Buckle Up: My Economic Outlook for 2026+

TL;DR: Strap in and buckle up, it’s (maybe) about to get dicey in the economy…

With hindsight, you can see ups and downs in the markets, in the present you can feel stresses in your life, or periods of time when you are flying high. But every so often you can just tell when you are about to fly into a particularly turbulent patch of air. Right now I think we have just started a new patch of uncertainty, outlined by 3 key forces:

• Inflation
• Global Liquidity
• AI

Inflation #

Up until around about the beginning of March 2026, core inflation across most western economies had been higher than targets (specifically since 2022 after the fossil fuel crisis triggered by the Russian invasion of Ukraine), but generally trending downwards, and was assumed to reach the target level either the end of this year, or mid-2027.

Markets had generally priced this return to normality in - as had central banks - who were beginning to lower rates, and were assumed to approach approximately 3% by the end of 2026. Indeed, that is what I had also assumed, surely the majority of people can’t be wrong about something as important as this?

That was, until the USA received a booty call on February 28th from their good friends in Israel, telling them that Iran was days away from enriching weapons grade uranium, and conveniently all gathered in an accessible location. The USA subsequently launched “Operation Epic Fury” (funnier if you read it in Trump’s voice), blowing up Iran’s leaders and several military bases - including the nuclear enrichment plant. The original intention was that this would last maybe a week or two before Iran’s government fell and a new regime took over - but we’ve heard this story before, right? Naturally, Iran is not happy about this, and has been flinging bombs left right and centre towards it’s neighbours, and shutting down the Straight of Hormuz (a shipping lane where 20% of the worlds oil flows). Predictably, restricting global supplies of oil by ~20% is a guaranteed method of increasing oil prices.

What’s interesting is that since markets generally run on the “TACO trade” principle (Trump Always Chickens Out), Oil futures hadn’t moved by much, as people generally assumed the war would be over within a few weeks with minimal lasting damage to oil infrastructure Well, the 3rd week has just come and gone, and as of this morning (19th March), Iran has managed to damage the Ras Lafan oil refinery quite substantially.

I’ll leave it there, as it’s not particular fun to imagine the continuation of global conflicts, but I think it’s fair to say that this isn’t going to go away quickly or cleanly. At least Trump won’t be invading Cuba for the next few months - though if China manages to finally finish purging it’s military generals, Taiwan (and the semiconductor industry) could be in for a nasty surprise.

What does this mean?

Inflation was assumed to fall back to 2-3% by end of year, and is looking more and more like we are in for a longer lasting period of 4-6% inflation for the foreseeable future. The markets unwinding their hopes and dreams, along with the friction of lower borrowing will have tangible consequences to investment.

This might not sound like much, until you realise that from 2021 -2027, cumulative persistent inflation (from ONS RPI figures) is looking like it will be around 46%. For reference, 2011-2017 was 16%, all whilst base rates were at a record low of 0.5%, as opposed to the 2020’s expected average of 4.5%.

Global Liquidity #

By this, I mean the accessibility of capital being invested around the world. We’ve pretty much covered it above already: higher interest rates will reduce borrowing.

But to labour the point, I want to briefly touch on the yen carry trade and private credit. Since the birth of Abenomics, the Japanese central bank has held rock bottom interest rates (at around -0.1%). Recently though it looks like Japan is going to start playing in the same ballpark as it’s mikata countries, and has already hiked it’s interest rates to 0.75%. So who cares? Well, Japan has for a long time been a great place to borrow money from, and invest the money elsewhere. Surprisingly, the currency was relatively stable throughout this process.

This form of infinite money glitch led to a lot of capital being available cheaply to purchase other assets, such as government bonds. As long as the asset being purchased yielded a bit above the ~0.5% it would have cost to borrow the underlying yen, along with some buffer for currency fluctuations, then there was a willing buyer for it. This kept up demand for relatively lower yield socks and bonds elsewhere, like the USA or UK. As this reverses, we are likely to see a reduction in demand for stocks and bonds, requiring higher yields and lower P/E multiples to make it make sense again for investors. Think: lower stock market valuations, higher interest rates. A quick aside from this - every time you hear “fiscal sustainability” being uttered from a government, remember that they also sell bonds. If your government’s borrowing gets more risky, it will annoyingly start to bring up your own borrowing costs. Them’s the rules.

Our only hope for this is that the Swiss Franc remains cheap to borrow and relatively stable, to try and step in where the Yen has run away.

I’d also like to touch briefly upon Private Credit. There have been a bunch of murmurings around default rates increasing as general interest rates have crept up, and economic growth has stalled. If we expect the minimal/no growth to be prolonged due to higher inflation as outllined above, then we would expect to see further defaults in this opaque slice of the financial sector.

Why does this matter? If you find out your favourite companies are leveraged on uneasy foundations, then we may start seeing some unwinding here. I’m not too concerned about defaults here, as these markets are so locked up and regulation is generally better that any fluctuations will be slow enough as to not cause too much damage. The general point I’m trying to make is that if this does wobble, then we will get a reduction in liquidity, and less grease in the economy is always less fun.

AI #

A fun collection of recent, lighthearted and totally-not-depressing quotes from our current overlords:

“By the end of 2028, more of the world’s intellectual capacity could reside inside of data centers than outside of them.” - Sam Altman, CEO OpenAI

“Half of all entry-level white-collar jobs could be eliminated within the next one-to-five years” - Dario Amodei, CEO Anthropic

“10 times bigger than the Industrial Revolution – and maybe 10 times faster.” - Demis Hassabis, CEO Anthropic

“Every job will be affected, and immediately. It is unquestionable… You’re not going to lose your job to an AI, but you’re going to lose your job to someone who uses AI.” - Jensen Huang, CEO Nvidia

If you glance past the obvious fact that these 4 are incentivised to say scary shit like this to pump their meme-valuations, then you realise, they are kinda right.

There’s a growing theory on the “K-shaped economy”, where the rich get richer, and the poor get poorer. This has broadly been happening in the western economies now ever since they started outsourcing labour abroad and debased their currencies from scarce metals, incentivising the speculation on essential commodities like housing. So what’s the difference?

The difference is a more recent phenomenon called “the permanent underclass”. If we hold these assumptions to be true…

• AI will reduce the barrier to entry for “information economy” jobs, increasing supply and thereby reducing average wages for previously scarce jobs if employees can leverage AI to get a leg up.
• The best employees will be even better with AI, and thus able to command a higher salary and break out of the now-larger pool of employees in their sector to rise to the top.
• The lowest performing employees - if unable to keep up with the new influx of entrants into their sector, may end up being crowded out or stuck on salaries below their expectation. …then we can expect either companies will indeed reduce headcount once they are happy with their newly more productive workforce, or they will just continue with the same structures as they currently have, but reduce wages in real terms to account for the additional cost of each employee once AI tokens are taken into account.

Either way, this sure sounds like not fantastic news for:

• House prices (if average wages decrease or unemployment increases in economies heavily reliant on services)
• Wealth inequality (if the spoils increasingly get concentrated into fewer hands)

Another way of thinking of this is that the risk-adjusted salaries for knowledge workers may be about to take a nosedive.

Personally, I’m of the latter opinion, and think broadly that AI will be good overall in terms of economic progress + increasing competition in the markets due to lower barriers to entry for new companies, but that in the medium term this will probably lead to a lot of instability across the incumbent knowledge economy companies, all while shovelling money into foundation model companies, once they remove their subsidies as soon as it becomes critical to productivity. But who knows? The productivity boosting effects may be overstated, as after all a machine cannot be held accountable for the decisions it derives, providing a natural cap on the takeover potential in employment.

Summary #

Phew, that was a bit bleak wasn’t it?

This is not financial advice, and I am not mystic meg, this is just the ramblings of an ambient observer who works in AI, travels to Asia a lot, and occasionally gambles his money in the stock markets. I barely know what’s happening tomorrow, but I wrote this to try and comprehend why it feels like the next 6 months are less certain than the last 6.

There’s still a potential universe that I’m rooting on where:

• The doomer effect of AI is deemed to be overhyped, and either the majority of jobs remain unaffected but appreciative of the increase in productivity, or everyone is happy becoming plumbers and pothole fillers.
• Trump chickens out of the Middle East, China doesn’t actually want to take over Taiwan, and our silicon wafer/oil prices stay nice and steady
• Companies don’t default on their debt despite increased competition, or do but to a manageable amount that keeps money lubricating the economy
• Our governments stop running budget deficits, and borrow less, or at least become less risky borrowers
• Inflation comes back down to that nice magical 2% target, and we ease back into normality.

History doesn’t repeat, but it does rhyme, the problem is I can’t tell where I heard this song from?