When Resilience Becomes Momentum

Until recently, the global economy could best be described as resilient, having faced a succession of shocks without falling into recession. The most recent oil shock has left limited imprint on activity, and, to date, a fairly narrow impact on prices. Initially, the foundations of resilience seemed narrow: in the US, they rested largely on AI-related capital expenditure (capex) and a hardy consumer; in China, on a booming export economy; and in Europe, on the rising tide of fiscal spending. However, incoming data suggests that the breadth of the expansion has widened, and momentum has picked up. This materially changes the risk distribution.

GLOBAL GROWTH: A CYCLICAL EXPANSION

The headline story for global growth remains one of resilience, but the nature of that resilience is changing. The most significant development is the broadening of the expansion's underlying base. Incoming data suggests that global capex is growing at about 9.7% annualised, the strongest since 2022. Meanwhile, labour market dynamics are creating tension with this more robust underlying data. Much of 2024 and 2025 was accompanied by gently rising unemployment across developed markets, suggesting that the growth dynamic was real but fragile. That pattern has still not been convincingly reversed. Despite the improvement in growth composition, companies are not yet expanding their workforce.

Figure 1

The cleanest illustration of the growth-labour tension is the US. US GDP is now tracking at approximately 3.5% annualised in the third quarter of 2026, with consumption growing at a similar rate. The principal structural driver remains AI-related fixed investment. Contributions from information processing equipment, software, and research and development to US real GDP have risen to levels not seen outside of the late-1990s technology boom. Incoming data suggests capex is broadening beyond technology and related services. The US consumer, meanwhile, remains relatively healthy, despite soft incoming data: September payrolls data was weak, and the previous two months’ figures were revised substantially lower. The unemployment rate also edged up slightly after rounding. In Europe, growth remains subdued but has not deteriorated as sharply as feared.

A soft first quarter in 2026 was partially offset by a stronger second quarter, and the eurozone remains on track for full-year GDP growth of about 0.9%, rising to around 1.2% in 2027. Fiscal support has been the critical stabilising force. Germany, Italy and Spain are each benefiting from industrial sector activity and elevated defence spending commitments. France is facing more acute pressure, partly from rising domestic gas prices, but, more recently, from a sustained rise in bond yields as France’s weak fiscal position has become a more visible concern. Europe's political calendar is also crowded: France, Italy, Spain and Germany all face elections in 2027, and the consequent caution in fiscal policy ambition is unlikely to dissipate before those votes are cast.

China presents the starkest internal contradiction of any major economy. Export momentum remained strong throughout Q2-26, with AI-related exports accelerating sharply as global demand for compute infrastructure increased. Additionally, sectors with excess capacity and government support (mostly tech and vehicles) have outperformed as global demand remains strong. Yet, this external strength is masking a domestic economy that is cyclically and structurally weak. Consumer spending is subdued, household confidence is poor, and the real estate sector, which remains the single largest driver of wealth and investment in China, is in a deep recession. The transmission of traditional stimulus tools has become increasingly constrained: government debt is becoming a binding fiscal constraint, and the scope for direct consumer demand support remains politically contentious. A slow correction in the property sector, sufficient to reset the base for a sustainable recovery, is necessary, but it implies years rather than quarters of below-potential domestic demand.

INFLATION CHALLENGES PERSIST: CENTRAL BANK POLICY REPRICING

Across developed markets, the disinflation process that began in earnest in late 2023 has stalled at levels above central bank targets. The oil shock has complicated an incomplete journey back to 2%, but the more fundamental issue is that core services inflation has been more persistent than expected. The result is that 2026 will be the third consecutive year in which developed market central banks projected moderating inflation that failed to materialise. Their own forward projections for core inflation in 2027 have been revised upward by an average of approximately half a percentage point since the start of the year.

Figure 2

Three mutually reinforcing dynamics have driven a decisive shift in central bank behaviour during September 2026. The first is growing impatience with above-target inflation. The second is building confidence in the breadth of the expansion itself. The third, and perhaps most consequential, is the recognition that policy stances across developed markets have been less restrictive than previously believed. Elevated asset prices, strong credit growth, and the compression of term premiums had collectively produced financial conditions that were less tight than headline policy rates implied.

The outcome has been a synchronised adjustment in monetary policy. In September 2026, the Federal Reserve Board raised its policy rate by 25 basis points (bps) to 4%. As its first increase in three years, it sent a clear signal that the easing cycle widely expected at the start of 2026 has been postponed. The European Central Bank (ECB) raised its deposit rate by 25bps to 2.5%, and the Bank of Japan, which had only recently exited negative rates, lifted its policy rate to 1.25%. The Bank of England remained on hold but signaled the risk of rate hikes to come. These moves, taken together, mark the beginning of a cumulative developed market tightening.

STRUCTURAL CHANGES: FORCES SHAPING THE LONGER TERM

Beyond the cyclical dynamics, three structural forces that will shape the investment environment over the coming decade are crystallising.

The first is debt. US gross government debt now exceeds 120% of GDP, with federal debt held by the public standing at approximately $40 trillion – roughly $117,000 per capita. Annual deficits are expected to remain in the range of 5%-7% of GDP over the coming decade, meaning bond issuance will remain persistently elevated. In France, public debt stands at 119% of GDP and is expected to be 122% in 2027. The budget deficit is 5.4% of GDP, and France remains in Excessive Deficit Procedure, with meaningful consolidation fiscally and politically challenging. Globally, public debt is projected to approach 100% of GDP by 2029, with the US, France and China the principal contributors.

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The consequence of this is not necessarily an imminent debt crisis, but it does imply structurally higher sovereign yields, greater competition between government and the private sector for capital, and a persistent term premium that markets have already begun to price. US debt service costs already consume approximately 3% of GDP annually, and the trajectory is upward. Economies operating at these debt levels are more sensitive to inflation surprises and political shocks, have less fiscal room to respond to recessions, and are more vulnerable to the dynamics of fiscal dominance, whereby monetary policy loses independence to the demands of sovereign financing.

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The second structural force is demographic. Ageing populations are a feature of both developed and emerging economies, and the arithmetic is unambiguous. Compared to the period from 2000 to 2024, annual working-age population growth over the next decade is expected to slow by 0.5 percentage points in the US, 0.8 points in the eurozone, and 1.3 points in China. All three will face shrinking populations by 2075. The implications for China are particularly acute: 30% of the population will be over 60 by 2035, and the State pension fund faces a structural shortfall that fiscal resources are unlikely to bridge comfortably. Ageing populations also hit fiscal arithmetic twice, first by reducing the tax base, and second by expanding the expenditure commitments for health and pensions. The result is a structural tightening of fiscal space that reinforces the debt dynamics described above.

The third force is technology and its intersection with both productivity and labour markets. AI investment is the most significant capital demand shock in a generation, and its potential to offset demographic deterioration through productivity gains is genuinely material. Scenario analysis calibrated against the diffusion rate of internet-era technologies suggests that at moderate adoption rates, AI raises measured productivity with limited aggregate unemployment, particularly when task creation and wealth effects are factored in. The optimistic case sees productivity gains sufficient to partially offset demographic drag in most developed economies. But the outlook is not uniformly positive: in parts of Europe, China, Brazil, Taiwan and South Korea, demographic pressure could still lower potential growth even in an optimistic AI-diffusion scenario, and the distribution of gains will depend heavily on the quality of policy responses to technological displacement.

SOUTH AFRICA: RECOVERY DELAYED, NOT DERAILED

South Africa (SA)'s economy entered 2026 with some positive cyclical momentum, only to encounter the oil shock in Q2-26. GDP growth started the year on a relatively solid footing, but softer private consumption, ongoing weakness in capital expenditure, and a sharp drag from imports saw Q2-26 contract 0.2% q/q and left the full year tracking at approximately 1.1%. The medium-term trajectory is more encouraging: we forecast GDP growth of 1.6% in 2027 and 2.2% in 2028. This is underpinned by incremental progress on structural reforms in energy and logistics, both of which support a recovery in gross fixed capital formation.

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The reform programme, anchored by Operation Vulindlela, continues to make progress although progress is uneven across the priority areas, with political friction often the binding constraint rather than technical or institutional capacity. Electricity and logistics – the two sectors most directly linked to economic throughput – are both registering progress. However, while renewable projects are largely on track, the binding constraint has shifted from generation to transmission. Port throughput at Durban's DGT Pier 2 is up 6.6% year on year (y/y), and the open-access freight rail reform is advancing, if unevenly. Digital infrastructure, where the least improvement is needed, is a genuine bright spot, with Smart ID bank partnerships and the MzansiXchange expanding materially. Water and local government reform, by contrast, remain the areas of most significant underperformance relative to their economic potential.

Unlike most developed markets, 2026 began with headline CPI close to the South African Reserve Bank (SARB)'s 3% target, anchored by falling fuel prices, soft core price pressures, and a moderately restrictive policy stance. The latest oil price shock will see large fuel price increases in September and October. Unless this unwinds materially, headline inflation is expected to peak close to 6% y/y in early 2027, with the drought risk associated with El Niño adding to upside risks for longer. Against this backdrop, the SARB raised its policy rate by 25 basis points in September 2026, lifting the repo rate to 7.25%. We expect monetary policy to remain conservative, and flag the risk of another hike should price pressures broaden into core inflation and expectations fail to adjust more materially.

SA's fiscal position stands as one of the more meaningful positive developments in the current cycle. Concerted expenditure consolidation, combined with revenue windfalls and lower borrowing costs generated by improved market sentiment, has enabled National Treasury to outperform budget targets for the third consecutive year. We expect a deficit of approximately 3.4% of GDP in 2026/27 – narrower than the Budget forecast – and a primary surplus of 1.5%, making three consecutive years of primary surplus. This is significant for the debt trajectory: gross government debt likely peaked in the 2025/26 fiscal year and is now expected to moderate gently. The fiscal credibility earned through this consolidation is an asset, but it is not without fragility. Debt remains high in absolute terms, and debt service costs absorb a substantial share of revenue. Treasury also faces a series of large redemptions in coming years, which it has started to manage proactively. In a global environment where the cost of capital is rising and term premiums[1] are expanding, the premium attached to fiscal, institutional and monetary credibility has increased, not decreased.

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The political landscape is shifting in ways that carry important implications for the medium-term outlook. Local government elections, which are a significant mid-cycle indicator of political support, are likely to reflect the structural break of the 2024 national election. The ANC's support continues to fall, while the DA holds relatively steady and newcomers, including the IFP, the Patriotic Alliance and the MK Party, are the disruptors. Coalitions are likely in the majority of metropolitan municipalities, and the outcomes will set the scene for ANC succession dynamics ahead of the 2029 national election.

CONCLUSION

The global expansion is proving more durable than the resilient-but-fragile characterisation that seemed appropriate earlier in the year. But durability is not without its complications. Central banks have pivoted from accommodating the oil price shock to tightening policy rates. Along with higher policy rates, higher yields are also tightening financial conditions and the demand for capital by corporates is also rising. The repricing of the global rate environment could become more challenging for sovereign borrowers, emerging market economies, and asset prices globally. This includes a US 10-year yield above 5%, the Fed funds rate moving back above 4%, and potentially 100bps of synchronised G3[2] tightening.

For SA, the global context cuts both ways. The improving growth picture offers a more supportive backdrop for commodity revenues, trade and investor sentiment toward emerging markets as an asset class. But higher developed market rates intensify competition for capital, reduce the comparative advantage of local yields, and tighten the conditions under which the SARB can ease policy without currency consequences. Against this backdrop, SA brings genuine positives: a visible fiscal consolidation, monetary policy anchored by a credible central bank, a reform agenda that is slow but moving, and a political transition that, however uncertain, is proceeding through institutional channels. Execution is now the variable that determines whether the credibility test is passed.

[1] The extra return investors demand for holding a long-term bond
[2] The Federal Reserve Board, European Central Bank & Bank of Japan  

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