A recession is unlikely in the US. However, the Federal Reserve faces the challenge of balancing an economic slowdown with persistent inflation. Given the rising debt ratio, financial markets are relying on the central bank to be ready to act as a lender of last resort if necessary. Europe, and especially Germany, can be viewed with more economic optimism again in 2026, though reforms remain urgently needed. France’s increase of public debt is a concern, but here too, markets seem reassured by the hope that the European Central Bank will step in as a lender of last resort if need be.
The global economy defies the current political environment and continues to grow. Growth is being driven primarily by emerging markets, but the US economy is also contributing. “We are not seeing an economic collapse, just a cooling,” says Jörn Quitzau, chief economist at the Swiss private bank Bergos. “In 2025, the US economy is expected to grow by around 1.8 percent, slightly below its previous potential growth rate.” In the eurozone, former crisis countries such as Spain, Greece, and Cyprus are the main growth engines, while the large economies of France and Germany remain causes for concern.
The inflation landscape is very mixed. In Switzerland, the inflation rate has remained within the desired range of 0 to 2 percent for more than two years. In the eurozone, it is now only slightly above the European Central Bank’s (ECB) 2 percent target, giving the ECB a comfortable environment without immediate pressure to act. In the United Kingdom, on the other hand, inflation is well above the target at 3.8 percent. In the United States, it remains stubbornly high at around 3 percent. In addition, the effects of pending tariffs remain a source of uncertainty. The US Federal Reserve, with its dual mandate, finds itself in a difficult position. On the one hand, it must keep prices stable, and inflation is currently too high for that. On the other hand, it must ensure maximum employment, even as the economic slowdown begins to affect the labor market. Added to this is growing political pressure.
“While there is a chance that inflation in the UK will come closer to the 2 percent target by the end of 2026, we will likely continue to face higher inflation rates in the US,” says Quitzau, who expects central banks like the Fed to adopt a certain level of inflation tolerance going forward. Rates of 2.5 or 3 percent may be accepted. This is due to several factors such as demographics, deglobalization, and in Europe, the increasing pricing of CO2 emissions, which are expected to push inflation rates higher in the medium term, not just in the US. Additionally, due to high public debt, central banks will likely have to adopt a looser monetary policy, in order to avoid greater economic harm. A side effect of this will be higher inflation rates.
US: Low Risk of Recession, Growing Debt Burden
In the US, a recession is unlikely. Fiscal policy remains highly expansive, and monetary policy is becoming more so. This should contribute to economic stabilization. “However, the volatility of US politics is harmful. So far, the negative effects are barely visible in economic data, but lost trust tends to have medium- to long-term effects,” says Quitzau. He does not expect the US dollar to be replaced as the global reserve currency, as some observers fear. The reason is simple: there are no good alternatives.
A risk is posed by the rising debt burden, which continues to grow due to the policies of the US president. The International Monetary Fund (IMF) expects the US to have a budget deficit of around 8 percent in the coming years. This will cause government debt, which currently stands at 122 percent of GDP, to rise to about 144 percent by 2030. “This is an enormous debt level. The financial markets will probably not provide all the capital for new borrowing at moderate interest rates. But then the Fed will step in as a buyer. So for the time being, the high US debt level is unlikely to cause a major financial crisis, says Quitzau.
Europe: France Drowning in Debt, Germany Returning to the Growth Path
In Europe, the focus is on French public debt, which has now exceeded 110 percent of GDP. However, the political environment makes it difficult to cut public spending and implement measures that could boost economic growth and stabilize public finances. “Since the political situation is unlikely to change quickly, there is a risk that financial market players will eventually lose patience and demand higher interest rates for their capital. This could trigger a debt spiral,” says Quitzau.
So far, the markets remain very calm. While this may be misleading, it is also understandable. It is assumed that the eurozone would not leave France to fend for itself in a critical situation. “However, in order to use certain instruments (ESM; ECB), conditions must be met that France does not currently fulfill. But even though the ECB should technically not be allowed to intervene, it would likely still do so in some form. Ultimately, a bailout would likely prevent a collapse of France and a potentially widespread financial crisis,” says Quitzau.
Germany currently has no debt problem, and economic recovery is on the horizon. Despite a growing population, economic output has stagnated in real terms over the past five years. “For 2026, we expect growth of around one percent,” says Quitzau. High government spending provides an additional fiscal boost, which will have an impact in 2026 and 2027. “However, by then, further growth-promoting reforms will need to take effect, which must be addressed now in the ‘autumn of reforms,’ such as pension reforms and reducing bureaucracy. Additionally, it must be understood, not only in Germany but across Europe, that economic growth leads to progress and moves society forward. Without growth, and through giving up prosperity, we will not revitalize the economy or society, and we will continue to fall behind in the international competition,” warns Quitzau.
Artificial intelligence (AI) could prove to be a growth wild card for Germany and other countries. AI has the potential to bring massive productivity gains in certain areas of the economy. It could provide a significant growth boost, regardless of economic policy reforms. This could help solve many problems, including the rising government debt, which would be offset by higher growth.