Standard Chartered Sri Lanka recently held its annual Global Research briefing to present findings from its latest report, Global Focus – Economic Outlook 2026. The report, themed “An Uneasy Calm,” examines how growth drivers are shifting as export momentum eases and investment plays a larger role.
The briefing featured Madhur Jha, Global Economist and Head of Thematic Research; Divya Devesh, CFA, Co-Head of FX Research for ASEAN and South Asia; Saurav Anand, Economist covering India; and Bingumal Thewarathanthri, Chief Executive at Standard Chartered Sri Lanka. Together, they outlined a transition towards fiscal support, investment and technology-led growth, and discussed the implications for currencies, capital flows and Sri Lanka’s policy path as the recovery moves into normalisation.
The report points to a shift from export support and rate cuts towards fiscal spending and investment-led growth in 2026. How does this change the way economies grow, and how should investors interpret that shift in the data?
Madhur: Growth was strong last year and remains well supported, but the drivers are changing. In 2025, growth relied heavily on exports, helped by front-loading to the US and by rate cuts that supported consumers. In 2026, that export impulse fades and central banks approach the end of their easing cycles. What replaces it is a broader mix of growth engines.
“Sri Lanka’s 2026 outlook is strong on the back of political stability and policy continuity, with GDP growth expected to start normalising after the post-crisis rebound in 2024–25.”
Consumption remains resilient, while investment is assuming a larger role, supported by fiscal spending, public investment and improving private-sector capital expenditure. This brings more sectors into the growth story, making it more balanced. For investors, the key point is that headline growth may look flat, but its composition is healthier. The data reflects multiple sources of momentum rather than reliance on a single driver, opening opportunities across a wider range of sectors.
Your outlook for the US and China relies on investment continuing to drive growth despite trade frictions and policy constraints. What does this reveal about how global growth is evolving in 2026 compared with earlier cycles?
Madhur: For both the US and China, growth is being driven more by investment than by trade alone. In China’s case, there is greater near-term certainty around trade with the US, even though policy risks remain. More broadly, the global economy is moving towards a multipolar structure, with growth no longer centred on a single dominant economy.
What defines this cycle is the scale of AI-led investment. The US leads in investment spending, while China is strong in patents and industrial clustering. There is a clear race to build AI capability, and that investment is supporting growth in both economies despite trade frictions.
This investment push also creates spillovers. Building AI capacity requires infrastructure, equipment and commodities, which benefits economies linked to these supply chains. We are already seeing this in markets such as India and Malaysia through data centre and semiconductor projects. Compared with earlier cycles, global growth in 2026 is less dependent on trade volumes and more anchored in long-term technology investment, helping to keep the outlook stable even as risks remain elevated.
What’s the outlook for the USD and US rates in 2026?
Divya: We are bullish on the US dollar in 2026. Markets remain positioned for further Federal Reserve rate cuts, but we expect the Fed to stay on hold, supporting rate differentials and the dollar. This view is reinforced by continued US economic outperformance, with consensus growth forecasts revised higher over the past six months.
Fiscal support and AI-related capital spending should keep growth resilient, strengthening the dollar’s fundamental backing. At the same time, markets are still pricing in around 50 basis points of easing, which we see as unlikely, while concerns about Fed independence appear overstated. Taken together, this points to a steady appreciation of the US dollar.
Recently the Renminbi has appreciated, but its positive spillover for Asia has been limited. Why?
Divya: Historically, the renminbi has moved in tandem with other Asian currencies, but that relationship has shifted in recent months. The renminbi’s recent appreciation has been driven more by policy guidance—particularly lower dollar–renminbi fixings—than by stronger economic fundamentals in China.
Because markets view this move as policy-led rather than growth-led, it has not signalled stronger underlying growth. As a result, the appreciation has failed to lift regional sentiment, and most Asian currencies have continued to weaken.
Sri Lanka’s ongoing fiscal consolidation requires discipline, but rebuilding after Cyclone Ditwah will also call for higher public spending. How can policymakers balance that discipline with flexibility, and how much room is there for monetary easing to support growth in 2026?
Saurav: Based on experience elsewhere, post-cyclone reconstruction typically requires spending of around 2.5–5% of GDP. Going into Cyclone Ditwah, Sri Lanka’s fiscal position provided some room to absorb the shock. The fiscal deficit for the first eleven months was close to 1% of GDP, and the government had already budgeted for a wider deficit of around 4.5% in 2025.
The challenge, therefore, is less about abandoning fiscal consolidation and more about prioritisation and execution. The supplementary budget has created flexibility to support recovery while staying broadly on the consolidation path. The key issue is how effectively committed funds are deployed.
“Fiscal policy is set to take centre stage in 2026, with an increased focus on defence and infrastructure spending in major economies, including the EU. If growth turns out to be weaker than expected, financial markets may penalise economies with limited fiscal space to support domestic growth.”
On monetary policy, there is room to respond if growth weakens, but the approach remains cautious. Inflation is moderate and the external position still matters, so broad rate cuts are not the base case. Support is instead being delivered in targeted ways, particularly for affected businesses and SMEs. If growth disappoints more materially, the central bank would have scope to ease further, but for now the stance remains measured.
The report highlights ongoing uncertainty around global trade policy, including potential tariff risks between major economies. How exposed is Sri Lanka to these external shifts, and where would the impact show up first: in exports, investment sentiment, or supply chains?
Saurav: Global trade uncertainty presents both risks and opportunities for Sri Lanka. Higher tariffs are negative in absolute terms, but relative positioning matters. Sri Lanka’s tariff exposure is broadly in line with peers and, in some cases, better placed. While US imports in key categories such as textiles have declined, Sri Lanka’s exports to the US have remained broadly flat, suggesting some gain in market share.
However, risks remain. Further tariff increases could weigh on demand if higher prices curb US consumption, making export diversification more important. At the same time, shifting trade dynamics could support investment, as firms in more exposed economies reassess supply chains. With the right policy environment, Sri Lanka could attract manufacturing and supply-chain investment aimed at serving the US market.
Overall, the impact would be felt across exports, investment sentiment and supply chains. Much will depend on how global trade policies evolve and how quickly Sri Lanka adapts to those shifts.
The report notes Sri Lanka’s recovery is shifting from rebound to normalisation, with output still below pre-crisis levels. From your vantage point, what changes are you seeing in how businesses and households make decisions today versus a year ago?
Bingumal: In 2025, behaviour shifted sharply following the rating upgrade and the reopening of imports, particularly vehicles and consumer durables. Households moved quickly to replace items deferred during the crisis years, driving a temporary surge in imports. That phase has now eased, and decision-making has become more cautious.
Today, both households and businesses are taking a more measured approach. Purchases are more deliberate, and businesses are prioritising cash flow over expansion. PMI readings around the 50 mark reflect this shift: activity is stable, but confidence to invest aggressively remains limited.
At the enterprise level, governance and compliance have improved, particularly around tax discipline, reflecting the changed policy environment. Larger companies have adapted faster and consolidated market share, while the SME sector continues to face challenges. Some firms did not survive the crisis, and recovery for that segment will take time. Overall, the economy has moved from rebound to consolidation, with stability now taking priority over rapid growth.
Private-sector credit growth has surged, and the report highlights both opportunity and risk if it stays above 20%. From a bank’s perspective, how do you gauge whether this expansion is fuelling productive investment or adding pressure on imports and the external balance?
Bingumal: Credit growth is healthy only when it aligns with real economic expansion. Past cycles showed that rapid lending without matching GDP growth eventually led to higher stress in the system, which is why composition matters as much as pace.
At present, credit growth above 20% is manageable because it follows a very low base. A significant share has flowed into services and industry, supporting output and investment. The main area requiring caution is personal consumption. Vehicle and consumer lending rose early in the cycle, but measures such as tighter loan-to-value limits are already moderating that trend.
What banks are watching closely is whether credit continues to shift towards productive uses rather than remaining consumption-led. Ultimately, the risk is not the headline growth rate of credit, but where it is directed. As long as lending supports economic growth of around 4.5–5%, pressures on the external balance should remain contained.