KIEP: "Global Growth Rate to Rise to 3.0%... Gradual Dollar Weakness Expected"

2026 Global Economic Outlook Report
U.S. Growth Forecast Raised by 0.5 Percentage Points

The Korea Institute for International Economic Policy (KIEP), a government-funded research institute, has projected that the global economy will grow by 3.0% next year. This is an increase of 0.1 percentage points from its previous forecast and is the same level as this year. However, KIEP identified several downside risks to growth, including rapidly changing tariffs and trade order, weakened fiscal capacity, and concentrated investment in technologies such as artificial intelligence (AI).

In its "2026 Global Economic Outlook" report released on November 11, KIEP stated, "Despite external uncertainties, the global economy is expected to show moderate growth led by the United States, supported by solid domestic demand." KIEP's forecast for next year's global economic growth rate is 0.1 percentage points higher than its previous projection in May, higher than the Organisation for Economic Co-operation and Development (OECD) forecast of 2.9%, but lower than the International Monetary Fund (IMF) projection of 3.2%. According to KIEP's outlook, the global economy will maintain a similar level of 3.0% growth this year and next year.

However, KIEP warned that if a global trade war reignites, global trade and investment could contract sharply. Additionally, the persistent fiscal deficits in major countries, including the United States, could weaken governments' crisis response capabilities and increase macroeconomic vulnerabilities. KIEP also pointed out, "If the AI bubble bursts or reality falls short of expectations, a sharp adjustment in asset prices in the technology sector could trigger negative shocks across the broader economy."

Yonhap News Agency

Moderate Growth Led by Advanced Economies, Differentiation Among Emerging Markets

KIEP's upward revision is attributed to the solid trend in domestic demand. In the United States, the growth forecast for next year was raised by 0.5 percentage points to 1.8%, reflecting robust consumer spending and the limited spillover effects of tariff policies, which were less significant than initially expected. In Europe, consumption and investment are expected to recover gradually due to stable prices, but growth is projected to remain at 1.1% due to export constraints stemming from external uncertainties. In Japan, growth is forecast to be limited to 0.6%, as exports and production conditions deteriorate with the full impact of U.S. tariffs.

For China, which has a significant impact on the global economy, the effects of the U.S. tariff suspension are expected to limit the impact of U.S.-China tariff tensions. With economic stimulus measures proving effective, next year's growth rate is projected to reach 4.8%, which is 0.7 percentage points higher than previously expected.

However, Russia is expected to see a sharp decline to 0.9%, significantly lower than earlier projections, as consumption, investment, and production all enter a slowdown phase. Brazil's growth is forecast to decrease substantially to 2.2% from the previous year, due to weakened household consumption caused by high interest rates and a widening current account deficit.

Interest Rates to Decline, Weakening Dollar, Oil Prices to Remain Around $60

Next year, the Trump administration's trade policies and geopolitical risks are expected to be major factors increasing exchange rate volatility. KIEP stated, "The U.S. dollar is expected to weaken gradually next year due to the continued rate-cutting stance of the Federal Reserve, but the direction of the Trump administration's trade policies will have a decisive impact on the value of the dollar." KIEP added, "As the inflationary effects of tariffs become more pronounced from next year, both inflationary pressures and economic slowdown are expected to occur simultaneously, which may limit the pace of monetary easing by the Federal Reserve and partially offset the dollar's weakness."

The won-dollar exchange rate is expected to face moderate upward pressure due to global dollar weakness and foreign capital inflows resulting from the inclusion in the World Government Bond Index (WGBI). However, structural constraints such as high household debt and the full impact of U.S. tariffs are expected to act as downside risks, leading to high volatility. KIEP noted, "High household debt, at the upper 90% range of GDP, acts as a structural factor weakening the won by restricting consumption and limiting monetary policy flexibility. If the real estate market adjustment is prolonged, it could delay the recovery of domestic demand."

As for international oil prices, KIEP expects a continued mild downward trend due to strong supply. The average international oil price next year is projected to be $60.707 per barrel for West Texas Intermediate (WTI). This is higher than the U.S. Energy Information Administration (EIA) forecast of $48.50, but lower than the IMF's projection of $65.84. KIEP also pointed out that there are short-term upside risks to oil prices, such as the Israel-Iran and Israel-Hamas conflicts, the Russia-Ukraine war, and additional U.S. sanctions against Russia and Iran, which could cause oil prices to spike.