Economic backdrop
US
For many quarters we’ve held the narrative that the US economy was “cooling, not collapsing.” Well, it finally appears that this narrative is due for an update. With the double-barreled policy tailwind (i.e., monetary and fiscal), the US economy should see gradual acceleration throughout 2026 off the below-trend pace in the fourth quarter of 2025. Hence the “cooling” appears to be transforming into a “thawing.”
The annual GDP growth numbers will likely look quite similar (1.8% to 2.0% ballpark), but that masks the undulation occurring on a quarterly basis. If we look at the exit rates in the fourth quarter, the US economy is exiting 2025 at a below-trend run-rate, which we see accelerating to slightly above the trend run-rate in the fourth quarter of 2026. The catalysts behind this are (1) a continued easing of monetary policy and (2) fiscal expansion. The former will help curtail the contraction in the private credit markets and enable a positive credit impulse to ensue, while the latter, including the One Big Beautiful Bill, stimulates capital investment via bonus depreciation and expensing, while supporting consumer spending power via increased tax rebates.
Much debate has centered around how this all plays into the Federal Reserve’s interest-rate policy. We at Aegon Asset Management believe that the Fed will continue to cut rates in 2026, ultimately arriving at a 3% fed-funds rate. The main driver of this is the rapid “cooling” of the labor market (trends in the labor market are like a super tanker, they don’t turn around in one or two months) and continued accommodation will support a labor ”thaw.”
Inflation is the other side of the Fed’s dual mandate. For all the hullaballoo about tariff inflation it has underdelivered, though not to the magnitude to assuage the hawks on the Federal Open Market Committee. Our view continues to be one that, on the margin, tariffs will cause disinflationary demand destruction given the softness in the labor income proxy.
Rates outlook: While the majority of the steepening has occurred in the rates curve, our macro forecasts are consistent with a further grind in the bull steepener. The long end would likely need acute economic weakness or a recession to push materially lower, especially given the longer term deficit outlook.
Europe
Europe is entering 2026 after a prolonged period of sluggish growth. The region has faced several headwinds, including high energy prices, slow productivity improvements and more limited fiscal support compared to the United States. As a result, growth rates have lagged.
However, positive real wage growth and steady employment gains suggest that European consumers are relatively resilient, which is providing some support to domestic demand.
Despite these positives, consumer and business confidence continue to be weighed down by external factors. The US tariffs are a drag and uncertainty due to geopolitical tensions has made integrated supply chains more risky. As Europe is an open economy, it remains sensitive to shifts in international trade dynamics. Recent trends toward “friendshoring”—relocating supply chains to allied nations—and strategic export controls (such as China’s restrictions on rare earth metals) have exposed Europe’s vulnerabilities in energy, security and technology.
On a more optimistic note, targeted policy interventions are anticipated to support the European economy. Germany’s infrastructure and defense investment package is expected to stimulate growth, with the bulk of its impact materializing in 2026. The European energy situation has also improved, as increased liquid natural gas supply and expanded renewable power generation have helped suppress energy prices and reduce reliance on expensive energy imports.
Performance across member states remains uneven. Spain has benefited from lower energy costs, structural reforms and net immigration, supporting robust growth. Poland continues to close the economic gap with Western Europe, demonstrating strong momentum in industrial output and household incomes.
France’s economic outlook is complicated by persistent political and fiscal challenges. The country’s high public debt—among the largest in the euro area—has raised concerns about long-term fiscal sustainability. Political gridlock has made it difficult to advance key structural reforms, such as pension adjustments and public sector spending reductions, which are necessary to increase fiscal flexibility and stimulate growth.
Other risks persist as well. The war in Ukraine shows little sign of abating, leading to significant costs and ongoing security risks for the European Union (EU). Hybrid warfare tactics and protracted conflict remain sources of instability.
The EU’s potential for growth is also linked to the advancement of single-market reforms and the reduction of internal barriers, which depend on political commitment. Recent geopolitical developments have increased attention to these issues.
Inflation dynamics are shifting. Services inflation, which had remained stubbornly high, is now declining in most countries. Negotiated wage growth is also moderating, with expectations for future wage increases more subdued. Additionally, increased Chinese exports to the EU are exerting a disinflationary effect. Overall, we expect inflation to fall below the European Central Bank’s (ECB’s) target levels.
The ECB has implemented its eighth consecutive interest-rate cut, and market pricing suggests that rates have now reached a plateau.
In summary, the European economic outlook for 2026 is cautiously optimistic. While structural challenges and geopolitical risks persist, policy support, improved energy conditions and resilient labor markets provide a foundation for moderate growth. The recovery remains uneven and downside risks—particularly from external shocks and unresolved domestic reforms—should be closely monitored.
United Kingdom
The UK economy is currently navigating a challenging environment characterized by slowing growth, elevated inflation and fiscal challenges. After a positive start to the year, economic momentum has slowed, with recent growth driven more by the public sector than by private domestic demand. The unemployment rate has increased during the past year, hitting its highest level since 2016 outside of the pandemic period.
Inflation continues to run above the Bank of England’s (BOE’s) 2% target and remains higher than in many peer economies. This persistent inflation has caused the Monetary Policy Committee to act cautiously, keeping interest rates at restrictive levels. Against this backdrop, the government faces the challenge of implementing significant fiscal consolidation measures in its upcoming budget to adhere to established fiscal rules. As seen in the liability-driven investment (LDI) crisis sparked by budget changes under Prime Minister Liz Truss, fiscal announcements must balance taxation, market reactions and public opinion.
Consumption and business investment are likely to remain subdued due to elevated uncertainty and tight monetary policy. Surveys reflect ongoing business caution, with companies deterred from investing by squeezed margins and high financing costs.
Looking ahead, it is anticipated that the BOE will continue cutting interest rates. Headline inflation is expected to return to target in the first half of next year, paving the way for a cyclical rebound in the second half of 2026 and into 2027 as monetary easing takes fuller effect. Unemployment is forecast to peak in 2026 before gradually declining.
Over the medium term, the UK’s economic trajectory will hinge on its ability to kickstart productivity gains, which can offset demographic pressures. Productivity will be the most important factor influencing living standards in the long run. In the baseline forecast, higher productivity supports real wage growth and increased real incomes, even as average working hours decline.
As productivity rises and interest rates fall, business investment is expected to increase, with firms shifting toward more capital-intensive operations. However, ongoing fiscal consolidation will likely act as a headwind.
Overall, the UK’s economic outlook is defined by near-term softness and medium-term uncertainty, with the pace of productivity growth and the effectiveness of fiscal and monetary policy set to determine recovery and living standards through the end of the decade.
Global corporate credit research overview
- Consumer-related companies are responding to cautious consumer spending by increasing promotional activity resulting in margin pressure, which is expected to continue
- Industrial sector companies remain relatively resilient, with potential downside related to economic activity, consumer sentiment and trade policy implications
- Financial sector companies are seeing stable credit quality and earnings remain solid
- Leverage ratios for corporate issuers and capital adequacy levels for financial firms remain healthy across most sectors
Geopolitical tensions, tariffs and trade, fiscal and monetary policy and the resulting impacts on inflation and growth are all contributing to cautiousness on the part of consumers and most corporate sectors and issuers. As a result, we expect modest global economic growth in the coming quarters. Balance sheets will likely remain stable, contributing to continued consistent credit fundamentals across most sectors.
Wage growth has slowed, particularly for lower-income households, as unemployment continues to rise in developed markets—a trend that may accelerate with broader artificial intelligence (AI) adoption. Against this backdrop, low-income consumers are showing signs of financial strain.
Middle- and upper-income consumers are maintaining discretionary spending but continue shifting from branded products to store labels. The luxury sector remains under pressure, with premium brands performing better than those targeting aspirational buyers. Consumer companies have relied on promotions to drive volumes, creating margin pressure as demand remains soft. Additional price discounts are expected to stimulate sales, but will likely further compress margins.
The industrials sector has shown resilience, particularly in end markets that are exposed to data center-related spending, but remain vulnerable to slower growth and trade policy uncertainty. Basic industries continue to be pressured by overcapacity, while construction is impacted by elevated interest rates and affordability concerns. Companies are increasingly countering headwinds through cost and efficiency measures, supply chain and procurement adjustments, onshoring production capacity and price increases in an expanding number of sub sectors.
In media and communications, we continue to monitor secular changes, merger and acquisition (M&A) activity and investment in content and spectrum—all of which have potential credit rating implications.
We expect that AI-related data center buildouts in both the US and Europe will continue to contribute to growth for companies in the technology, construction, natural gas and electric utility sectors, among others. We expect companies to derive improved efficiency in their processes through the use of AI solutions. However, given the rapid buildout activity, evolving technology and unclear monetization strategies, the sector’s return profile remains uncertain.
The financial sector outlook continues to be stable with pockets of known weakness, particularly in US office commercial real estate. Several US banks experienced modest loan losses in the third quarter resulting from recent bankruptcies. But these were absorbable, and management teams view these as isolated incidents rather than reflective of systemic risks in their loan portfolios. Generally, bank earnings in both the US and Europe have benefited from a pickup in capital markets activity, higher net interest income and lower loan-loss provisions.
Leverage ratios remain relatively stable across most sectors, supported by earnings growth. While interest coverage has weakened, recent rate cuts should help stabilize the decline. Most corporate issuers continue to benefit from strong investor demand and relatively easy access to capital. The stability in credit metrics is a key element of our overall stable fundamental outlook. Having said that, we remain focused on the aforementioned economic uncertainties, as their impacts on corporate debt issuers become clearer in coming quarters.
Fixed income overview
Fixed income outlook
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