Although uncertainty in trade policy has decreased, it still limits growth, as highlighted in this year’s final Nordic Outlook report. Tariffs and trade barriers force companies to adjust costs, higher prices reduce consumer demand, and elevated uncertainty affects investment decisions. Geopolitical conditions also remain extremely complex. In the U.S., the tariff shocks of spring, summer, and autumn have been replaced by negotiations and several new “trade” agreements. Several stock markets have reached new record highs, even though U.S. tariffs are now the highest since the 1930s, and uncertainty persists regarding the content and rules of any “agreement.” Relations between the U.S. and China remain tense. The European Union and China also still need to find a constructive way to cooperate to avoid trade tensions.
Global GDP Growth: 3% per year
Global growth forecasts are moderately improving because the negative impact of the tariff shock, particularly in the U.S., has been smaller than expected. This can partly be explained by stockpiling before tariffs were introduced and the redirection of imports toward countries with lower tariffs. Trends in import prices indicate that tariffs have so far mainly affected importers by reducing profits and impacting end consumers. Exporters have only partially passed costs on. Therefore, global GDP growth between 2025 and 2027 is expected to be slightly above 3% per year.
Tariff-driven early shipments of exports and imports in the spring affected growth rates in many countries. The effect was stronger at the beginning of the year and weaker toward the end. However, it is too early to dismiss the impact of tariffs, and it should be remembered that several forces operate simultaneously in the economy. In the U.S., this relates to significant investments in artificial intelligence, while in Europe it relates to increased defense spending. In the U.S., reduced immigration is offset by weaker labor demand. Additionally, the adaptability of businesses and households has been surprisingly positive. Growth has also been supported by rising stock markets and reduced credit risk spreads.
However, high stock market valuations and other signs of elevated risk appetite raise concerns. There is a risk of creating a toxic “growth cocktail” if multiple factors coincide - or example, unexpected inflation increases, higher government bond yields, a stock market drop, or if anticipated gains in corporate profits and productivity from AI investments do not materialize. On the positive side of this “equation” is the impressive ability of companies to solve problems and adapt to disruptions, as well as growth-supporting impulses driven by the need for investments in security, infrastructure, technology, and so-called green energy production.
Inflation Normalizing
Global forces reducing inflation are considered strong enough to return inflation to target levels within a reasonable timeframe. This trend is driven by falling Chinese export prices; consistently lower raw material and energy prices; productivity gains from artificial intelligence; and in several countries, a stronger currency. The impact of tariffs on U.S. inflation is visible in statistics, though the limited effect so far suggests the process has only just begun. Therefore, real purchasing power for American households will face some adverse factors even in 2026.
Overall, inflation trends in recent months have in many cases been better than forecast. However, the picture varies across countries. International prices have generally moved favorably. Many commodity prices have remained stable, and oil prices are expected to stay at current levels next year. There has been a small increase in consumer goods prices. Food prices have improved, though some product groups continue to rise. International commodity price indices have fallen in recent months, and producer prices for food in the U.S. and Europe have stabilized. Service prices are still rising slightly too fast, remaining a primary driver of inflation due to tight labor markets and high wage growth.
In the euro area, inflation has decreased to around target levels. In 2026, it is expected to move slightly lower. China’s prolonged overproduction has caused price pressure and deflation. Compared with the peak of Chinese producer and export prices in 2022, both have since declined (export prices down by roughly 20%). Taking both direct and indirect effects on consumer goods into account, we estimate that Chinese price pressure has reduced inflation in many countries by about 0.1-0.2 percentage points per year.
Interest Rates in the Eurozone and U.S. - Converging
According to European Central Bank (ECB) President Christine Lagarde, the ECB is in a good position, with inflation close to target, and growth needs to accelerate. We expect the ECB’s key rate to remain around 2% in the near term. The U.S. Federal Reserve (FED) cut rates at its October meeting, though the committee is more divided than usual. Our forecast is that the FED will cut rates by another 25 basis points in December and then by 75 basis points in 2026, reaching 3%. By the end of 2026, ECB, FED, and Sweden’s Riksbank rates are expected to be largely neutral. However, slowing economic growth may encourage central banks to reduce rates.
High (and still rising) government debt raises questions about fiscal sustainability in many countries. This means different countries have different policy leeway; those with lower debt and more reliable fiscal policy - like Germany (at least compared with other major euro area economies) and the Nordic countries - can implement more expansionary fiscal measures.
The slowdown in the U.S. economy has been smaller, as substantial investments in artificial intelligence and technology create demand and provide resources for sustainable high-productivity growth. At the same time, questions arise about the durability of growth if AI investments slow or household consumption growth declines. Consumption is currently driven mainly by relatively small high-income household groups, and growth is occurring without increased employment.
Economic Growth in the Eurozone: 1.4% this year, 1.2% next year
The impact of U.S. tariffs on eurozone growth has been smaller than forecast. Indicators point to some upward momentum, driven by Germany’s defense and infrastructure spending (with the greatest GDP impact expected in 2026) and rising real incomes. Growth may be constrained by political uncertainty in the region, such as difficulties passing the 2026 budget in France and challenges for the German government. Long-term structural obstacles remain due to rapid population aging, weak competitiveness, low productivity growth, and low investment levels.
The fastest-growing economy in the region is Spain. France saw surprisingly strong GDP growth in Q3. Germany’s economy stagnated in Q3, and 2025 may be another lost year, awaiting stimulative effects. Eurozone growth is expected at 1.4% this year and 1.2% next year.
China will reach its growth target this year, focusing on both industrial development and household consumption stimulation. China has managed to restructure its exports by redirecting trade to other countries, while exports to the U.S. have fallen by roughly 30% compared to the previous year. However, without additional fiscal support, growth in 2026–2027 may slow.
Baltic Region: Lithuania Leading, Latvia’s Growth Forecast Up
In recent years, growth rates in the Baltic states have differed, with Lithuania’s economy clearly stronger than Estonia’s and Latvia’s. This is due to stronger domestic demand, primarily household consumption, and also export growth, particularly in services. Lithuania’s growth is expected to reach 2.5% this year and accelerate to 3.2% next year.
Economic recovery is also expected to strengthen in Latvia and Estonia, supported by consumption and investment, while growth in key Nordic export markets will improve (though in Finland it will remain moderate, affecting Estonia). Latvia’s growth is expected to strengthen in the second half of the year, with this year’s forecast raised to 1.5%. Next year, as household confidence strengthens, consumption should contribute more to growth, accelerating it slightly to 1.9%. Estonia’s economy is gradually recovering, with 0.7% growth expected this year, accelerating to 2.5% next year. While higher defense spending supports growth, it also increases budget deficits and debt.
Oil Prices Stable, Petroleum Products Higher
In 2026, ample oil supply is expected if there are no unexpected supply disruptions. OPEC+ controls supply to maintain oil prices at levels that allow market share recovery, while avoiding sharp price drops. The five-year contract price has been stable at around $68 per barrel (Brent) over the past three to four years. With Ukraine becoming more effective at targeting Russian refineries, price risks are more likely linked to petroleum products.
Although crude oil is abundant, petroleum products such as diesel, gasoline, and jet fuel may remain relatively expensive. Brent is expected to average $65 per barrel during the forecast period, with diesel potentially carrying a $30 premium over Brent.
Natural Gas Prices More Uncertain
Natural gas prices ahead of winter are uncertain; with relatively low storage levels in Europe, a cold winter could raise prices. However, significant supply growth is expected in 2026 and 2027. Therefore, any winter-driven gas price increases are likely to be geographically and temporally limited.
An intensified “tariff war,” disruptions in trade and transport chains, or rising energy prices could lead to higher inflation and lower growth. One reason economic activity has been weak in many places is cautious households. If a calmer period occurs, confidence could return, demand could rise, and growth would be faster and stronger. This also applies to the stronger multiplier effect on growth from Europe’s defense and infrastructure spending.
