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Shock absorption: 3 signs the economy is picking up from here

  Key takeaways:

  • We see signs that economic growth will remain resilient next year, supported by multiple stabilising forces.
  • A wave of AI-driven investment is emerging as a major engine for expansion, boosting productivity and offsetting cooling in consumer spending.
  • Policy conditions are shifting from restrictive to neutral, with central banks and fiscal measures now providing a mild boost rather than a drag.
  • The labour market is holding firm, with steady job and income growth helping to sustain household demand and underpin the ongoing recovery.

Last week, markets zeroed in on two big questions: Are rate cuts nearly over, and is the AI boom fading? The Fed cut rates for a third consecutive meeting, but signalled they don’t see scope for many more cuts in the near future as the economy holds firm. Meanwhile, tech stocks lost momentum amid concerns over heavy capital spending, driving a shift into cyclical sectors and ex-US markets.

Below, we unpack how shock absorbers have kept the economy on track this year—and why we expect firming forces into next.

1. The investment cycle is doing a lot of heavy lifting

The US economy mostly runs on consumer spending—households drive about two-thirds of US GDP, and that hasn’t changed. But what’s powering growth at the margin is shifting, thanks in large part to a surge in AI-driven investment.

Business spending on non-residential fixed assets—think data centres, chip factories, power infrastructure, and the software and intellectual property that fuel AI—has stepped into the spotlight. Traditionally a modest slice of GDP, this investment has recently contributed up to a quarter of real US GDP growth, a sharp jump from its usual 15%. In other words, punching well above its weight.

We see this as the beginning of a major capex wave. Our investment bank estimates AI-related capital spending will likely reach $500 billion this year and may climb to $700 billion next year, as companies race to build out the backbone of the digital economy. By 2030, annual funding needs could top $1.4 trillion. These are multi-year commitments—once a company starts a data centre or chip plant, it’s usually in for the long haul.

This investment boom also brings a potential productivity boost. As firms deploy automation, software, and AI tools, even modest efficiency gains could help the economy grow faster without reigniting inflation—the type of environment the Fed is aiming for.

We’re optimistic this wave can help keep growth on track, even if consumer spending cools.

2. Policy is shifting from headwind to neutral

The policy mix isn’t fighting the economy the way it was a year ago. Instead of worrying about tighter conditions, the conversation has shifted to how gently the central banks can ease from here—an important shift as the big adjustment to higher mortgage rates, a stronger dollar, and tighter credit has largely played out.

The incremental drag is fading, not building. Following on the Fed’s move last week, the European Central Bank is expected to hold rates steady at 2% this week. Meanwhile, the Bank of England is set for its sixth cut of the cycle, likely lowering the Bank Rate to 3.75% and potentially shifting to a more data-dependent approach from here.

Lower interest rates and easier policy are starting to ripple through the broader economy. Financial conditions—seen in rising equity prices, tighter credit spreads, and a weaker dollar—are now providing a mild boost. On the fiscal side, the outlook is brightening as well. After a year of tariff-driven tightening, new tailwinds are emerging: markets anticipate a US Supreme Court ruling that could ease tariff pressures, supporting growth just as businesses ramp up investment in AI, defence, and infrastructure. Meanwhile, OBBBA-linked tax refunds are set to put more cash in consumers’ pockets, giving household demand an extra lift.

3. The labour market bent but didn’t break

In the US, the unemployment rate has ticked up to 4.4% from 3.5% back in January, but this isn’t a story of mass layoffs—and signs point to the job market stabilising from here. Most of the recent softness comes from more people entering the workforce or wrapping up temporary roles, not companies cutting headcount. That’s a sharp contrast to typical recessions, where layoffs drive unemployment higher; this time, they’ve only added a sliver to the rate so far, much less than at a similar point around the Dot-Com bust or the Great Financial Crisis.

The Fed is aiming for a cooler, more balanced labour market—relieving wage and inflation pressures without triggering a wave of job losses. Recent data on job openings and hiring plans suggests this softening is already starting to level off, even if the next few months still see some tougher prints. Meanwhile, US paychecks are still growing about a percentage point faster than prices, keeping purchasing power steady. Household cash flow isn’t booming like it did post-COVID, but it’s solid enough to keep spending—and the recovery—moving forward.

As long as jobs and real incomes hold up, and so does the consumer—we think the expansion can, too.

What it means for you

All told, we see global growth picking up next year. The labour market is softer but still holding firm overall, policy is shifting from a headwind to neutral, and a surge in AI and infrastructure investment is powering a new engine of expansion. Reflecting our confidence, we expect just one more Fed rate cut next year—even as markets are pricing in more. Against this backdrop, we favour risk assets like stocks over bonds, and see real assets such as infrastructure as powerful tools for managing inflation risk.

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All market and economic data as of December 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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Thanks to a few “shock absorbers,” we expect both the economy and markets to hold firm next year.
Published Dec 15, 2025

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