In recent months, incoming macro data suggests the global economy continues to grow at a solid pace, despite the heightened uncertainty related to US trade and economic policy. Indeed, last week’s US payrolls numbers were a positive surprise, with 130,000 jobs created in January, and unemployment falling to 4.3%. However, digging a little deeper, shows a more fragile picture.Â
Healthcare accounted for the vast majority of jobs gains in January, and over the past year, while other major sectors in the US like retail, manufacturing, and government have contracted. Annual benchmark revisions also saw the average monthly change of 49,000 last year revised down to just 15,000 jobs. Nevertheless, despite the clear signs of weakness in the labour market, other activity indicators suggest the US economy continues to move along robustly.
A key driver of this resilience has been the surge in AI-related investment. Technology investment as a share of US GDP has risen to the highest level since 2001. Although this surge has been concentrated in the US, it is also generating spillovers globally, most notably to Asia’s computer and chip exports, and in the investment of European firms in adopting the technology.Â
Therefore, the upside surprise to global growth in the last year was driven by business investment rather than consumption. If this surge in investment ultimately boosts the productive capacity of the economy, then GDP growth could be structurally higher in the medium term. However, given the narrow growth base, there are also downside risks if the predicted productivity gains are more slowly realised.
In Europe, activity remains subdued outside of the spike in exports to the US in 2025 ahead of tariffs. Ongoing geopolitical uncertainty has dampened consumer and business confidence though. Furthermore, most indicators suggest growth remained weak in the Eurozone and UK at the end of last year. Indeed, last week’s UK GDP numbers confirmed a loss of momentum in Q4 2025, which was not surprising, given the negativity around another tax-raising budget in November. The 0.1% quarterly gain was below consensus (+0.2%), leaving annual growth at just 1%, a sharp slowdown from the near 2% rate at the turn of 2025.
Forward-looking indicators point to continued muted growth in early 2026, with the current flare-up in political uncertainty around the future of British prime minister Keir Starmer a further risk to confidence. If a decision was made to replace Mr Starmer in the coming months, it would see the UK parliament elect its seventh prime minister in the decade since Brexit, with this instability feeding into the volatility of sterling and gilt markets in recent years.
