The global growth divergence

Global divergence takes shape

The global market narrative is one of divergence, where not all major economies are navigating the post-inflation world equally. While central banks grapple with similar challenges, the United States has exhibited remarkable resilience, maintaining an above-trend growth rate of over 2.8% in 20241. This strength is in sharp contrast to the subdued performance across the UK and the Eurozone, creating a starkly different environment for global investors and multinational corporations.

U.S. growth driven by structural Capital Exchange

“Not all major economies are navigating the post-inflation world equally," states Amol Dhargalkar. According to Amol Dhargalkar, Chatham Financial’s Chairman, the U.S. economy's ability to withstand headwinds like inflation and rising interest rates is fundamentally tied to a specific, unprecedented capital expenditure cycle.

Amol notes the "insatiable demand for data centers and AI-connected CapEx" as a massive lift for the U.S. economy. This technological dynamism is not merely lifting growth; it’s potentially sending the U.S. economy into "a different trajectory" altogether. This CapEx has the potential to drive job creation, boost productivity, and provide an offset to traditional recessionary pressures.

Europe and the UK: growth bias to the downside

Jackie Bowie shares, “we didn’t have much to be thankful for... this was not a growth-oriented budget." Conversely, the Eurozone and the UK face a bias to the downside, with a less buoyant outlook for the coming years. According to Jackie Bowie, Chatham Financial’s Head of EMEA, while forecasts suggest convergence of overall economic performance in the long term, the near-term is gloomy.

Despite announced measures, a major fiscal boost in Germany has not generated a substantial impact on near term growth forecasts. Furthermore, the political and fiscal climate in the UK suggests further pessimism. Commenting on the recent UK budget, Jackie stated, "we didn’t have much to be thankful for... this was not a growth-oriented budget".

Structural differences behind the divide

The underlying structural differences explain some of the divergence. The Eurozone, particularly Germany, remains heavily export-led and is impacted by global headwinds and trade slowdowns than the domestically driven US market. While service-driven economies within the EU, such as Spain, are performing better, the overall regional average masks significant weaknesses in the two largest economies. For investors, this means that exposure to the UK and German markets carries a distinct downside bias, while the US market, buoyed by tech-driven CapEx, remains a primary source of economic stability, albeit with its own fiscal challenges

Strategic implications for investors

The global economy has entered a fundamentally bifurcated reality. This divergence is not cyclical but structural. The United States is re-platforming on an unprecedented, domestically driven capital expenditure cycle, specifically the insatiable demand for data centers and AI infrastructure. This technological advantage secures a distinct, higher growth trajectory for the U.S., making it the essential anchor for global capital.

In stark contrast, the Eurozone and the UK face persistent structural deceleration, hampered by export-led reliance and a lack of domestic fiscal management. For investors and multinational corporations, there is a bit of a dilemma as the liberation day announcements generated a ‘sell USA’ narrative, but looking forward to is difficult to justify this view given the relative growth potential. Future returns will be defined by the ability to strategically capitalize on this new, AI-fueled divergence.

¹US Bureau of Economic Analysis, Q4 2024, Page 3

This article is part of Capital markets: strategy and risk, our Insights series where our leaders and experts help you navigate the complexities of today's capital markets and make informed and strategic decisions.