Analytical company Capital Economics has identified key events that could threaten the economic outlook for 2026.
Capital Economics has outlined the key developments that could challenge the 2026 economic outlook, warning that only a handful of risks are significant enough to shift the broader macro picture.
Much of the concern centres on the parts of the financial system that have grown quickly outside traditional banking.
The regulated sector “looks better capitalized and less leveraged than before previous crises,” but the rapid expansion of private credit stands out because “the combination of leverage and illiquidity rarely ends well when growth slows,” Neil Shearing, Capital Economics’ chief economist, said in a note.
Issues at a single fund would not have major macro consequences, yet a broader freezing of credit markets could tighten conditions far more abruptly.
Valuations in some equity markets add another dimension to the discussion. After a long rally, Shearing says it may take little more than “a couple of missed earnings targets” to unsettle investors.
A sharp drop in share prices would weigh on household wealth and corporate balance sheets, though the broader effect on activity is usually limited. Historically, a 10% decline in equities reduces GDP by only a few tenths.
“Markets often behave as though a correction is an economic event in itself. In reality, it usually takes something more than falling share prices to cause a recession,” Shearing wrote.
The inflation backdrop is similarly important. Capital Economics’ base case assumes price pressures keep easing in 2026, allowing central banks to lower rates. But recent years have shown how easily inflation can deviate from forecasts.
Stronger demand would add some upward pressure without being especially damaging. More difficult would be renewed supply disruption or a shift in expectations that keeps wage growth elevated, which could force policymakers to maintain restrictive settings even as activity slows.
“To be clear, this is not the most likely outcome, but it is the type of shift that changes the entire policy environment in a way markets tend to underestimate,” Shearing added.
Another important factor is the U.S. economic performance. Capital Economics’ above-consensus forecast rests on continued productivity strength and on softer job growth not undermining household spending.
If productivity falters at the same time the labour market cools, weaker hiring could spill into consumption and set off a deeper retrenchment.
“For an economy as critical to the global outlook as the U.S., that is the clearest downside risk to the outlook,” Shearing said.
Furthermore, political and policy developments could also complicate the landscape. With public debt high, the economist argues that fiscal credibility now serves as the “glue required to hold the public finances together,” making investor confidence sensitive to events such as France’s 2027 presidential race, a potential change of government in the U.K., or a U.S. Supreme Court ruling on tariffs that could force revenue refunds.
Questions around monetary credibility may also emerge as the Federal Reserve transitions to a new chair and as the Court weighs the administration’s decision to dismiss Governor Lisa Cook.
Despite the focus on vulnerabilities, Capital Economics stresses that not all risks point lower. One of the more constructive possibilities is that the recent improvement in U.S. productivity marks the early stages of a broader AI-driven upswing that spreads to other economies.
It is not the central forecast, but Shearing describes it as the kind of shift that can “change the economic game entirely.”