After a Rollercoaster Year, 2026 Looks Just as Thrilling

2025 was full of economic twists and turns in the United States. However, it’s still too early to form a clear picture of everything that’s happened. Many pieces of the puzzle are still missing, as the federal government shutdown disrupted the release of multiple economic indicators. As you’ll see in this week’s “What to Watch For” section, the coming week will bring plenty of useful data. We’ll finally get third-quarter real GDP data just before Christmas—almost two months late. As discussed in our latest Economic and Financial Outlook External link., we still expect robust third-quarter real GDP growth, followed by a much weaker uptick in the fourth quarter. If we had to quickly describe the state of the US economy in 2025, we’d say that although tariffs shook business confidence and concerns about the rising cost of living dampened consumer sentiment, the real economy held up well. Is this indeed, as Donald Trump has claimed, a new golden age of America? No. But has 2025 been a disaster? Also no.

Will 2026 push the United States further toward one of these two extremes? That’s not our scenario, but the road ahead still looks bumpy. Several developments will be worth watching closely.

Tariffs Remain the Big Story

The Trump administration continues to base its economic policy on high tariffs. Even countries that signed bilateral agreements with the US in 2025 face much steeper customs duties than they did a year ago. The US Supreme Court is currently reviewing the legality of the tariffs introduced under the International Emergency Economic Powers Act—namely, the fentanyl-related tariffs on Canada and Mexico and the “reciprocal” tariffs on most other countries. We may not have to wait until 2026 for their ruling, as an announcement could come soon. Meanwhile, Donald Trump said that reversing his policy would be catastrophic. “The biggest threat in history to United States National Security would be a negative decision on Tariffs by the US Supreme Court.” Almost 84 years to the day after the attack on Pearl Harbor and more than 24 years after 9/11, that statement raises eyebrows, but it also underscores how important tariffs are to the president. Note that the issue isn’t whether the US can impose tariffs, but how these tariffs were imposed. If Congress had adopted Trump’s trade policy—as it did with President McKinley’s tariffs in the 1890s External link. and the Smoot‑Hawley tariffs in the 1930s—there would be no legal challenge. But getting such a policy through both chambers is certainly not a given, even with Republican majorities.

Sectoral tariffs aren’t being contested, and we may very well see new ones targeting specific industries announced next year. Officials have already started the investigations needed to impose tariffs on aircraft, electronics (including semiconductors and electronic circuits), smartphones, medical and pharmaceutical products, industrial machinery, robotics, and wind turbines and parts. However, the president has yet to make any final decisions.

Another key trade issue for 2026 is the planned review of the Canada–United States–Mexico Agreement (CUSMA). The deal, enacted in 2020, calls for a joint review of the agreement and any recommendations for action submitted by a party, along with a decision on appropriate actions, before the agreement’s sixth anniversary on July 1, 2026. The three countries must also state in writing whether they want to extend the term of the agreement past 2036 for another 16 years. It’s already clear the US will propose plenty of changes, and it will be interesting to see whether this review could be as contentious as feared. Note that a failure to reach an agreement does not mean that CUSMA will end next year. It just won’t automatically be extended past 2036. That said, the agreement allows withdrawal after six months’ notice, but the Trump administration has said little about that. Ultimately, we’ll see whether the CUSMA talks change the exemptions Canada and Mexico currently enjoy on eligible goods.

What About Tariff Dividends?

One factor that could slightly alter the outlook would be if the Trump administration moves forward with tariff dividend cheques. President Trump has floated this idea a number of times. Like the stimulus cheques sent out during the pandemic, the tariff dividend would be a lump sum payment sent directly to all but the wealthiest Americans. The amount most often mentioned is US$2,000. The catch? The total cost would wipe out expected tariff revenues. In recent months, monthly tariff receipts averaged US$32.4 billion, or just under US$400 billion annually. The dividend would cost somewhere between US$300 billion and US$600 billion, depending on how many people qualify. Considering the size of US deficits and the absence of a major economic downturn, this measure doesn’t seem entirely appropriate.

Free Rein or Lame Duck?

If implemented, the tariff dividend could be seen as an election-year giveaway to woo voters. Polls show US voters give Donald Trump a net negative approval rating on the economy. Their biggest concern is the same as it was during the 2024 election: the cost of living. Americans are increasingly skeptical that the administration is trying to get it under control.

The pressure is mounting, with less than a year to go before the midterm elections on November 3, 2026. Tariffs, the loss of health insurance subsidies and rising electricity costs are driving up the cost of living—and all are partly or entirely due to Trump policies. Some provisions of the 2025 One Big Beautiful Bill Act External link. offer tax relief for households and make things easier for them, but the net positive impact will likely be modest.

Under these circumstances, Republicans could lose some ground and the House majority could flip after the midterms. Historically, the president’s party loses seats. This has occurred in every midterm election since the early 1900s, except in 1934, 1998 and 2002. However, the redrawing of electoral maps in some states could change the equation.

If the Republicans keep their congressional majorities and Trump maintains his hold on his base, he’ll have free rein to pursue his agenda in the second half of his term. If Democrats win the House (the Senate’s a tougher bet), Trump would soon turn into a lame duck with little sway over domestic economic policy. To avoid that, Trump has to hope for something that’s far from certain: a sharp pickup in economic growth in 2026.

Can AI and a New Fed Chair Save the Day?

In 2025, one of the main forces powering the US economy was investment in artificial intelligence (AI). Without the private sector’s massive investment in IT equipment, software and data centre construction, real GDP growth in the first six months of the year would have been much more anemic. There’s also the indirect boost given by the wealth effect resulting from the AI-driven stock market rally. The Trump administration clearly wants the AI boom to continue, with a raft of policies promoting the industry External link.. This week, the president signed an executive order blocking states from enforcing their own regulations on the AI industry. The question now is whether AI will keep driving growth or run out of gas. At some point, profits must increase enough to justify all this investment. If not, the AI boom could be just another case of irrational exuberance like previous financial bubbles, with serious consequences for markets and the broader economy.

Public skepticism about the widespread adoption of AI is already evident. According to the Pew Research Center External link., 57% of Americans believe AI poses elevated risks to society. Only 25% see major benefits, while 15% think both risks and benefits are significant. Local issues created by the energy needs of data centres could also influence the midterms External link..

Donald Trump also needs to pick a new Federal Reserve chair. Jerome Powell’s term ends in May, and the nominee must be confirmed by the Senate before then. It’s a tough job, and Trump’s criticism of Powell External link. has been harsh. A critical question is whether the new Fed chair can maintain independence from the White House. The leading candidate now appears to be Kevin Hassett, director of the National Economic Council and one of Trump’s key economic advisors. If confirmed, Hassett will try to project independence, but his views probably align closely with Trump’s. If the US economy doesn’t pick up as much as Trump wants, Hassett may push for looser monetary policy. But convincing his colleagues on the Federal Open Market Committee could be a challenge.

There’s no shortage of issues heading into the new year, and their outcomes will have major economic and financial implications. And that’s without considering other curveballs that could come our way, particularly on the geopolitical front. In short, 2025 was full of surprises, and 2026 promises to deliver plenty more.