Section 2: The economy and markets
Key points to know
The AI boom. Tech sector dominance has made AI spending the biggest driver of the global macroeconomic outlook. Since 2024, 64 cents of every dollar of U.S. GDP growth has been attributable to tech spending, across software and hardware. Hardware has been particularly strong, rising from nearly 2% of U.S. GDP to more than 3% — a substantial increase representing hundreds of billions of dollars annually (Figure 1). This has kept the global economy on stronger footing than it would otherwise be, and growth should continue through the coming year. Surging chip demand has also pushed certain inflation categories higher, with the software and accessories subindex in the U.S. rising at an annualized pace of around 50% so far this year, per Bloomberg.
Oil overhang. The global economy continues to grapple with persistently elevated oil prices. Though prices have retreated from their conflict-driven highs, we expect them to remain higher for longer. This reflects: a) continued uncertainty about the ongoing conflicts in the Middle East, b) renewed concern over how quickly affected producers can restart, and c) a relatively slow ramp-up in production elsewhere, including in the U.S. Headline inflation has already moved sharply higher across most major economies. As the lagged impact of higher energy prices filters through to broader prices, core inflation will remain pressured in the coming quarters.
Resilient consumer. Inflationary headwinds are putting the U.S. and global consumer under increasing strain. Nominal spending remains firm, but much of that strength reflects higher inflation rather than stronger fundamentals. With labor markets loosening and wage inflation slowing, rising inflation is now compressing real income growth. In the near term, consumers will likely look through the volatility and maintain spending. The U.S. outlook should remain positive if the labor market stabilizes around current levels, as we expect. But a further rise in oil prices would likely weigh more meaningfully on spending, with energy-exposed economies in Europe and Asia most at risk.
Broad, but not universal, shift toward tightening. With growth supported by AI spending and a still resilient consumer, most major central banks have refocused on price stability in the face of a global energy shock. Both the European Central Bank and Bank of Japan have hiked rates this year to address upside inflation risks. The U.S. economy is somewhat more insulated, but we have adjusted our outlook to reflect higher near-term inflation. We now anticipate a longer policy pause through the end of 2026, with the Fed likely cutting rates again in early 2027 as disinflationary forces re-emerge.
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
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