The global economy proved more resilient than expected in the six months following “Liberation Day”. The latest set of US economic indicators painted a robust picture, with the Citi US Surprise Indicator firmly in positive territory, as economic data outpaced consensus expectations. On the other hand, the euro area’s growth has been more sluggish, although it should improve during the fourth quarter.
So far, the overall impact of tariffs has been relatively muted. The US price index for personal consumption expenditures (PCE) has only risen marginally, meaning that—for the moment—consumers are not bearing much of the tariff burden while US firms are absorbing most of the cost. However, not all businesses can afford to foot the bill indefinitely as profit margins erode, and recent evidence suggests they are increasingly passing these costs on. This will eventually result in higher consumer prices for imported goods and for American-made products that use imported components.
Another factor underpinning of the robust US growth has been the AI buildout, with AI capital expenditure now the main driver. The top four hyperscale cloud providers are set to spend around $400 bn this year alone. However, we must bear in mind that not every dollar translates directly to US GDP. Much investment goes toward imported technology goods, which subtracts from GDP, and efforts to reshore manufacturing capacity will involve a long transition process. With respect to the long-term growth prospect, the big question remains whether AI will live up to its promise of high productivity gains.
One clear sign of weakness has come from the labour market with the publication of a gloomy July jobs report in August along with a major revision to national employment data for the 12 months to March, which came in far below the levels implied by its closely watched monthly jobs reports. This amendment is the largest on record and roughly halves the 1.8 million job growth figure the agency had previously estimated, reflecting both softening demand and immigration-constrained labour supply. Going forward, investors will scrutinise labour data to gauge how the economy is evolving.
On the other side of the Atlantic, the euro area’s growth has remained sluggish, but hopes remain that we will start seeing the impact from fiscal stimulus during the fourth quarter. After a delay of over nine months, the German Bundestag approved the 2025 budget act, and the federal government can finally embark on its defence and infrastructure spending programme. With the loosening of the German debt brake, the federal government has gained major fiscal flexibility for the coming years. It will be important to track industrial orders as well as the government’s financial numbers to gauge how swiftly the fiscal expansion is implemented. On the negative side, France’s political situation continues to drag on the economy. Lecornu, the fifth prime minister in under two years, faces major challenges and the impact of political uncertainty is weighing on consumers, with confidence still very low.
The global economy is navigating a complicated environment, and the outcome depends upon numerous factors. However, we continue to believe that the US economy will decelerate as the impact of tariffs filters through. It will be important to track inflation and labour data. The key macro theme in the euro area will be the rollout of Germany’s historic budget stimulus, although challenges remain — such as the unclear path towards fiscal consolidation in France.
Date of report: October 6th 2025