Global Macroeconomic & Financial Scenario Outlook (2025–2029)

Alternative 1 (≈25% probability) – “Recession Shock (Hard Landing)”

Overview: In this downside scenario, the economy tips into a recession within the next 3–6 months. Central banks’ indecision and lagged effects of tight policy result in an abrupt slowdown in demand. The bond market’s conviction of rate cuts proves correct – and in fact, cuts happen faster and deeper than in the base case, as policymakers scramble to respond to a sharper downturn. Asset prices, which have been propping up spending, finally crack: equity markets fall sharply and housing prices retreat, revealing underlying economic fragilities (weak productivity growth and high private debt) that had been masked by high asset valuations. Consumers and firms, spooked by persistent recession talk and perhaps a negative catalyst (e.g. a financial stress event or external shock), retrench en masse, causing a self-reinforcing downturn. This scenario sees clear echoes of 2008–2009, though the origins are different (this time stemming from policy over-tightening and sentiment shifts, rather than a banking collapse). Importantly, while a recession occurs, it is moderate in severity (not a depression), in part because authorities respond with stimulus and because banks – much better capitalised now – remain largely resilient, avoiding a full financial meltdown.

• United States: In this scenario, U.S. GDP contracts for a couple of quarters. We forecast real GDP growth of roughly –2% to –3% (annualised) in Q3 and/or Q4 2025 – a mild recession by historical standards (comparable to, say, 1990–91 or 2001 downturns). The cracks start to show in consumer spending as excess savings are depleted and the cumulative hit of high interest rates squeezes borrowers. Consumer psychology plays a crucial role: after months of media warnings, households suddenly act on recession fears, significantly cutting back on discretionary spending (travel, durable goods). This validates the negative narratives and accelerates the downturn – a classic self-fulfilling prophecy where pessimistic media narratives cause aggregate demand to contract. At the same time, businesses, noticing softer sales and higher financing costs, curtail hiring and investment. Unemployment begins to rise; by late 2025 the U.S. unemployment rate could increase from ~3.5% to 5%+. Inflation: With demand evaporating, inflation decelerates rapidly. Headline CPI could fall to ~1.5–2% by early 2026, and core inflation would also drop closer to target (and possibly below on a short-term basis). This disinflation is faster than the Fed anticipated – essentially an overshoot of their goal due to the recessionary gap. An added disinflationary impulse comes from asset price declines: the wealth effect goes into reverse. U.S. equity markets fall into a bear market (e.g. the S&P 500 down ~20–25% from its recent peak) as earnings prospects dim and risk aversion spikes. Households experience a significant loss of wealth, given that equities and housing form a large chunk of net worth. Housing, which had been resilient, now softens materially – home prices nationally could decline on the order of 5–10% over the next year in this scenario, as rising unemployment and high mortgage rates choke off demand. (Certain frothy regional markets might see even steeper drops, reminiscent of 2008 albeit to a lesser degree due to undersupply this cycle.) This drop in housing wealth has a direct negative effect on consumption – consistent with estimates that a ~2% quarterly house price decline can cut consumer spending by ~0.5% over two years – and feeds a deflationary trend (housing disinflation in CPI). Federal Reserve response: Sensing the sudden downturn, the Fed pivots dramatically. They cut rates sooner and more aggressively than in the base case. By the end of 2025, the Fed could deliver on the order of 100–150 bps of rate cuts, bringing the Fed funds target down to ~3% or even lower if the recession is pronounced. (This aligns with hedging in interest rate futures that had reflected the possibility of a severe downturn requiring rapid loosening.) The Fed also pauses quantitative tightening; in a stress scenario it might even consider new QE or liquidity programs to stabilize Treasury markets and credit (much as it did in 2020). Bond markets rally strongly on the prospect of easier policy and flight-to-quality. The 2-year Treasury yield plunges (possibly to ~2.0–2.5%), its largest decline since the global financial crisis, as traders price in multiple Fed rate cuts and seek safety. The 10-year yield also falls, albeit not as dramatically – perhaps to ~3% or just below – reflecting lower expected inflation and a bid for long-duration bonds. The yield curve likely steepens significantly from its inverted state: with short rates collapsing, the 2y–10y spread could swing positive (say +50 bps), a typical pattern once the Fed starts cutting in a recession. Credit spreads, however, widen: corporate bond yields relative to Treasuries jump as default risks increase for weaker firms. Some highly leveraged sectors (e.g. speculative-grade corporates, commercial real estate borrowers) face a credit crunch. Financial system: While a 2008-style banking crisis is not our base assumption (thanks to stronger capital ratios – Tier 1 capital is far above 2007 levels – and proactive Fed liquidity support), we could see pockets of instability. For instance, a liquidity squeeze in the Eurodollar market might occur if foreign banks or shadow banks face dollar shortages. As much as $13 trillion in dollar obligations exist outside the U.S. banking system, and stress there could force the Fed to reopen swap lines broadly to provide dollar liquidity, as it did in 2008 and 2020. In this scenario, the Fed likely does so rapidly, mitigating the worst global funding stresses. Large U.S. banks remain solvent and liquid (no Lehman-style collapse), but smaller or weaker institutions could wobble under credit losses – potentially requiring targeted support (similar to the 2023 regional bank troubles, reemerging in a recession). Consumer sentiment and behavior: Consumer confidence falls to recessionary lows. The University of Michigan sentiment index, for example, could revisit depths seen in early 2022 (when inflation fears peaked) or worse, as unemployment news dominates headlines. Paradoxically, inflation moving down so fast might initially not register as a positive with consumers, who are more alarmed by job prospects. We essentially “talk ourselves into a recession,” as the adage goes. Policy response (fiscal): A U.S. recession in 2025 might prompt a fiscal response despite political gridlock – perhaps extended unemployment benefits or stimulus measures, especially with an election year approaching (if the political will exists). This could cushion the downturn somewhat by 2026, but in the 3–6 month horizon, the contraction is front and center.
• Europe: The Eurozone is pulled into a downturn as well in this scenario. High energy costs and past ECB tightening have already sapped growth, so the U.S. hard landing pushes Europe outright into recession. We anticipate Euro Area GDP could shrink by –1% to –2% over the next two quarters (worse in manufacturing-heavy economies like Germany). Consumer spending in Europe drops as real incomes are squeezed not just by the past inflation, but now by rising unemployment and fear of job loss. Inflation: Eurozone inflation falls dramatically from its mid-single-digit rates. By late 2025, headline HICP might be near 2% or below, with core inflation following suit as the output gap widens. Countries like Spain or Italy, which saw higher inflation, could even see sub-1% inflation or brief deflation. The ECB reacts by halting any tightening plans and accelerating its easing: it might cut the deposit rate from ~2.5% towards 1% or lower in short order. (In 2008, recall, the ECB infamously hiked in July then had to cut rates rapidly by year-end; in this scenario, they avoid such a mistake and pivot to cuts earlier, learning from that episode.) Despite these cuts, the ECB also likely reactivates asset purchases or other tools if peripheral bond spreads widen. Given high debt levels in some European countries, a recession could reignite concerns about sovereign spreads (e.g. Italy). The ECBs Transmission Protection Instrument might be on standby to prevent unwarranted bond selloffs. Financial sector: European banks, like U.S. ones, are better capitalised now than in 2008, but a recession would increase non-performing loans. We might see isolated stress in smaller banks or those heavily exposed to real estate (for example, Swedish banks given Sweden’s property downturn). Overall, however, a systemic banking crisis is not assumed, though credit conditions tighten significantly. Asset markets: European equities drop ~20% in this scenario, in line with global risk asset moves. Housing markets in Europe, already cooling, turn downward; for instance, house prices in the Eurozone could fall ~5%+ on average, with larger declines in overvalued markets (e.g. German cities). This adds to the negative wealth effect and further chills consumer spending. Euro: In a global risk-off, the U.S. dollar typically strengthens. The euro could depreciate (perhaps falling from ~$1.10 to under $1.05) as investors flock to USD assets and as ECB rate cuts make the yield differential less attractive. A weaker euro might provide a small offset by boosting export competitiveness, though in a global recession export volumes suffer anyway. Sentiment and politics: Unemployment in Europe ticks up (e.g. from ~6.5% to 8% in the Eurozone), which could spark political pressures for stimulus. The European Commission might relax budget rules to allow fiscal loosening (much as they did during COVID). Nonetheless, Europe’s recovery usually lags the U.S., so even as the U.S. might bottom out in 2026, Europe could still be struggling. This short-term recession scenario for Europe has parallels to the 2008–09 crisis (when European GDP contracted sharply after the U.S.), but one key difference is the starting point: in 2008, European banks were loaded with U.S. toxic assets; now, the issue is more general demand shortfall, with banks in better shape. Also, inflation was low then, whereas now it’s coming down from high levels – so real interest rates actually rise initially as inflation falls faster than nominal rates, potentially deepening the recession (unless the ECB cuts very fast).
• Asia: A U.S.-European recession inevitably dampens Asias outlook. China in this scenario likely misses its growth targets significantly. With Western import demand dropping, China’s export sector contracts, leading to spillover layoffs in manufacturing. If not already fully resolved, China’s domestic property troubles worsen as well – a global downturn reduces commodity prices and construction, further pressuring developers. We could see Chinas GDP growth fall to ~3% or lower in 2025, a “hard landing” by Chinese standards. In response, Chinese authorities unleash more stimulus: interest rates are cut aggressively (even though they’re already low), banks are instructed to lend, and the central government prepares fiscal expansion (perhaps large infrastructure projects or bailouts for the property sector). However, these measures take time, so China’s short-term trajectory is weak. Other Asian exporters (South Korea, Taiwan, Southeast Asia) also suffer from the global slump – e.g. Korea might enter a recession due to slumping electronics demand. Inflation in Asia: largely falls or stays low, as commodity prices likely plunge in a global recession. Oil could drop to, say, $50–60/barrel, which is a boon for energy importers like India but also a sign of weak global demand. Many Asian economies see inflation well below target (some flirting with deflation). Policy: Central banks across Asia pivot to easing. The Reserve Bank of India (RBI), for instance, might cut rates to support growth (especially if inflation there falls back into the 3-4% range). Even Bank of Japan, which has been trying to raise inflation, might postpone any tightening and maintain accommodative policy as global pressures intensify. One interesting aspect is the global dollar system: in a global recession, the dollar typically strengthens and dollar funding can dry up for emerging markets. Countries with high dollar debts (some Southeast Asian corporates, etc.) could face strain. But lessons from past crises mean many Asian economies now hold large FX reserves as a buffer (e.g. India, China, etc.). Additionally, the Fed’s swap lines can extend to major Asian central banks (BoJ, RBA, possibly PBoC indirectly through arrangements) to alleviate dollar shortages. We might see the IMF or regional arrangements (Chiang Mai Initiative) activated to assist vulnerable economies. Japan’s role as a capital exporter can also help: if U.S./EU yields plummet, Japanese investors may repatriate less, continuing to provide offshore USD liquidity. Asset impact: Asian stock markets fall broadly, with export-oriented markets down >20%. Chinese stocks might underperform given domestic and external woes. Currencies in emerging Asia likely depreciate against the USD, though those with strong external positions (like China’s RMB) might hold relatively steady or only slide modestly. Interconnected feedback: The global nature of this recession scenario means feedback loops amplify it – e.g. a U.S. import slump hurts China/Germany, which in turn hurts commodity exporters (Australia, Brazil) – a classic synchronous downturn. This has shades of the 2009 global recession, though perhaps milder in magnitude. A mitigating factor is that policymakers today would react faster with stimulus (having learned from the slow response in 1929 or even 2008). Thus, while Q3/Q4 2025 are painful globally, by 2026 there is a concerted global easing that lays ground for recovery (beyond our 6-month horizon).

Bottom line (Short-Term Recession): This hard-landing scenario carries ~25% probability. It is characterised by a policy overshoot – central banks kept rates high a bit too long such that, when combined with negative expectations, it triggers a recession. Bond markets end up vindicated (they correctly signaled the need for cuts with an inverted yield curve). Key variables would shift dramatically: global growth turns negative for a few quarters, unemployment rises, and inflation quickly converges to target or below. Central banks reverse course to cut rates aggressively (the Fed potentially back to near 0% by 2026 in this scenario). Importantly, asset price correction is central: housing and equity declines remove the artificial support under the economy, revealing weak underlying productivity (which had not kept pace with asset-driven “paper wealth” ). A balance sheet recession dynamic could take hold – akin to the post-2008 deleveraging or Japan’s 1990s, though hopefully milder given quicker intervention. In essence, this scenario is a manifestation of the downside risk if the wealth-driven expansion flips into a wealth-driven contraction. While painful, it is not as severe as 2008 because of stronger financial system safeguards (e.g. banks’ Tier 1 capital ~15% now vs <4% in 2007) and proactive monetary backstops.

Alternative 2 (≈15% probability) – “Stagflation Persistence” 

Overview: In this scenario, the global economy experiences a frustrating stagflationary impasse over the next 3–6 months. Inflation proves stubbornly high, refusing to fall to target as quickly as hoped, due to factors like resurgent commodity prices or entrenched wage growth. Central banks, facing uncomfortably high inflation, become indecisive about easing – in fact, they delay or cancel expected rate cuts, and some even contemplate further hikes. Bond markets, which had boldly priced in multiple cuts, are forced to reprice to a higher path for interest rates. This leads to an upward shift in yields (particularly at the short end) and a possible spike in long-term yields as well if investors demand a higher inflation premium – a dynamic reminiscent of mid-2008 when bond yields jumped on inflation fears even as growth was slowing. The result is a toxic mix: economic growth stagnates (or slows to near zero) under the weight of high interest rates and fading real incomes, yet inflation remains elevated (well above 2%). Asset markets struggle in this environment: neither a bull market (due to growth concerns) nor a full crash (nominal growth keeps corporate revenues growing in cash terms), but likely declining in real terms. This scenario bears similarity to the 1970s stagflation episode, though in a milder form (for now). Unlike the 1970s, central banks today have explicit inflation targets and more credibility – but that credibility is on the line here, as misreading inflation dynamics could prolong the pain. 

• United States: Instead of continuing its downward trajectory, inflation in the U.S. plateaus or even ticks up slightly in the second half of 2025. For instance, headline CPI, which might have been ~3% in early 2025, could stall in the mid-3% range or climb back towards 4% by late 2025. Core inflation proves “sticky” around 3–4%, refusing to budge as services prices and wages remain robust. Possible drivers: a renewed surge in oil prices (say, due to geopolitical tensions in the Middle East) drives gasoline and transport costs higher; wage growth in a still-tight labor market runs near 5%, keeping core services inflation elevated; and inflation expectations among the public start to inch up, causing a wage-price spiral lite. The Fed, which had been hoping to start gentle rate cuts, is caught in a bind. Rather than cutting in late 2025, the Federal Reserve holds rates at the peak (≈4.5–5%) and even floats the possibility of another hike if inflation doesn’t improve. This stance surprises markets that had priced in easing – effectively the Fed is saying “not so fast”. The 2-year Treasury yield, which had fallen towards 3.7%, jumps back up to 4.3–4.5%, erasing the inversion gap with the fed funds rate. Long-term yields also rise because investors now see inflation staying higher for longer: the 10-year yield could rise toward 4.5–5% (levels not seen consistently since 2007), as an inflation risk premium gets embedded. The yield curve might flatten or even briefly revert to upward sloping, as short and long yields converge around 4.5%. Notably, this yield backup is happening even as growth is weakening – an atypical combination signaling stagflation. GDP and employment: With no monetary relief, economic growth slows to a crawl. We might see a quarter of near-zero growth or a very slight contraction, but not a deep recession yet – more like “growth recession” conditions. The unemployment rate could rise modestly (from ~3.5% to ~4–4.5% by end-2025) as interest-sensitive sectors (housing, manufacturing) shed jobs, but overall labor markets remain relatively tight by historical standards (as some industries still face labour shortages). The paradox is that despite weak growth, inflation stays high – so the misery index (inflation + unemployment) stops improving or worsens. Consumer sentiment: High inflation keeps sentiment depressed. Households feel the pinch of declining real incomes – wage gains are not keeping up with 4%+ inflation, and with asset markets underperforming, the wealth effect doesn’t help. Confidence surveys likely reflect considerable pessimism (comparable to early 2022 levels when inflation anxiety was peaking). Consumers start to behave in a more inflation-anticipating way – for example, making purchases sooner fearing prices will rise, which perversely can sustain demand and prices. Asset prices: Equities underperform significantly. The S&P 500 could decline or at best remain flat over 6 months, which in real terms is a loss given 4% inflation. Higher discount rates (with 10yr yields at 5%) compress equity valuations (P/E multiples fall). Corporate earnings might hold up in nominal terms (as companies can pass on some price increases), but margins could suffer from rising costs. Housing market: Housing affordability worsens further as mortgage rates rise in tandem with Treasury yields. We could see 30-year mortgage rates pushing 8%+. This essentially freezes the housing market – sales volumes drop sharply, new construction slows, and home price appreciation, which had already cooled, likely turns slightly negative nationally. However, given sticky inflation and general demand, we might not see a steep nominal drop in home prices, just stagnation (real house prices fall). One factor: many homeowners have low fixed-rate mortgages from prior years, so they don’t need to sell – this prevents a flood of supply. Thus, housing acts more as a stagflationary drag: low activity and persistent high rents (because would-be buyers stay renters). Indeed, shelter inflation could remain elevated in CPI in the short term because rent increases lag home prices (the “sticky rent” issue). Monetary policy credibility: The Fed’s predicament here is analogous to its 1970s dilemma or even mid-2008. In 2008, the Fed’s concern about rising headline inflation (due to oil) kept it from cutting rates aggressively until the crisis forced its hand; similarly, here the Fed’s priority on fighting inflation leads it to withhold stimulus despite economic malaise. The risk is a policy mistake – if the Fed misjudges and holds too tight for too long, it could eventually cause a deeper recession (as happened in the early 1980s when Volcker had to induce a sharp downturn to break inflation). In this 6-month window, though, they choose inflation-fighting over growth, meaning no immediate recession but prolonged stagnation. 
• Europe: A stagflationary scenario in Europe might actually be worse than in the U.S., because the Eurozone is more exposed to commodity price swings and has less autonomous policy flexibility for member states. In this scenario, let’s say energy prices spike again going into next winter (for instance, a renewed natural gas shortage or oil price jump). Headline inflation in the Eurozone, which had been coming down, rebounds – perhaps climbing back above 4% (from ~3% prior). Core inflation in Europe also persists around 3%. The ECB, which had started easing, does an abrupt about-face. It stops further rate cuts and warns that it could even raise rates if inflation remains too high. This is a shock to markets and politicians alike, given growth is near zero. European growth indeed stagnates – we might see Eurozone GDP growth ~0% for the coming two quarters (or small negatives balanced by some positives). Countries like Germany could fall into a mild recession (contracting output) due to their manufacturing sector being hit by high input costs and weak external demand. Meanwhile Southern Europe might see slightly better activity due to tourism and fiscal support, but broad stagnation is the rule. Unemployment in the Eurozone, which had hit record lows (~6.5%), starts rising toward 7–8%, yet inflation doesn’t recede proportionally. This is the bane of stagflation. Bond yields: The German 2-year Schatz yield rises as markets price out ECB cuts – moving back toward ~3%. Peripheral bond yields (Italy, Spain) also rise; with growth stagnant, debt ratios look worse and investors demand a premium. The ECBs hawkishness, however, keeps the euro currency supported or stronger (in contrast to the recession scenario). A stronger euro (perhaps rising to $1.15 if markets believe the ECB will out-tighten the Fed) could slightly dampen imported inflation, but not enough. Fiscal policy: Governments in Europe face a dilemma – inflation is high (so they don’t want to stoke it with spending), but economies are weak (so they want stimulus). Likely there will be some targeted relief (e.g. energy subsidies if prices spike again) but also pressures to restore fiscal discipline given high debt and higher borrowing costs. This lack of a coordinated fiscal response means the burden falls on the ECB, which is in inflation-fighting mode. Social impact: Stagflation can breed discontent – we might see more labour strikes or wage demands (as in UK, France in 2023) because workers feel the cost-of-living crisis isn’t resolved. If wages do rise significantly in Europe (to compensate for inflation), it could further entrench inflation – a dynamic the ECB is keen to avoid. Thus a key risk is wage-price spiral: not an out-of-control one, but enough that inflation stays ~3-4%. Asset markets: European stocks decline, especially rate-sensitive sectors (utilities, real estate, tech). The STOXX 600 might fall ~10%+ over this period. European house prices, already stretched in some countries, start to decline in real terms. In nominal terms, some markets might plateau (like France, Germany), but in high-inflation countries nominal prices could even still rise modestly, masking real declines. Banks in Europe could face margin pressure: higher rates help net interest margin, but if loan demand is weak and defaults edge up, it’s not clearly beneficial. They also hold sovereign bonds, which are losing value as yields rise (though accounting rules and hold-to-maturity portfolios may cushion immediate hits). Overall, Europe in stagflation sees little relief – it’s a situation of “no growth, still-high prices,” which is politically and economically hard to navigate. 
• Asia: Asia’s outcome in a stagflationary scenario depends on whether the inflation is global commodity-driven and how each country is positioned. Oil-importers like China, Japan, India would face the pain of higher import costs. China might see its inflation finally perk up (which ironically the PBoC might welcome to a point, given recent deflation fears). If oil is up and global inflation high, Chinas CPI could rise to ~3% or more, constraining PBoC’s ability to ease further. Yet China’s growth might not benefit much from global demand (since U.S./EU are stagnant). So China could face its own version of stagflation: moderate inflation despite sub-par growth. The government might resort to more direct stimulus (which could then risk further inflation or debt problems later). Japan: higher commodity prices push Japan’s inflation above target again (perhaps 3%+), which might actually help firmly exit deflation psychology, but if it’s purely cost-push, it hurts consumers. The BoJ in this scenario might end Yield Curve Control and allow rates to rise a bit to anchor inflation expectations – but it will tread carefully to avoid choking the fragile growth. Emerging Asia: many ASEAN countries are also oil/gas importers (except Malaysia). They would experience higher inflation, which could force their central banks to maintain tight policy even as growth slows. India, for example, could see CPI stick around 6% (above RBIs comfort) due to costly imports, limiting its rate cut space and keeping growth below potential. Trade flows: If the U.S. and Europe are not in outright recession (just stagnation), Asian export volumes might not collapse, but they won’t grow briskly either. The benefit Asia saw from supply chain normalization fades, and instead they face a lukewarm external environment with possibly rising input costs. Commodity producers in Asia (like Indonesia for coal/palm oil, Malaysia for oil/gas) could actually see some benefit – their export revenues rise with prices, which might improve their trade balances but also fuel domestic inflation and possibly Dutch disease effects. Global dollar dynamics: In stagflation, the US dollar might not follow its usual recessionary strengthening path. If U.S. inflation is high and Fed not easing, the dollar could remain relatively steady or even weaken against some currencies (investors might diversify into currencies of countries handling inflation better, or into gold/commodities). Emerging markets with high inflation and weak growth could face stagflationary debt risks – unlike a pure recession scenario where the IMF can prescribe stimulus, in stagflation policy choices are tougher. Debt-laden countries might face rising borrowing costs and reluctant lenders, raising risk of sovereign stress in some frontier markets (e.g. some South Asian economies or highly indebted ones). We might see more reliance on the IMF or bilateral support in this scenario for vulnerable nations. 

Bottom line (Short-Term Stagflation): This scenario (~15% probability) is essentially a “higher-for-longer” world where inflation doesn’t behave as forecast, forcing central banks to maintain or even increase tight policy, thereby strangling growth but not yet defeating inflation. Key variables: Inflation stays ~3.5–4.5% in advanced economies (above target), policy rates remain near current peaks (Fed ~4.5–5%, ECB ~3–4%) instead of falling, GDP growth stagnates ~0%, unemployment rises modestly, 10-year yields rise (US ~4.5–5%), yield curves flatten (no inversion as both short and long rates high), equities decline ~10–20%, and housing stagnates with very low sales. In many ways, this is a “pick your poison” scenario akin to what McKinsey termed “higher for longer” – not as catastrophic as a crash, but a prolonged period of subpar economic performance and above-target inflation. Historically, the late 1970s is a parallel (inflation stayed high until a severe policy action caused recession). A crucial difference now is central banks’ determination not to let 1970s-style spirals take hold – so one might consider this stagflation scenario as a transitional phase that, if it persisted, would eventually provoke an even stronger central bank response (possibly leading to a recession beyond our 6-month horizon if needed to finally tame inflation). Thus, stagflation in the short term could simply be delaying an eventual hard landing, unless some positive supply-side developments intervene (e.g. productivity boost or resolution of supply chain issues) to bring inflation down benignly. 

Alternative 1 (≈25% probability) – “Prolonged Slump (Balance Sheet Reset)” 

Overview: In this adverse medium-term scenario, the world experiences a prolonged period of subpar growth – essentially a drawn-out hangover from the excesses of the past decade. If a recession occurred in 2025 (as in the short-term Alt 1), its aftermath lingers and recovery is weak and halting. Even if a hard landing was avoided, growth remains sluggish (“secular stagnation” vibes). This could be due to several reinforcing factors: private sector deleveraging (households and firms repairing balance sheets after asset price declines), credit constraints (banks become more risk-averse, lending less), and possibly persistent global uncertainties (geopolitical tensions, trade fragmentation) that dampen investment. Inflation in this scenario falls and stays too low, even below target – raising the spectre of deflation in some regions, akin to the post-2008 or post-1990 Japan environments. Central banks find themselves re-running the post-GFC playbook: rates back near zero, quantitative easing reintroduced or expanded, and pleas for fiscal policy to help. However, high public debt and political fatigue limit fiscal expansion, so the economy muddles through. This scenario aligns with what McKinsey described as a “balance sheet reset” or Japan-like outcome, where asset values are sharply correct (30%+ down from the peak) and leverage is slowly unwound, resulting in a lost half-decade of sorts. It’s essentially the realization of the downside risk that the base case avoids – a world where the bill from the 2020-2021 asset boom and pandemic stimulus comes due in the form of an extended sluggish period. 

• United States: In the prolonged slump scenario, the U.S. might have entered a recession in 2025 and struggled to regain momentum through 2026 and 2027. Real GDP growth could average only ~0–1% per year in 2025–27, meaning by 2027 output is far below the pre-2024 trend. The unemployment rate might rise and then stick around 6–7% for several years – a significant labour market slack reminiscent of 2010–2013, when joblessness was high and took a long time to come down. Consumer behaviour: Households, scarred by declines in stock portfolios and home equity, focus on saving and debt reduction. The personal saving rate, which was very low during the asset boom, jumps back up. For example, if pre-recession it was ~3%, it might rise to 8%+, reflecting a more cautious consumer. This depressed consumption relative to income contributes to slow growth. Wealth effect reversal: By 2027, U.S. equity indices might still be below their 2024 peaks in this scenario. Suppose the S&P 500 fell 30% in the recession and only partially rebounded – it could easily be, say, 15% lower than the peak even after some recovery. House prices might also not regain their highs; down 10–15% from the top and then flat. Consequently, net wealth relative to GDP falls significantly (a kind of “wealth reset” ). This is a healthy correction to valuations that were out of line with productivity, but it brings a negative demand impulse each year as people adjust to feeling less wealthy. Investment: Businesses are reluctant to invest in new capacity with so much uncertainty and slack demand. Private fixed investment could be quite subdued; capacity utilisation stays low. Perhaps only government and green energy investments provide some support. Inflation: With chronic output gaps, inflation likely falls below 2%. By 2026 and 2027, U.S. core inflation could be ~1% or even less, flirting with deflation in some sectors. Commodity prices would likely be low (oil perhaps $50 or lower, given weak demand), further pulling down headline inflation. This is a flip from the recent experience and more like the 2009–2015 era, where the Fed was more worried about too-low inflation. Fed policy: The Federal Reserve in this scenario cuts rates all the way back to the effective lower bound (around 0% or maybe slightly above if they keep a floor). By 2026 the Fed could be at 0–0.25% again and undertaking new rounds of quantitative easing (QE) to stimulate the economy and keep long-term yields down. Given that inflation is no longer a threat, the Fed’s concern pivots fully to supporting the recovery and avoiding deflation. For instance, the Fed may buy Treasuries and mortgage-backed securities to push mortgage rates down and try to revive housing. They might even explore more unconventional tools if needed (forward guidance that rates will stay zero for longer, or facilities to support credit flow to SMEs). Bond market: Yields in the U.S. would be very low across the curve. The 10-year Treasury yield could fall to, say, 1.5–2.0% and remain in that vicinity – reflecting a combination of low inflation, Fed QE, and heavy demand for safe assets in a risk-averse climate. The yield curve might steepen off the absolute floor but overall remain fairly low (e.g., 2-year ~0.5%, 10-year ~1.5% gives a +1% spread – a normal but low-yield curve, similar to early 2000s or early 2020s). Credit conditions: Despite low risk-free yields, borrowing might not surge because banks tighten lending standards (wary of defaults) and borrowers are not keen. We could see a phenomenon like the post-2008 credit crunch: loan growth stays sluggish. Some sectors with high leverage (energy, real estate developers, etc.) might go through bankruptcies, and banks nurse their loan books carefully. On the positive side, the financial system as a whole does not implode – thanks to regulatory capital, etc., big banks survive, but they aren’t expanding credit dynamically either. Fiscal space and policy: A slow economy and low interest rates may tempt fiscal policymakers to do more stimulus. However, by 2026–27, public debt will be higher (due to low growth and whatever deficits incurred during the recession). Political appetite might be limited for large new spending (especially if a lot was done in the pandemic and if a divided government prevails). We might see some incremental infrastructure or industrial policy spending (perhaps both parties can agree on competitiveness investments), but not a big New Deal. So fiscal is mildly supportive at best, not a game-changer. That puts more onus on monetary policy which is largely spent at ZLB – a classic liquidity trap scenario. Consumer sentiment: Extended weakness means confidence stays fragile. There could be a sense of economic malaise as in the early 1990s or 2010s when people felt the economy was not delivering for them. If unemployment is persistently high, public dissatisfaction could rise, influencing politics (possibly more support for populist or radical policies, which itself creates uncertainty). Parallels: This draws strong parallels with the U.S. post-2008 recovery, which was the slowest on record – except now debt levels are higher and policy space is more constrained. Also a parallel with Japans Lost Decade (1990s) – where a property and stock bust led to chronic low growth and deflation. The U.S. may avoid outright deflation thanks to its dynamic private sector, but stagnation is a risk. 
• Europe: Europe in a prolonged slump scenario likely fares worse than the U.S. (as was the case after 2008, when Europe had a double-dip and long stagnation). If the Eurozone had a recession in 2025, by 2027 it might still be basically at the same level of output as pre-recession. We project Euro Area growth averaging ~0–1% annually, meaning essentially no real growth per capita for a few years. Unemployment could rise to 9–10% (particularly if fiscal austerity re-emerges, as it mistakenly did in early 2010s Europe). Inflation: Likely undershoots the ECBs 2% target consistently. Europe is prone to deflation in such scenarios (indeed, core inflation was 0-1% in the mid-2010s). We could see HICP inflation around 0–1% in 2026–27 if slack is large and energy prices are low. Several peripheral countries might experience outright price declines. ECB policy: The ECB would reverse its course fully to stimulus. By 2026, expect the ECB to have cut the deposit rate back to 0% or negative again if deflation threatens. They would likely restart QE (asset purchases), potentially including expanding corporate bonds or even equity purchases (as the Bank of Japan did) if needed to support markets. There might be new rounds of TLTROs (targeted long-term refinancing operations) to push banks to lend. However, with rates at zero and the balance sheet bloated, the ECB is back in the same quagmire as the 2014–2019 period. Fiscal: The EU might relax its budget rules initially in the recession, but if government debt soars (Italy could approach 160-180% debt/GDP in a deep slump), pressure returns to consolidate, risking a replay of austerity that further depresses growth. Possibly the EU does more joint funding (like NextGenEU 2.0) to invest and stimulate, but political consensus is tough. Without strong fiscal help, Southern Europe could languish with high unemployment (Spain, and Greece in the early 2010s style). Banking/finance: European banks remain a concern in this scenario because low/negative rates squeeze their margins for a long time, and weak growth means higher non-performing loans. We might see a need for banking consolidation or even state support for some weaker banks (like Italy’s or Germany’s smaller banks) if profitability is too low. But overall, not a meltdown, just zombie banking. Euro stability: In the worst case, investors might question the sustainability of some sovereign debts. For instance, if Italy’s economy stagnates and the ECB eventually tries to taper stimulus, bond spreads could widen dangerously. However, given lessons learned, the ECB would likely maintain support (via QE or even yield curve control for sovereign spreads) to prevent a Eurozone breakup scenario. So the euro area holds together but at the cost of ongoing central bank intervention. Currency: The euro likely weakens in a global stagnation scenario because the U.S. might still look relatively better or at least the Fed might have slightly more room than the ECB. Also, investors seeking yield might avoid euro assets if rates are negative. So EUR/USD might drop back near parity ($1.0–1.1). A weaker euro could help net exports a bit, but if global demand is weak, it’s not a panacea. UK: Though not explicitly asked, note the UK could similarly have a rough time – high debt, reliant on foreign financing, and stagflation potential. It might mirror Europe’s path or worse due to Brexit constraints. 
• Asia: In a prolonged global slump, Asia is hit via trade and financial channels. China may struggle to meet even its lowered growth targets. If global demand is anaemic, China’s export machine sputters. Domestically, if property markets never quite recover, China could have Japan-like deflationary pressures (already in 2023 China had deflation fears). We could see Chinese growth sliding to ~3% or below by the late 2020s. That’s essentially stagnation for China, given its ambitions and still-developing status. China’s government might respond with massive stimulus (they have more fiscal space than the West arguably, and a controlled financial system). However, more debt-fueled stimulus could worsen their debt imbalances without restoring strong growth – a liquidity trap of its sort. There’s a chance that if Western demand is weak, China will pivot more aggressively to domestic consumption via wealth redistribution or social safety net improvements, but those take time. Japan likely falls back into near-zero inflation or deflation, vindicating pessimists that the recent uptick was temporary. BoJ might re-institute yield curve control at nearly 0% and become a permanent fixture in markets. Emerging Asian economies (like Southeast Asia, and India) would see growth curtailed – maybe growing at half their potential rate. For example, India might grow only ~3–4% instead of 6%, due to weak global investment and possibly its financial problems if interest rates globally are volatile. One glimmer: these economies have internal demand drivers and might use the opportunity of low commodity prices to implement reforms, but generally their convergence would slow. Global trade and dollar system: A slump with low inflation likely means global interest rates are low everywhere, and liquidity is abundant but not eagerly invested (classic pushing on a string). The Eurodollar system might balloon in size because central banks are providing lots of liquidity and investors park it in safe dollar assets – we saw that post-2008: a global savings glut intensified, keeping yields low. However, emerging markets might not benefit if risk aversion is high; they could see capital outflows and weaker currencies despite low U.S. yields (like the post-2013 environment for some). However, one difference: if the U.S. is at zero rates, the yield-seeking might return to emerging markets eventually (as happened mid-2010s when EMs got flows due to zero U.S. rates). But if those EMs have structural issues, capital might still shy away. Commodity exporters (like the Middle East, Russia, Africa, and Latin America) suffer in this scenario with persistently low commodity prices and demand. This could cause debt crises or political instability in some of those regions by 2026–27, which, while not the focus, could add to global risks (further reason for investors to be conservative). 

Bottom line (Medium-Term Slump): This scenario (~25% probability) essentially is a prolongation of recessionary conditions and a deflationary aftermath. It underscores the risk that if the economy’s fundamental engines (productivity, confidence) are not reignited, we could end up in a quasi-stagnant equilibrium – not free-fall, but grinding along the bottom. Key variables: by 2027, unemployment elevated, inflation below 1% (many developed economies flirting with deflation), policy rates ~0% in U.S./Europe (pushing limits of conventional policy), public debt higher (due to low growth, possibly >100% of GDP in U.S., ~120% EU avg, >300% of GDP in Japan), 10-year yields very low (~1-2%), equity markets not far above their troughs, housing markets down or flat, and global GDP growth maybe ~2% or less (half of pre-2020 norms). Historically, this mirrors Japan’s lost decades and also the post-GFC secular stagnation fears that were only alleviated by extraordinary stimulus (and arguably by the external shock of pandemic stimulus which reset things). It’s essentially the scenario where the arguments about wealth vs productivity come to roost: since productivity didn’t catch up to wealth, wealth falls to meet productivity, and that process weighs on the economy for years. The risk is that the longer the slump, the more permanent damage (hysteresis) – e.g., workers drop out, investment forgone – making it even harder to escape. 

Alternative 2 (≈20% probability) – “High-Inflation Regime (Stagflation to Hard Landing)” 

Overview: In this medium-term alternative, the stagflationary pressures from the short term persist and even intensify, leading to a prolonged period of high inflation and subpar growth. Essentially, the global economy of 2025–2027 starts to resemble the late 1970s: inflation that is entrenched above target (say in the 4–6% range) and growth that is erratic and generally weak, punctuated by policy-induced slowdowns. Central banks, having initially hesitated to crush the inflation due to growth concerns (as in the short-term stagflation scenario), eventually realised that without a significant monetary tightening, inflation would not revert to 2%. Thus, sometime in this horizon, they may be forced into a “Volcker moment” – i.e. an aggressive tightening that likely triggers a recession (a hard landing) but is deemed necessary to break inflation’s back. The timing could be towards 2026 or 2027 if inflation hasn’t improved. Alternatively, policymakers might still delay, resulting in inflation remaining high through 2027 (a “higher for longer” with no crash yet, but also no resolution). In both variants, inflation expectations risk de-anchoring among the public and investors, which in turn could lead to a vicious cycle of rising wages, prices, and interest rates. Meanwhile, fiscal dynamics deteriorate under high nominal yields, raising debt sustainability issues. This scenario encompasses both the possibility of persistent stagflation and the eventual likelihood of a sharper hard landing later if central banks capitulate to the need for drastic action. It is somewhat the opposite of Alternative 1: here the economy doesn’t slow enough on its own, requiring a forced slowdown later. 

• United States: Suppose through 2025–26 the Fed manages only to nibble at inflation, not break it. By 2027, U.S. inflation could still be running around 4% or higher. Perhaps it oscillates – e.g., cools to 3% one year, then a new shock (oil, geopolitical conflict or fiscal expansion) pushes it back to 5%. The average remains well above 2%. Inflation expectations among consumers and businesses drift upward; 5-year forward inflation expectations might rise from ~2% to, say, 3%+, a worrying sign. The Fed in earlier years might have stuck to a policy rate of around 4-5%, which proved insufficient to tame inflation. By 2026, seeing no alternative, the Fed decides to forcefully hike into restrictive territory (just as Volcker did starting in 1979 and leading into the 1981–82 recession). We could envision the Fed raising rates to, say, 6–7% (which in real terms might be only ~2% if inflation is 4-5%). This finally causes a more severe tightening of financial conditions. The bond market likely anticipates this eventual pivot – we might see long-term yields rising steadily through 2025 and 2026. For instance, the 10-year Treasury yield could climb into the 5–6% range by 2026, as markets demand higher compensation for inflation and as the Fed’s own long-run neutral rate estimate perhaps rises. Such levels would be the highest since the early 2000s and would materially raise borrowing costs economy-wide. Economic growth: Under the weight of these rates, the economy can’t sustain growth. If a recession hasn’t occurred yet, one becomes highly likely by 2026–27. This would be a hard landing orchestrated by late policy action. It could be quite severe because by now debt levels are higher (households and businesses have been operating with high inflation but also likely accumulating debt, thinking nominal growth will bail them out). When high rates hit, heavily indebted entities suffer (some defaults, bankruptcies – maybe a wave of corporate failures similar to the early 80s when many industrial firms and Latin American countries defaulted under high U.S. rates). We might see unemployment shoot up to, say, 7–8% in this late hard landing – a deeper shock than the Alt 1 recession which was milder. In effect, this scenario compresses the pain that was avoided earlier into a later period, potentially making it sharper (the “pay later” scenario). Fiscal impact: The U.S. fiscal situation becomes challenging. With 10y yields of ~5-6%, the government’s interest expenses mount (a lot of debt rolls over every year). If inflation is high, it boosts nominal GDP (which could help debt/GDP in the short run) but also boosts interest costs and possibly triggers higher entitlement spending (indexed benefits). If a hard landing then occurs, deficits blow out (as in the early 80s with Reagan deficits + high rates). By 2027, the U.S. debt-to-GDP could be significantly higher than today, and markets may start questioning long-run debt sustainability – potentially pressuring the Fed with concerns of fiscal dominance. Consumer and business adaptation: During the persistent inflation phase, consumers and firms change behaviour – cost-of-living adjustments (COLA) in wages become common, contracts get indexed to inflation, and businesses price more frequently. This adaptation can entrench inflation (like the 70s). Ultimately, the late hard landing is needed to break that cycle – e.g., causing a spike in unemployment that finally dampens wage demands, akin to 1982 when the U.S. jobless rate hit 10%. Asset markets: In the run-up, asset prices might not collapse initially because high inflation often props up nominal revenues (companies have higher sales in nominal terms) and erodes real debt (which can be good for equity until interest rates catch up). But as soon as the market senses the Fed will have to go nuclear, equities re-rate downward heavily. Possibly a big market crash occurs in mid-2026 when the Fed’s stance shifts aggressively. The S&P could drop 30%+ in that event. Housing in high inflation might see nominal prices hold or even rise (people buy real assets as an inflation hedge), but with mortgage rates eventually soaring to double digits (if 10y is 5-6%, 30y mortgage could be ~8-9% or more), housing affordability collapses and a housing bust follows. Home prices could fall significantly in real terms, though perhaps not as visibly in nominal terms if inflation remains high. For example, home prices might plateau nominally but inflation-adjusted they’re down 20%. Construction slumps due to expensive financing. 
• Europe: A high inflation regime in Europe could be particularly tricky. Europe’s inflation in this scenario likely remains elevated as well – perhaps not quite as high as the U.S. if demand is weaker, but sticky enough (say Eurozone inflation ~3–4% through 2025–26). The ECB, initially slower to tighten aggressively (due to fears of hurting weaker economies), eventually realises inflation expectations are drifting up. It might then tighten in late 2025 or 2026 even at the cost of a serious recession in Southern Europe. We could see the ECB policy rate back up to its peak of ~4% or higher, and possibly the need to do it despite governments’ objections. The result might be a renewed Eurozone crisis environment: high rates push Italy or others to the brink of debt unsustainability. Unlike 2012, however, now inflation is high, so the ECB is in a bind – it wants to tighten to quell inflation but that undermines fiscal stability. This is the dreaded fiscal dominance scenario: the central bank’s inflation fight is constrained by government debt concerns. If the ECB caves to fiscal pressure and monetises debt (keeps buying bonds, tolerating higher inflation), the euro could lose credibility (possibly a scenario where the euro weakens sharply and risk premia rises). If instead, the ECB sticks to fighting inflation, we might see a restructuring or bailouts needed for some sovereigns or a massive EU-level intervention to share the burden. Either path is fraught. Growth: Europe likely ends up in recession by mid-decade either way but with inflation still relatively high (stagflation turning into a possibly deeper stagflation or eventual disinflation via collapse). Stagflation persistence: Possibly the worst for Europe is stagflation without resolution – reminiscent of the UK in the 1970s (which had high inflation and weak growth until monetarist policies in the 80s). Unemployment would rise, but if wages chase prices, you get unemployment and inflation together (the infamous misery index is very high). Political climate: High inflation erodes real incomes significantly. In Europe, this could trigger strong social unrest (e.g., mass strikes, as seen when inflation spiked in 2023, but more widespread). Pressure on governments to shield citizens could result in more fiscal spending (which further fuels inflation – a vicious circle). 
• Asia: In a globally inflationary scenario, Asia too would face higher inflation than in the base case. Emerging Asia could see inflation in mid-to-high single digits, forcing their central banks to hike and possibly causing growth to fall short. India might have persistent 6%+ inflation, RBI keeps policy tight, hence growth may only be ~4-5% instead of 6-7%. China interestingly might export inflation through supply chains (charging higher prices for exports as its costs rise), but China’s demand might not be as overheated. If China maintains a relatively easier policy to support growth while the West is in stagflation, its currency (RMB) might depreciate, causing some inflation. If commodities are high (likely, if inflation is partly driven by energy/food), China’s import bill surges, adding strain. They might resort to price controls or strategic stockpile usage. Japan, after finally seeing inflation >2%, might ironically have the opposite problem of needing to contain inflation – a new challenge after decades of trying to raise it. If the yen stays weak in a high global inflation environment, imported inflation could push Japan to tighten policy (e.g. end YCC, raise rates) for the first time in forever, which could unsettle Japanese markets given huge public debt. So even Japan could face a kind of reckoning. Global trade: A high-inflation regime often leads to more protectionism as countries try to combat domestic price pressures (export bans, tariffs etc.). We saw hints of this in 2022 (food export bans, etc.). If that continues, globalisation could retreat further, reducing efficiency and potentially keeping inflation pressures simmering. 

Alternative 1 (≈30% probability) – “Global Deleveraging and Low Growth (Japanification)” 

Overview: In this adverse long-term scenario, the world in 2029 is mired in the consequences of the balance sheet reset and slump that followed the early-2020s boom. It resembles a “Japanification” of the global economy: ultra-low interest rates, low or negative inflation, and chronically weak growth as both private and public sectors carry heavy debt burdens and focus on deleveraging. The term “Japanification” refers to what Japan experienced after its 1980s bubble burst – decades of very low growth/deflation despite zero interest rates, due to an overhang of debt and reluctance to spend or invest. In this scenario, one can imagine that the Alternative 1 medium-term slump continued or even worsened. Perhaps repeated fiscal austerity or policy missteps prevented a robust recovery, and any growth that did occur was absorbed by debt repayment rather than new demand. By 2029, inflation expectations might have fallen to near zero or even become negative (people expect falling prices), which is dangerous as it raises real debt burdens further – a deflationary trap. The global economy essentially operates far below capacity, and unemployment, while maybe not explosively high (some dropped out of the labour force, others took pay cuts), is above full employment levels. Interest rates have been at the zero bound so long that central banks have lost some influence, and unconventional tools have diminishing returns. There’s a sense of stagnation and resignation – it’s not an acute crisis (those happened earlier, perhaps some sovereign restructurings or banking rescues happened mid-decade), but a slow grind. 

• United States: In this scenario, the U.S. by 2029 might have a real GDP growth trend of only ~1% or less, with several mini-recessions or flat years along the way (like 2026 and 2028 are flat, maybe 2027 slightly up, etc.). The level of output could be significantly below the pre-2020 trend line (lost output not recovered). Inflation is around 0% to 1%, and the Fed consistently undershoots its 2% target – effectively, the U.S. is in a deflationary environment. The Fed funds rate has been at the zero lower bound for years now, and the Fed might even have tried some form of negative rates or enhanced forward guidance, but politically that is tough in the U.S. (so likely stuck at zero). The Fed’s balance sheet could be enormous because they attempted more QE – possibly owning not just Treasuries and MBS but maybe corporate bonds or other assets if legally enabled – basically acting as a supporter of last resort. Yet these efforts only managed to stabilise financial markets (keeping yields low) but didn’t spur strong growth due to a liquidity trap – banks have excess reserves but few willing borrowers. Bond yields: The 10-year yield might be ~1% or even lower. Perhaps yield curve control was implemented at some point to cap yields (like BoJ style) if debt got high. Investors expecting low inflation and periodic Fed buying are content with 1% yields as there’s little else (stocks aren’t giving much better, etc.). Debt levels: ironically, public debt might be extremely high as a per cent of GDP (because denominator growth/inflation is so low). The U.S. could be at, say, 150% debt/GDP by 2029 after years of large deficits from stimulus and low growth. However, the low interest rates mean that the government can finance it at near zero cost – similar to Japan’s situation where debt is >250% of GDP but mostly internally held at low rates. There might be more open discussion of Modern Monetary Theory or debt monetization since traditional thinking hasn’t solved deflation, but likely confidence in such measures is low. Consumer behaviour: Households, after the asset bust, remain conservative – high saving, low appetite for credit. Younger generations might invest less in stock markets (burned by earlier volatility) and more in safe assets or even cash, prolonging the low-rate environment (paradox of thrift economy-wide). Assets: Equity markets might be range-bound for the decade, delivering poor returns. The S&P 500 in 2029 could be around similar levels as the mid-2020s, just oscillating. Some high-dividend, stable stocks might do okay (like utilities – similar to how in Japan, certain defensive stocks did alright, but the overall market stagnated). Housing: Real estate might similarly stagnate in price (nominal and real). With low rates, one might think housing would boom, but if banks are cautious and population growth is low, housing just becomes a stable utility-like asset. Homeownership might rise because prices are low and credit is cheap – ironically improving affordability – but housing is not an engine of growth, just a place to live. Banking: Banks probably consolidate and shrink in influence, as in Japan. Some may turn essentially into utilities holding government bonds and taking deposits (because lending opportunities are scarce). Financial innovation slows in a deflationary climate – it’s hard to have a vibrant FinTech scene if there’s little credit demand or return. Productivity: Possibly also low, because investment in new tech is meager (who wants to invest in expansion in a stagnating economy?). This could become a vicious cycle: low productivity -> low growth -> low demand -> low investment -> etc. However, one nuance: sometimes pressure can spur efficiency gains (as companies struggle, they automate to cut costs). But if demand is lacking, even cost-cutting improvements might just lead to downsizing rather than output expansion. Psychology: The public might come to expect stagnation as the norm. This happened in Japan – deflationary mindset: people hold off buying big items because they think prices might fall further, which further suppresses demand. Breaking out of this mindset is very difficult (took Japan decades and they still haven’t fully). The U.S. historically is more dynamic, but even it could fall into this trap under certain conditions (especially if politics are dysfunctional and cannot deliver effective stimulus). 
• Europe: Europe could fare even worse under global japanification. The Eurozone was already at risk of this in the 2010s. By 2029 in this scenario, Euro Area growth might be ~0–1% trend and inflation around 0% (very likely some countries in deflation). The ECB would have reinstated negative interest rates (say deposit rate –0.5% or –1%) and resumed massive QE (maybe owning a large share of members’ sovereign bonds effectively). The ECB might have to more explicitly support governments (blurring the monetary-fiscal line) because some like Italy might have had to restructure or be constantly financed by ECB to avoid default in a deflationary spiral. Possibly a scenario where the EU changed rules to allow perpetual low-cost refinancing or even some debt mutualisation just to keep the union intact in the face of stagnation – e.g., a portion of national debts converted to Eurobonds held by ECB indefinitely (a stealth monetisation). This might keep the Eurozone together but at the cost of extremely slow growth and constant policy intervention. Unemployment in Europe could remain high (8-10%), but interestingly if the population shrinks maybe not as visibly high – the labor force may contract as people emigrate or drop out. Some younger Europeans might leave for better opportunities elsewhere (like how some Japanese moved abroad for opportunities). Social fabric: High structural unemployment and no growth can breed extreme politics, but by 2029 maybe populations become apathetic instead – in Japan people adapted to low growth by focusing on stability and social harmony. Europe is more diverse, so stagnation might cause divergent national politics (some begging for more stimulus, others resisting transfers). There is a risk that such a scenario could put a strain on the EU – rich countries tired of financing poorer ones with nothing to show, poorer ones in perpetual slump resent rich ones. But I assume in base they manage to hold it together with compromises. Possibly the euro stays weak (maybe below parity) because no one expects much from Europe – though if the U.S. is also low yield, capital might still stick with Europe due to inertia. Assets: European equities are probably as flat as the U.S. or worse. Japanese equities lost like 75% from 1989 to 2009. Europe didn’t have as extreme a bubble, but still, say Euro Stoxx could be lower in 2029 than in 2019. Real estate in Europe might hold value better because of limited supply and low rates, but demand is low, so maybe mild deflation in housing too. Banks: European banks struggle – many become zombie banks supported by ECB funding. Possibly some big banks nationalised or merged. The financial landscape might shift more to government-controlled or few big players with implicit state backing. 
• Asia: In a japanification scenario, ironically Japan itself would just continue what it’s had – so it’s not a shock for them, just disappointing that they never got a breakout. They’d still be around 0–1% growth, struggling with ageing, and maybe even worse if global demand is weak. China is interesting: a prolonged global slump could be disastrous for China’s ambitions. By 2029, China could be stuck in the “middle-income trap” – growth has fallen to ~2% or less, which is near stagnation given their aspirations. Possibly deflation there too if their debt bubble unwinds. If the world is deflationary, China’s exports face weak demand, and its enormous domestic debts (especially local governments, and state enterprises) become harder to service with low inflation. It could face a lost decade of its own – not achieving developed status by 2030 as hoped. Social stability might be tested if urban unemployment rises due to a lack of growth drivers (and they have aged as well by then). That said, China’s government may fight stagnation with periodic large spending, which might prevent deeper recessions but also raise debt more – essentially following Japans post-90 path of many fiscal stimulus packages to prop up a low-growth economy. Emerging Asia: many would suffer from permanent lower demand for exports, and low commodity prices if deflationary (hurting Indonesia, and Malaysia). They might rely on small domestic markets, so possibly stuck with low growth as well. On the bright side, very low global rates can allow them to borrow cheaply if they have market access, but if growth prospects are poor, investors may not be keen anyway. Global trade/investment flows: likely shrink as a per cent of GDP (as happened after 2008 for a while). Protectionism might increase as countries try to grab a bigger slice of a stagnant pie for themselves (though if everyone’s stagnant, there might be less conflict because nobody has inflation to blame on trade – but they might blame trade for low jobs). Geopolitics: A stagnating world could either reduce conflicts (everyone focusing inward on the economy, fewer resources for the military) or exacerbate them (scapegoating foreigners). Historically, prolonged economic malaise can lead to political instability and conflict (e.g., the 1930s). We might see more isolationism, weaker global institutions, and maybe regional fragmentation as rich areas pull away (e.g., could the Eurozone see core vs periphery break? Possibly, but let’s assume not in this scenario, just because that would be an even deeper crisis). Instead, likely global leadership remains gridlocked, managing crises at home more than cooperating. 

Bottom line (Long-Term Slump/Japanification): The world of 2029 here is one of missed opportunities and lingering malaise. It has echoes of the 1930s Depression (without the sharp initial contraction) or 1990s Japan globally. Everything feels like it’s in low gear: inflation ~0%, interest rates ~0%, growth ~0-1% in advanced economies, slightly more in EMs but well below potential, debt high, and policy ineffective (central banks practically pushing on a string, fiscal policy hampered by high debt and political discord). The positive is that outright crises might be largely avoided after the early adjustments – because everyone is so conservative, you don’t get new bubbles or hyperinflation or such. But the cost is a generation of stagnation. Probability ~30% in our assessment, because avoiding it would require effective demand management earlier – if that fails, this could ensue. 

Alternative 2 (≈20% probability) – “High Inflation and Debt Distress (1970s Redux or Worse)” 

Overview: In this worst-case long-term scenario, the efforts to control the inflation of the 2020s fail, and the world enters the late 2020s with inflation not only unresolved but potentially accelerating. This is essential if the medium-term high inflation/stagflation scenario continues. By 2029, we could have a situation analogous to the late 1970s/early 1980s, or perhaps even a more systemic global crisis triggered by high inflation and interest rates. Key characteristics: inflation expectations unanchored (people don’t trust central banks to maintain price stability), wage-price spirals in multiple countries, central banks either behind the curve or causing severe recessions to catch up, and government debt under strain as interest costs explode. This scenario might culminate in sovereign debt crises or currency crises in some economies. For example, some highly indebted countries might default or require IMF rescues (think 1980s Latin America or even Italy risk). The global financial system could be stressed by both high default rates (as high rates make loans unpayable) and high volatility (as investors flee currencies or bond markets that they lose confidence in). Essentially, this is a return to a pre-1990s world of macro volatility: big recessions, big inflations alternating. The extreme version could even see hyperinflation in some mismanaged economies, though major economies likely avoid that. But even moderately high inflation (e.g. sustained 10%+ in some countries) is disastrous enough for long-term planning and capital formation. 

• United States: If stagflation persisted, by the late 2020s the U.S. could see an episode of very high inflation – say inflation runs >5% year after year, possibly reaching double digits if there’s an oil shock or other trigger. If the Fed still hesitated, things could get out of hand. Alternatively, suppose the Fed does try to crack down belatedly (like Volcker did around 1979–80). In doing so, it might need to raise rates extremely high (Volcker took Fed funds to ~20% in 1981). Under today’s conditions, Fed funds anywhere near that would cause carnage given how much debt is in the system. One can imagine by 2027 the Fed has hiked to say 8-10% trying to stem 7% inflation and still struggling. This yields a severe recession around 2027–28 (maybe akin to 1981-82 which was very deep). Unemployment could spike to, say, 10% or more under that shock (like the early 80s). Only after that, by 2029, could inflation finally start trending down – but at an enormous cost. Bond market: Even before that, in the mid-2020s, bond investors would have demanded much higher yields to hold treasuries if they expected future inflation eroding value. The 10-year yield could have soared to, say, 8% or more at some point (especially if foreign investors lost appetite and the Fed wasn’t buying due to the tightening stance). The U.S. government’s interest costs would balloon. Fiscal crisis risk: The U.S. has the advantage of issuing debt in its currency (and reserve currency), so a classic default is unlikely. But it could face a form of fiscal dominance where the Fed might be pressured to tolerate higher inflation to erode the real debt or to avoid making interest costs unsustainable. If the Fed yields to that (i.e., effectively monetises debt), that’s a path to continued high inflation (like some Latin American countries in past). If it doesn’t (i.e., it slams inflation down at the cost of output), debt/GDP might shoot up due to recession and high interest, forcing either drastic austerity or eventually inflation anyway – a lose-lose. Possibly by 2029, the U.S. might be forced into fiscal measures like significant spending cuts or tax hikes (like the early 80s did see some belt-tightening under Reagan after initial deficits). That could help long run, but the short run, combined with tight money, is extremely painful. Consumer impact: the average American suffers in this scenario from both high cost of living and job insecurity. Real incomes likely fall over several years (the 1970s saw falling real wages; could repeat). The inequality might shift: debtors benefit (inflation erodes their debts), and savers lose (unless they are in inflation hedges like property or TIPS). The social contract could fray: you might see more labour militancy (unions striking for higher pay to catch up with inflation – a hallmark of the 1970s). Currency: The U.S. dollar could go either way – if the Fed is behind the curve, the dollar weakens as investors seek currencies of countries with better policies (perhaps the dollar loses value to gold or a stable currency like maybe the euro if the ECB is doing better, or more likely to hard assets and non-fiat like gold/crypto if trust in fiat fades). If the Fed then overtightens, the dollar might spike massively (like it did in the early 80s, hitting record highs, and causing global issues). So potentially large FX volatility. Possibly a scenario of global currency misalignments and crises – e.g., some emerging currencies pegged to the dollar might break (like the 1980s debt crisis when the U.S. rate spike crushed many EM pegs). 
• Europe: If the U.S. sneezes, Europe catches a cold – in a high inflation scenario, Europe too probably has high inflation, given energy vulnerabilities and all. If the ECB is also delayed, it might face similar or worse inflation because of the supply side (like in the 1970s, Europe had even worse stagflation due to higher energy dependence). Suppose Eurozone inflation e.g. 5-6% persistent. The ECB in the late 2020s would either live with it (eroding the euro’s credibility) or fight it with hikes that some economies cannot withstand. The risk of a Eurozone breakup would loom larger here – e.g., Italy with high debt could not handle 8% rates without restructuring. Maybe in this scenario, a country like Italy or Spain could default or leave the euro rather than endure depression-level austerity (extreme case, but probabilities rise under such stress). Or Germany might baulk at more bailouts if inflation is hurting their savers badly. Sovereign debt crises in the Eurozone could happen by the late 2020s: one or more countries needing rescue. The EU/IMF might do bailouts (like Greece in 2010, but larger scale), which would be very divisive. The euro might survive but with some scars (maybe joint debt issuance finally forced through to save the day, but causing political resentment). The UK similarly could have sterling crises if the policy is mismanaged (the UK historically had several in the 60s/70s). Already in 2022, a hint of that showed (bond market revolt). In this scenario, by the late 2020s UK might need IMF help or emergency rate hikes to save the pound if markets lose faith (like the 1976 sterling crisis). Banks and financial markets: High inflation & rates ravage fixed-income assets, so banks and insurers holding bonds incur huge losses (as in 2022, but magnified). Some might become insolvent, requiring government intervention. This scenario could see more financial institution failures – similar to the Savings & Loan crisis in the U.S. in the 80s or bank failures in some countries. Non-financial firms also default more under high rates (junk bond defaults surge). Possibly a global financial crisis triggered by a combination of inflation and tightening – but arguably central banks in this scenario prioritised the inflation fight even if things break (like Volcker said, its job to stick to its mission). So if something breaks (banking crisis), they face a conundrum: loosen to save banks (fueling inflation) or stay tight to quell inflation (letting banks fail)? Hard choices – maybe they do target bailouts but maintain a tight stance (like the Fed did lend to Continental Illinois in 1984 but kept policy tight). 
• Emerging markets and Asia: A high inflation global scenario likely wreaks havoc in many emerging markets. Historically, U.S. high rates in the early 80s led to the Latin American debt crisis – countries like Mexico, and Brazil defaulted on external debt. Something similar could happen: many developing countries borrowed a lot in the low-rate 2010s and especially during the pandemic. If by the late 2020s global rates are high, we’d likely see a wave of EM sovereign defaults or restructurings (some already on edge like Zambia, and Sri Lanka, might be joined by bigger ones like maybe Turkey, Egypt, or even large ones if badly managed). The IMF would be busy with rescue programs. Asia’s emerging markets often handle inflation better (many are used to it, and some benefit as commodity exporters), but high U.S. rates could cause capital outflows, currency crashes, and domestic inflation spikes there too. Countries with weak institutions might see hyperinflation or collapse (some smaller fragile states could fail economically). China: Very interesting in this scenario – high global inflation could initially help erode China’s dollar debt (if any) and raise their export prices, but if the U.S. slump in late 2020s hits, that hurts their exports. Also, if Fed hikes cause global recession, China’s attempts to grow might be foiled. They could either import inflation if they keep the yuan weak, or fight it at the cost of growth. Perhaps China in this scenario tries to ride it out but ends with mediocre growth of ~3% and inflation of maybe ~4% (higher than the target, low by global standards). Socially, inflation is sensitive (food prices can cause unrest), so they likely use price controls which cause distortions. If global chaos is high, China might find an opportunity to expand its influence (lending to countries cut off from the West or pushing RMB usage), but also a risk (if developed markets demand drops or if they face property/infrastructure bust from high rates). Commodity producers: ironically, some places like Middle East oil states could benefit from sustained high oil prices – they’d have a windfall (like in 1970s OPEC did). They might accumulate huge wealth (though inflation could erode some, but they can convert to gold or assets). That might shift global power – petrostates become wealthier relative to West. 

Bottom line (Long-Term High Inflation/Distress): By 2029, this scenario has either forced a drastic reckoning (with central banks finally squashing inflation via brutal recessions, causing a debt crisis but setting stage perhaps for eventual recovery beyond our horizon) or, if not yet resolved, the world is in a continuous high-inflation chaotic state. Key markers: Inflation maybe still ~5%+ in advanced world, policy rates extremely high (or at least were high and caused collapse), global growth very low or negative due to repeated recessions, unemployment higher than in any other scenario at times (maybe double digits at peak), multiple crises (sovereign defaults, bank failures, currency collapses) have occurred. It is a world with significantly higher macro volatility, akin to the worst of the 1970s stagflation meets 1980s debt crisis. The silver lining could be that by punishing inflation so severely, the stage could be set for a new stable period (like after 1983, the Great Moderation began). But that’s beyond 2029 likely; by 2029 we’d be either in the depths of that painful adjustment or still floundering. Probability we assign ~20%, as it requires many policy failures, but it’s not negligible given how the 2020s started with a shock to the system.