AI boom to power growth and keep core inflation firm

The economy is in the middle of an AI-related capex boom and, with some of the prior policy-related headwinds now fading, we expect average annual GDP growth to pick-up to an above-consensus 2.5% next year. A renewed tightening in the labour market and core inflation in excess of 2% will prompt the Fed to raise interest rates, although strong productivity growth should keep cost pressures in check and limit the tightening cycle to a total 75bp of hikes. Given our assumption of a major stock market correction by the end of 2027, we anticipate slower growth and a reversal of those hikes in 2028.