Jet-Lagged Recovery

by Carl Tannenbaum, Ryan Boyle, Vaibhav Tandon of Northern Trust, 1/26/26

Long trips rarely end at the airport. We arrive, but our internal clocks lag behind; the first day back is spent acclimating to the new landscape. The global economy enters 2026 in much the same way. Shifting rules of commerce, political stoppages and patchy data have left decision makers disoriented. The dataflow is returning, but it may be a while before we feel settled.

Major economies are advancing, but not in sync. Resilience carried economies through persistent uncertainty last year, and that quality should endure. Central banks are nearing a steady state, but conditions are unsteady. Renewed trade confrontations – like the recent threat tied to Greenland – would deepen that misalignment and harden fragmentation at a delicate moment.

Following are our thoughts on how top markets are faring.

United States

  • The U.S. economy is still feeling the effects of a record federal government shutdown, which disrupted key economic data releases. Consumption indicators, including the Fed’s preferred inflation gauge, remain delayed and will not normalize until March. Even so, we still hold the view that growth remains robust: the labor market has settled into a slower but stable equilibrium, tax refunds should provide near‑term support, and housing affordability proposals are gaining traction. While policy uncertainty has diminished to a degree, a return to calm remains unlikely.
  • Inflation has eased, with the core measure steady at 2.6% year over year in December, down from 3.0% in September. Data distortions are suppressing this figure, creating uncertainty. The Fed cut rates by 25 basis points in December to a 3.50%-3.75% range, but the messaging underscored growing policy complexity. We expect one additional cut in the first half of the year, followed by a prolonged pause. Questions about Fed independence are likely to remain in focus but will not alter policy outcomes in 2026.

Canada

  • Canada enters 2026 with recession risks reduced, but external uncertainty remains paramount. Higher United States-Mexico-Canada Agreement (USMCA) compliance and selective U.S. tariff exclusions have eased the terms of trade somewhat, lowering the likelihood of a downturn. Even so, the economy remains heavily exposed to U.S. trade policy. Industrial production, exports, and business investment are likely to stay subdued in the near term. We expect USCMA renegotiation to result in the removal of most U.S. tariffs by the third quarter, lifting a key drag on activity, but there is also a risk that negotiations prove difficult.
  • Canada’s labor market improvement stalled last month, with the unemployment rate rising three-tenths to 6.8%. Emerging slack in the labor market has been contributing to disinflation. Against this backdrop, the Bank of Canada is likely to remain on hold, balancing weak domestic momentum against fiscal stimulus and shifting trade dynamics.

Eurozone

  • The eurozone ended 2025 on firmer footing, with growth modestly stronger and inflation back at target. In 2026, activity will start unevenly but should gradually converge. Germany will begin to stir from stagnation while France’s recent strength fades amid persistent political and fiscal strains. Consumption should provide some support amid tight labor markets and accommodative financial conditions, but growth is unlikely to exceed potential. Risks remain skewed to the downside with the transatlantic trade environment once again looking more conditional. Even as tariff pressures have eased, lingering policy uncertainty and structural weaknesses leave European industries exposed to renewed trade frictions.
  • With inflation subdued and activity steady, the European Central Bank is expected to remain on hold through 2026. Geopolitical shifts, including a more assertive U.S. posture, may accelerate debates around European defense. Higher security spending would have implications for the bloc’s fiscal outlook.