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 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. Despite the improvement in growth composition, companies are not yet expanding their workforce.

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. 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. Yet, this external strength is masking a domestic economy that is cyclically and structurally weak.

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 result is that 2026 will be the fifth consecutive year in which developed market central banks projected moderating inflation that failed to materialise.

Three mutually reinforcing dynamics have driven a decisive shift in central bank behaviour during September 2026. The first is growing frustration 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[1] 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%. 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. 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. Globally, sovereign yields have come under pressure.

The second structural force is demographic. Ageing populations are a feature of both developed and emerging economies, and the arithmetic is unambiguous. 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 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. 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.

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.

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%.

SA's fiscal position stands as one of the more meaningful positive developments in the current cycle. 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.

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. 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.

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[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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