By Rob Crookston, Lead Investment Strategist at Bell Potter Securities on behalf of Tandem Securities (part of Bell Financial Group ASX:BFG).
Global growth is holding up better than feared, but it remains a story of two forces. A positive technology shock from AI investment and adoption is now a central driver of demand, while the energy shock from the Middle East conflict has faded as oil prices have eased back. On a risk-adjusted basis, economies with less exposure to energy and more exposure to the AI investment boom are best placed to outperform over the months ahead.
United States: AI capex supports above-trend growth
In our view, the US remains on a path of steady, above-trend growth, the strongest in the G7. Three forces are doing the work. AI capital expenditure is now a material macro tailwind, contributing roughly 1% to US GDP, and the impulse is broadening beyond hyperscalers into the wider real economy. Policy is adding a second leg of support: tax cuts extend the fiscal impulse, while banking-sector deregulation should ease constraints on credit growth. Energy independence is the third, limiting the damage from the Middle East conflict and helping US growth absorb that shock better than other developed markets.
Disinflation has stalled this year. Headline PCE, the Fed’s preferred measure, has risen for three straight months to around 4%, while core inflation has proved sticky near 3.4%. That said, the most recent core CPI print showed tentative signs of turning back towards target. We expect disinflation to resume in the second half as energy prices ease and, with inflation expectations still well anchored, believe the Fed can afford to stay on hold rather than hike. Markets are pricing around 30 basis points of hikes by year end, which we see as too hawkish, though we acknowledge the risk that sticky shelter costs or a reinflation in energy prices could prove us wrong.
Figure 1: AI is a key support for US growth
Source: Deloitte
Australia: A Federal Budget headwind on top of RBA hikes
Domestic activity in Australia is set to slow. The RBA’s hiking cycle is the first brake, with the lagged effect of a still-restrictive policy setting weighing on demand. The recent Federal Budget is a second headwind, having created uncertainty in the housing market, which remains the key swing factor for consumer sentiment and spending.
Inflation remains sticky, and we think the RBA delivers one to two further hikes before year end. The market is pricing only around 20 basis points of further hikes over the next six months, so we sit more hawkish than the market. Housing inflation is a particular concern: a housing shortage is pushing up both rents and residential construction costs, and that pressure has proved resistant to the slowdown elsewhere in the economy. Two forces should take the heat out of domestic inflation over the second half of the year. Lower energy prices would provide relief if the de-escalation trend in the Middle East holds, while a slower economy, via restrictive monetary and fiscal policy, should cool domestic price pressures more broadly. Taken together, we think the economy is approaching the peak of the hiking cycle, with the policy mix turning more supportive into 2027 as rate cuts come into view.
Figure 2: Australian CPI remains sticky
Source: ABS
Japan: finally normalising, with AI investment as an offset
Japanese economic growth is normalising after a period of stagnation. Higher energy prices remain a headwind, but the AI investment cycle should offset this through higher capital investment and stronger exports. Japanese semiconductor equipment makers and materials suppliers are well geared to the ongoing AI capex boom, and that exposure is helping to underpin a recovery in corporate earnings even as the domestic consumer remains subdued.
The BoJ is on a gradual normalisation path, continuing to hike rates off a low base as inflation stays above target and the domestic economy holds up. The bigger near-term story is the yen: after prolonged weakness, Japan and the US carried out a rare joint intervention in early August, which gave the currency a real lift. Coordinated, publicly-acknowledged action tends to work better than Japan going it alone, since it makes speculators warier of betting against the yen again. But it doesn’t change the underlying driver, the wide gap between US and Japanese rates, so intervention is more a circuit-breaker against disorderly moves than a fix for yen weakness itself. That leaves the yen dependent on further BoJ hikes, or a shift in Fed policy, to see a more durable recovery.
Europe: energy-sensitive economies bear the drag
Economic activity in Europe is set to slow. Energy-sensitive industrial economies, Germany foremost among them, are bearing a more pronounced drag from higher energy prices, compounded by earlier ECB rate hikes and a soft handover from the first half of the year. We expect growth to improve over 2027 as the energy shock fades and monetary policy reaches a peak.
China: moderating growth, policy support offsetting headwinds
China is expected to grow only moderately relative to recent history. Higher energy import prices, structural headwinds including the ongoing real-estate adjustment, and soft domestic consumption continue to weigh on activity. These drags are being partially offset by policy support, with front-loaded fiscal and monetary stimulus helping to put a floor under growth.
Outlook
Taken together, the regional picture supports a constructive but selective view of global growth. The US and Japan carry the clearest structural tailwind from AI investment, Europe and China are stabilising from a lower base with policy support doing some of the work, and Australia remains the one major economy still absorbing a monetary and fiscal tightening at the same time. The key risk to this view is a re-escalation of tensions in the Middle East and a renewed leg higher in the oil price, which would revive the energy-driven inflation pressures that have only recently begun to fade.
Disclaimer: Tandem Securities, Tandem Clearing and Desktop Broker are registered business names of Third Party Platform Pty Ltd (TPP), ABN 74 121 227 905, Australian Financial Services License (AFSL) 314341. TPP is a Market Participant of ASX Limited, Trading Participant of Cboe Australia Pty Ltd, Settlement Participant of ASX Settlement Pty Ltd and a Clearing Participant of ASX Clear Pty Ltd. Tandem Capital is a registered business name of Bell Potter Capital Limited (BPC), ABN 54 085 797 735, AFSL No. 360457. BPC is licensed to offer Margin Lending Services. Tandem Securities, Tandem Capital, Tandem Clearing and Desktop Broker do not provide investment advice, information provided in this document has been prepared without consideration of any specific clients financial situation, particular needs and investment objectives. It is general information only and does not constitute investment or other advice.
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