Weekly Economic Report: End of Year Special

As Christmas approaches, markets have slowed down this week and while policymaker action was quiet the economic signals released in these last few weeks have really helped to set the narrative for early 2026.

Late December data has revealed that inflation across major economies continues to cool - with inflation in the eurozone reaching the ECB's 2.0% target and the U.S. inflation also easing despite service inflation causing headwinds. Consumer spending going into 2026 has been largely price sensitive, nonetheless it's certainly held up - particularly in services and of course holiday-related economic activity.

In terms of policy developments this week, central banks continue to push their "wait-and-see" narratives, which has pushed back against many investors expectations that rate cuts will be rapid in early 2026. Both the Fed and the ECB have stressed the need for inflation progress to be sustained and that one off statistics won't be enough to urge policy changes. Meanwhile, in the UK we have continued to see that households and businesses alike are becoming more cautious ahead of policy implementation in April 2026 that was set out in the Autumn Budget.

Going into 2026, I would argue that Politics and the policies that are being introduced are re-entering the narrative of the market. Some analysts have been arguing that as inflation eases, political and fiscal decisions will be the news to look out for as the biggest impacters. As global policy changes, we find the global economy becoming more fragmented as growth is no longer moving in sync across economies.

I've also written a lot about the gig economy in recent economic reports, and that is certainly a section of the Labour market that I think will be an interesting watch in 2026 - as flexible work is beginning to structural change how the labour market absorbs shocks. Even in the case of unemployment statistics, the gig economy is almost acting as a buffer - with stress being understated or strength being overstated, meaning that interpretation by policymakers becomes harder, but also more important.

It's an interesting one to say we should watch out for, but one of the factors in the economy that personally interest me most- is productivity, and the use of AI to improve it. Some economists are pessimistic about the current policy situation in a few of the major economies - they would argue that this brings productivity back on the agenda as a long term solution. Stats show that productivity growth has been slow or even declining in 2025. Many would conclude that productivity growth has simply struggled to regain momentum to the scale of pre pandemic levels. For example, in Q1 2025 - U.S. official data showed that confirm business labour productivity dropped by 1.5% in Q1 2025 as output and hours worked were misaligned. But then comes the promise of AI - a productivity booster according to many B2B AI startups looking to sell their software to firms struggling with such issues. The potential of AI could even increase labour productivity by 1-2 percentage points per year over the coming decade if there is widespread adoption, according to developers at Anthropic.

Of course AI can augment human tasks which lets workers accomplish more or focus on more important tasks - but the potential of AI to free up human workers to focus on more strategic, creative and managerial tasks (that AI can't automate), could expand the economic value of human capital itself. I'm not saying that the next few suggestions are going to happen - they are mere hypotheticals, but experts would state that firms and public policy must look to focus on investments into widespread literacy in AI for those mid-career. Even ideas such as the shorter workweek has been tied in with technology adoption as a way of boosting morale and productivity at the same time - although some have argued that the idea is counterintuitive. A logician would probably assume that during a year of rapid advancements in AI, productivity growth certainly wouldn't remain weak; it would do the opposite. But it did remain weak. In an almost paradoxical way. However, as previously stated, the potential for AI to boost output and productivity is there. If it is adopted in the right way, that potential could be the defining theme of 2026, economy-wise.