Global growth rising amid new European debt stress
Global growth indicators strengthened over the past month, not least underpinned by the ongoing AI investment boom. Global PMI data continued to increase in September with a synchronized lift across regions. Even though the data centre build-out is strongest in the US, trickle down effects lift growth across the world as much of the supply chain for data centres are outside of the US. Advanced microchips are mainly produced in Taiwan and South Korea, where export data continues to boom, but Europe is also a supplier, not least when it comes to machines for chip production and inputs for energy systems. European manufacturing PMI remained robust in September and service PMI improved again. Private consumption continues to rise at a decent clip, especially in the US, providing tailwind for global growth as well.
We look for the global economy to continue to cruise ahead with GDP growth around trend into 2027. There is a definite risk the AI investment boom will create overcapacity at some point and trigger a sharp downturn. However, the current challenge in the AI value chain is rather capacity constraints amid a sharp rise in the demand for compute to power AI. US hyperscalers plan to increase investments from around USD800 bn in 2026 to USD1.3 trn in 2027 (4% of US GDP). Hence, for the coming year AI investments look set to be a continuing global growth driver.
Over the past week, stress in the European bond markets reached the highest levels since 2011 amid new uncertainties around the budget and debt outlook in France. Contagion lifted bond spreads in Italy and Spain as well. Our baseline scenario is that France will ultimately take needed budget measures to cool down market stress, but the turmoil adds a new risk to the growth outlook. Rising global bond yields have also provided a headwind to global growth but it has happened in response to stronger growth, so it will act more as a balancing factor rather than derail growth, in our view.
Oil prices have fluctuated again over the past month rising to USD110 per barrel in mid-September followed by a decline back to around USD100 per barrel lately. Key drivers have been continued stalemate in US-Iran talks, uncertainty over a possible US diesel export ban ahead of mid-term elections, global inventory depletion but also more oil flowing through the Strait of Hormuz. Our baseline scenario is more muddling through in the oil market amid continued volatility.
Inflation developments have been mixed. Euro inflation surprised to the upside in September with headline inflation moving up to 3.8% from 3.2% while core rose to 2.5% from 2.4%. In the US core PCE inflation was revised lower but was still 3.0% y/y in September, clearly above the 2% target. Robust growth amid upward inflation surprises keep central banks in hiking mode. The Fed raised policy rates by 25p for the first time in three years on 16 September taking the Fed funds rate to 4.0% while the ECB delivered a second hike in three months on 10 September lifting rates to 2.5%. We look for another two hikes by both central banks over the next 3-6 months.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
