Growth cools, debt rises: Global economy faces fresh risks in 2026

Officials from the Korea Center for International Finance speak during a seminar on the outlook for 2026, held at the Korea Federation of Banks headquarters in Seoul, Monday. Korea Times photo by Lee Yeon-woo

The world economy is entering a "new normal" of medium-to-low growth as it nears 2026, with performance set to slow across most major economies except the U.S., experts said Monday.

Korea, heavily reliant on exports, is also expected to lose momentum as tariff pass-through accelerates and structural drags deepen. The World Trade Organization expects global trade growth to fall from 3 percent in 2025 to just 1.5 percent in 2026.

The Korea Center for International Finance (KCIF) held a seminar on Monday to forecast the global economic and financial outlook for 2026, where it raised such concerns.

"Heightened geopolitical risks and growing political-economic polarization are likely to further increase uncertainty," said KCIF President Lee Yong-jae. "With some tariff pressures stabilizing, rising semiconductor capital investment at home and abroad — together with continued progress on inflation control — is expected to help anchor global growth at a moderate pace of around 3 percent."

As growth slows, governments are likely to lean more on expansionary spending as their main policy lever, the KCIF said.

Fiscal deficits in advanced economies widened from an average of 2.5 percent of GDP in the prepandemic years (2015-2019) to over 4 percent after 2020, and are projected to reach 4.9 percent by 2026. Korea's fiscal deficit also rose to 4.2 percent of GDP this year, up from 3.6 percent in 2023.

However, the challenge is that these rising debt burdens — coupled with an aging population and technological advances — are structural and long-term, making it increasingly difficult to return to its past trajectory.

"Higher government spending increases bond supply, pushes long-term yields up and eventually strain governments' ability to secure stable financing," said Yoon In-koo, head of international financial market analysis at KCIF. "More countries cannot help but turn to short-term debt, leaving fiscal policy vulnerable to shifts in market sentiment."

The longer-term risk, Yoon warned, is a toxic mix of inflation, currency depreciation and the boom-and-bust cycles of asset bubbles.

Meanwhile, other major issues highlighted at the seminar as shaping the 2026 outlook included U.S. President Donald Trump's second-year policy agenda, the policy trajectory of the U.S. Federal Reserve and the artificial intelligence industry's influence on the real economy and financial markets.

"In the unstable global economic environment ahead, it will be more important than ever to identify opportunities and respond with flexible strategies," Lee said.