Paul Gruenwald, global chief economist at S&P Global Ratings, joins Remy Blaire at the New York Stock Exchange to discuss the 2026 economic outlook, AI-driven productivity gains and how central banks are recalibrating to a higher neutral rate environment.
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Remy: Welcome to FINTECH.TV, I'm Remy Blaire. Yields are back but so is the volatility. After decades of lower for longer bond markets are recalibrating to regime defined by geopolitical fragmentation as well as sticky terminal rates. Now the question for this year 2026 is no longer about the timing, but where the new neutral actually sits. Well, joining us to navigate this next era is Paul Gruenwald, who's the global chief economist at S&P Global Ratings. Paul, great to have you here. Thank you so much for joining. Well, you and Vanguard are having an event here at the New York Stock Exchange. So first and foremost, given all the volatility that we've seen so far in 2026, what is the outlook moving forward and what are you paying attention to?
Paul: Yeah. Well we spent the second half of last year upgrading our forecasts right. We were all worried about the impact of the tariffs. They were not as bad as we thought. The labor market held together. And now we've got this investment boom for the data centers and AI. So we started the year in pretty good shape. question is we have a recovery that's pretty narrow. We've got one sector investing, one sector hiring. And the consumption is kind of skewed toward the high end. Is that all going to hang together? Maybe with some tailwinds from easy financial conditions and low oil prices. But right now, we don't normally say this, but we've got a little bit of upside risk to our forecast, I think for 2026.
Remy: Yeah. So tell me about this upside. And where do you see this coming from.
Paul: Yeah. Well I think the big the big prize is productivity around AI. And you know we economists have a have a sort of a data point from the 1980s. One of our Nobel laureates, Robert Solow, famously said that he could see computers everywhere in the economy except in the productivity data. people are kind of applying that same framework to AI.
But it looks like the last couple of quarters in the US, we're starting to see this unexpected and not fully identified source of growth. But, you know, if that's AI productivity coming through that is happening faster and a little bit larger than a lot of people thought So it's not time yet to sort of declare victory on this, but this is a potential windfall for earnings, for government tax revenue, for household income. So we'll have to see if that's the real deal. And then how how how big is it and how is it going to play out this year?
Remy: Yeah. And speaking of which, of course, we are paying attention to economic data when it comes to the labor market as inflation as well as policy coming out from the nation's capital.Now, when it comes to policy, there's still a lot of uncertainty in terms of implications for the US as well as for around the world. So how are you factoring this in?
Paul: Yeah.Well, one of the surprises last year was the resilience. So you know the labor market is held together. We're still I would say close to full employment in the US 4.4 ish. Um hiring has dropped but firing is also dropped. So the churn is lower. But yeah, we're looking at geopolitics. We have a long list of risks that could knock our forecast to the downside. But um, markets have been resilient. Trade looks like it's being rewired in response to the tariffs. Some of the the capital flows are getting rewired in response to the tariffs So the downside hasn't been as bad as we thought. I mean there could be more to come. But now we've got the balance with the AI story. So you know it doesn't look like a given. Everything we've gone through since the beginning of last year doesn't look like a terrible year this year, to be honest.
Remy: Yeah, and you did touch on risk. So tell us what you're watching when it comes to risks and why it matters.
Paul: Yeah. Well, I think the the foundation of growth right now, as I mentioned, is pretty narrow. So if anything happens to a combination of labor demand, the AI story or these benign financial conditions we have, that's probably going to lead to a down leg of growth and could lead us to lower our growth forecast. that could be a surprise around AI or earnings. It could be, you know, a bad print for the labor market, let's say. Or it could be, you know, something around, you know just volatility in the market. You know, jump in yields or something like that. But as I said, those risks have been around for a while and they still seem to be holding together.
Remy: Yeah. And finally, when it comes to the outlook moving forward, of course we're paying attention to policy, in particular monetary policy. But at the time, at a time when we're watching what the other global central banks are doing outside of the Federal Reserve, and what this means for rate differentials as well as the currency markets. What are the implications here and what is your outlook for the fed?
Paul: Well, the fed we think the neutral rate for the fed is 3%, maybe a bit more. So there are about 50 basis points above neutral. But you know, if you look at the economy and where we are on unemployment and growth etc., it's not obvious. The fed is far, far away from where it should be. we have the fed on hold the first half of this year and two more cuts later in this year.
The rest of the world looks like they're pretty much done. ECB we think is done. There are two maybe one more from the Bank of Canada. The reserve Bank of Australia actually raises rates this week. But I think this cutting cycle that we started in the middle of 2024 is largely done So in terms of flows, you know, with the US you've got relatively high rates and a good growth story that's probably going to support the, uh, the currency.
Remy: Well, Paul, great talking to you as we kick off 2026. Thank you so much for sharing your insights.
Paul: Pleasure.