The IMF's April World Economic Outlook was published last week with its own chief economist qualifying its headline number before the press conference was over. Its forecast - global growth of 3.1% in 2026 - is built on the assumption that the Middle East conflict proves short-lived and that oil averages around US$82 a barrel for the year. At the time of publication, Brent was trading near US$96. Pierre-Olivier Gourinchas told reporters he would place the world "somewhere between the reference scenario and the adverse scenario", with the latter implying global growth of only 2.5% and inflation of 5.4%.
The IMF's numbers are best seen as a framework rather than a point estimate. Global growth of 3.1%, if that is where the year lands, would represent a meaningful slowdown from 3.4% in 2025, but not a global recession. More relevant is that the organisation presents a range of outcomes, and the balance of risks is skewed to the downside: an adverse scenario looks more likely than not, and a severe one, say global growth of 2.0% and inflation above 6%, cannot be dismissed.
Within that context, the IMF describes a world running at three distinct speeds. First, most developed markets are growing, but modestly and below trend. The US, eurozone and Japan all expand in the projections, but are held back by a common set of headwinds: higher interest rates, ageing populations, limited fiscal room while being supported by resilient labour markets and ongoing investment in technology and infrastructure. The base case is a slow expansion rather than a deep recession.
Second, a handful of emerging economies are progressing considerably faster. India is a standout. Demographics, urbanisation and determined efforts to attract manufacturing and digital industries provide a genuine and well-supported structural story. But it is also a well-known story, and Indian equities have long been priced to reflect it. The same observation applies to the US, where technology-heavy markets are valued on assumptions about AI-driven productivity that the IMF's own Global Financial Stability Report flags as potentially vulnerable to reassessment - noting that AI investment could slow significantly if the conflict persists, weighing on firms along the AI value chain that have relied on what the IMF tactfully calls "circular financing". Fast growth and attractive investment opportunity are related but not the same thing, and in the current cycle the gap between them is particularly wide.
Third, there is a more challenged periphery: commodity-importing economies in Latin America, parts of the Middle East and North Africa, and pockets of emerging Europe, where higher energy costs, tighter external financing and elevated geopolitical risk make the outlook genuinely difficult.
Within the developed-market group, the UK sits near the bottom of the pack. The IMF now expects UK real GDP growth in 2026 to come in at just 0.8% - the largest downgrade it has applied across the G7 countries. The UK and US are expected to run the highest inflation rates in the G7 this year, with the UK reaching around 4% before settling back towards the Bank of England's 2% target by end-2027, and the US at 3.2%.
The UK's reliance on gas means moves in global energy markets rapidly pass through to household bills and business costs. With public debt elevated, the government faces a difficult balancing act between the pressures on public services, defence and the energy transition on one side, and maintaining market confidence in UK public finances on the other. The Bank of England has kept interest rates at levels not seen since before the global financial crisis: headline inflation has fallen, but underlying measures and wage growth have been sticky enough that the pace of easing remains slower than previously hoped, leaving borrowers still adjusting to a significantly different cost environment.
This is not a crisis, but a painful grind. The IMF expects the UK to rebound to 1.3% growth in 2027, and the country retains real strengths in services, higher education and parts of the technology sector. But the near-term domestic backdrop is unlikely to be a primary engine of portfolio returns.
A great deal of this weaker outlook is already reflected in market pricing, but an important point for investors is that the UK economy and its equity market are not the same thing. The UK equity market trades on a forward price-to-earnings ratio in the low teens, compared with above 20x for the US - a discount that has widened materially in the last five years. Average dividend yields across the UK market are nearly triple those of the US. Where global indices - particularly in the US - are priced for a great deal of good news, the UK offers something less common at this point in the cycle: valuation support. That does not guarantee outperformance, and a prolonged domestic grind would test the best managed businesses. But it does mean that a considerable amount of caution is already embedded in UK equity prices, which changes the risk profile of owning them materially.
The UK equity exposure in the T. Bailey funds of funds reflects the more attractive starting point that current valuations provide. It is concentrated in high-quality, cash-generative businesses that have demonstrated the ability to sustain their earnings and dividends through challenging periods.
Which of the IMF's scenarios we ultimately end up closest to will only become clear as the year unfolds, and the probabilities are already drifting towards the less benign end of the range. However, the exercise of constructing a portfolio is not primarily about forecasting which economic scenario prevails. It is about identifying assets that offer the best combination of quality, yield and valuation across a range of outcomes - including one in which the UK economy, and its equity market, prove more resilient than today's growth forecasts imply. That discipline does not require the domestic economy to be in the fast lane; it simply requires investors to look carefully at what its businesses are achieving.
