Download PDF: Policy Outlook 2025 – January 2026