1. US set to lead economic growth

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1. US set to lead economic growth

Global economics and policy trends

1. US set to lead economic growth

What we said
We identified the US as the fastest‑growing developed economy, underpinned by three structural strengths – economic resilience, a coherent growth plan and IT leadership – and three cyclical tailwinds – lower rates, lower energy prices and fiscal stimulus.

How it has played out
The structural thesis remains firmly intact. The US economy has proved remarkably robust despite uncertainty from the Middle East war, a change at the helm of the Federal Reserve and the lagged impact of tariffs. In its April 2026 World Economic Outlook, the IMF forecast US growth of 2.3% in 2026, versus 1.1% in the eurozone, 0.8% in the UK and 0.7% in Japan. While this figure still lags the expected growth rates of China and India of 4.4% and 6.3% respectively, US growth is nonetheless elevated in the context of other developed market economies.

Although the structural tailwinds to US growth are solid, two of the three cyclical factors – lower rates and lower energy prices – have been challenged by the war in the Middle East. From less than USD 60 at the start of 2026, West Texas Intermediate (WTI) oil has risen to around USD 90 per barrel1,reflecting the effective closure of the Strait of Hormuz, through which roughly 20% of global oil supply transits.

The disruption extends beyond oil to commodities such as natural gas, helium, urea, sulphur and phosphates, many of which are critical inputs for fertiliser and the global food supply chain. This has pushed up both realised and expected inflation and triggered a re‑pricing of interest rate expectations. Where futures had been pricing up to three US rate cuts in 2026 immediately before the war, markets are now entertaining the possibility of a rate hike, with similar shifts in expectations for other major central banks (see Theme 2).

The third cyclical factor – fiscal stimulus – remains in place and continues to provide powerful support to the US economy, reinforced by strong AI‑related investment. The impact of higher commodity prices is also cushioned by the fact that the US is a net oil exporter. The same is not true for Europe, which imports a significant share of its energy needs. This helps explain why the European growth outlook remains sluggish, even though higher defence spending offers a potential – but uncertain – catalyst to reignite growth (see Theme 7).

Outlook for H2 2026
We expect the US to remain the primary growth engine of the global economy in H2 2026. The three structural drivers we highlighted are still in place and continue to differentiate the US from other advanced economies. Fiscal stimulus and strong AI‑related investment should keep US growth above that of most peers, even as the policy backdrop becomes more complex.

The key swing factor is the evolution of the Middle East conflict and its impact on energy prices and inflation. Our central case is that the Strait of Hormuz gradually reopens, allowing oil prices to retreat from current levels, though an elevated risk premium is likely to keep them above pre‑war averages. This would ease pressure on inflation and give the Federal Reserve some room to support growth if needed.

The main risks to this benign scenario are:

  1. A renewed escalation of military conflict in the Middle East, leading to a more persistent energy price shock.
  2. Supply constraints resulting in a slower build-out of IT‑related capital expenditure, particularly around AI.
  3. A rapid rise in unemployment, potentially linked to AI-driven labour-market disruption.

On balance, we still see the most likely outcome as a resilient global economy with particular strength in the US, and a more challenging environment for energy‑importing regions such as Europe and the UK. This underpins our preference for US growth assets over other developed markets in H2 2026.

Action for investors:

  • Within developed markets, keep growth exposure centred on the US, where structural drivers remain intact as fiscal policy and AI investment continue to support activity.
  • In emerging markets, continue to favour economies with strong domestic demand, notably Taiwan and India. Taiwan remains at the heart of the AI boom, while India offers a potential value opportunity. We see a lack of near-term catalysts in China.
  • Within emerging market (EM) fixed income, prioritise local‑currency exposure, as hard‑currency EM debt looks fully valued in our view.
  • Be more cautious on UK and European equities, given a more challenged growth backdrop and greater sensitivity to the energy shock and recent rate hikes.
  • Avoid a purely passive approach, especially in a year with several high‑profile IPOs (see Theme 10), where index mechanics and flows can amplify both upside hype and downside risk.

1 Source: LSEG Data & Analytics. As at 31 May 2026.

1. US set to lead economic growth

In 2026 policymakers will continue to emphasise supporting economic growth over fighting inflation. We think the US will be the best-placed advanced economy in growth terms in 2026. However, while it is our core view that US growth will surprise to the upside, there are some potential pitfalls to be aware of.

US leadership
There are three structural and three cyclical reasons why we believe the US will be the fastest growing advanced economy in 2026.

The three structural factors are:

  1. Economic resilience. Since the pandemic the US economy has demonstrated a high degree of economic resilience, performing better than other advanced economies. While some recession indicators have prompted concerns about a deterioration in the US economy, these have so far proved unfounded. This may be connected to the large amount of stimulus that was applied during the Covid period, coupled with the highly flexible, adaptable and innovative nature of the US corporate sector.
  2. A clear growth plan. Scott Bessent, the US Treasury Secretary has set out a clear plan for delivering economic growth – “3-3-3”1 – 3% real growth, 3% budget deficit (relative to GDP), and an increase in oil production of 3 million barrels per day. Key to the success of these three targets, respectively, are deregulation and pro-business reforms; spending cuts and revenue increases; and simplification of permits to increase oil supply and reduce costs (see Theme 5). Whether these objectives can be achieved by these measures alone is yet to be seen, but at least the US has a plan, in contrast with much of the rest of the world.
  3. IT leadership. The US remains at the forefront of global IT innovation and development largely due to the considerable investment in research and development that has already taken place. In the first half of 2025, private sector investment in IT equipment contributed almost half the growth in GDP.2 Already-announced plans by the largest IT companies strongly suggest this large contribution will continue to at least 2030. This will, most notably, include investment in data centres and energy provision which is set to continue to be a battle ground in the global race for IT supremacy (see Theme 6).

The three cyclical factors are:

  1. Lower rate environment. We anticipate that we will reach trough rates in the first half of 2026 (see Theme 2). Given the lag between monetary policy and activity, lower rates will have an increasingly positive effect on economic growth as the year progresses, in particular supporting consumer spending.
  2. Lower energy prices. 2025 saw much talk about tariffs resulting in slower growth and higher inflation. However, that has not materialised. One reason is that energy prices have been in decline, something that works in exactly the opposite direction to tariffs, supporting growth and lowering inflation. Furthermore, lower energy prices are expected to continue to benefit the US economy at least in the first half of 2026 and potentially into the second half if they remain depressed.
  3. Fiscal stimulus. President Trump’s much touted One Big Beautiful Bill Act contains a number of measures that will be growth positive. Of note, growth will be well supported next year by accelerated depreciation, the ability of companies to fully expense research and development costs in the year in which they occur and an increase in individual tax deductions. The Tax Foundation estimates that this will increase US GDP by about 1% in 2026 relative to what it would otherwise have been.3

“ … One Big Beautiful Bill Act contains a number of measures that will be growth positive. ”

Of course, there are still potential risks to the US outlook as we enter 2026. It is possible, for example, that the impact of tariffs has been delayed and there are some tentative signs that the housing market is levelling off. We have also observed a recent increase in student loan delinquencies, some high-profile bankruptcy cases, while the rate of credit card delinquencies is at its highest in over 10 years – nothing to panic about but it is possible that these become greater problems in 2026.

A separate risk that is not often talked about relates to artificial intelligence (AI). Whilst there are lots of good things associated with AI, there is also a risk that widespread adoption results in severe dislocation in the US labour market, displacing current jobs and sparking an increase in unemployment. However, on balance, we believe that the US is set to be the strongest advanced economy in 2026 and indeed the latest IMF projections also reflect this view (Figure 1).

Elsewhere: China set to lag the US but lead emerging market growth. The outlook for Europe is mixed.
It is true that structural impediments to Chinese growth – high levels of debt, a weak property market and long-term demographic challenges – remain. But the dynamism and huge scale of Chinese industry and the rapid adoption of new technology (notably in green energy, artificial intelligence and electrification) remain important strengths. India is now in a stronger position to compete with China in key areas of manufacturing and also has a strong domestic market, making it less vulnerable to international trade tensions. Consumer spending accounted for 61% of GDP in India but just 40% in China in 2025.4

In Europe the growth outlook is mixed. The lagged impact of lower European Central Bank rates will provide a tailwind to regional growth in 2026 and it is expected that the German economy, Europe’s largest, will receive a significant boost from the increase in fiscal spending that was agreed this year, notably with regard to defence spending. In addition, it will be interesting to see whether with an improvement in China, where a significant portion of European exports are destined for, improves prospects. Against this it is necessary to balance a worsening fiscal outlook and ongoing political uncertainty in parts of Europe, exemplified by the challenges facing the French establishment.

Of course, economic growth is just one factor to take into consideration when judging asset allocation. In equity markets, valuations are generally more attractive in emerging than in advanced economies, as discussed further in Theme 8.

Action for investors:

  • Within developed markets, remain focused on the US in terms of growth prospects.
  • Despite structural headwinds, China is still set to be the predominant emerging economy.
  • Emerging markets with strong domestic demand should be favoured in terms of growth prospects.
  • European luxury goods could benefit from recovering Chinese demand and improving global growth conditions.

1 Bloomberg: https://www.bloomberg.com/news/features/2025-08-11/treasury-secretary-bessent-on-tariffs-deficits-trump-s-economic-plan?sref=dNFL42AE
2 Source: US Bureau of Economic Analysis, LSEG, and EFGAM calculations. Data as at 08 October 2025. The share from IT investment was 46%, and from consumer spending was 68% – other components detracted from GDP growth. In the three years 2022–2024, IT investment contributed just 2% and consumer spending as much as 79% to growth.
3 https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/
4 Source: Oxford Economics estimate, via LSEG

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