The global economy is proving remarkably resilient despite persistent inflation, global uncertainty and rising energy prices. Yet economists warn that the outlook could become more challenging as central banks prepare to increase borrowing costs.

An economic assessment published in October 2026 highlights three major sources of investment supporting growth: artificial intelligence, defence spending and the transition towards cleaner energy.

Bill Diviney, head of macroeconomic research and senior eurozone economist, expects these investment trends to help advanced economies maintain relatively stable growth in the near term. However, he also anticipates that expensive energy and tighter monetary policy will increasingly affect economic activity in 2027.

Three Industries Driving Growth

Investment in artificial intelligence is creating substantial demand for data centres, advanced computing equipment and digital infrastructure.

Meanwhile, increased defence expenditure is supporting manufacturing, engineering and technological development. Investment in cleaner energy and infrastructure provides another important source of economic activity. Together, these sectors are helping offset the effects of uncertainty and higher operating costs.

Nevertheless, the benefits vary considerably between countries, depending on their industrial strengths, government spending priorities and exposure to energy prices.

Europe Faces A Difficult Year

The eurozone economy has remained relatively stable despite sustained pressure from energy costs. Business activity indicators for September suggest that economic momentum is continuing, although underlying growth remains modest. Diviney expects the region's expansion to weaken during 2027 as higher borrowing costs and energy expenses increasingly affect businesses and households.

Economic performance also differs significantly across member states. Spain continues to demonstrate stronger growth than several other major European economies, while France faces weaker conditions. Germany is expected to benefit from increased defence expenditure.

The Netherlands performed better than anticipated during the first half of 2026, supported partly by stronger private-sector balance sheets. However, structural constraints and renewed inflationary pressures could limit its future expansion.

Will European Interest Rates Rise?

The European Central Bank faces the challenge of controlling inflation without placing excessive pressure on economic growth. Current forecasts anticipate two additional interest rate increases, scheduled for December 2026 and March 2027.

These adjustments would bring the ECB's deposit rate to 3%. However, higher government bond yields are already making borrowing more expensive, potentially reducing the need for aggressive monetary tightening.

Diviney's assessment suggests that the ECB could begin gradually reducing interest rates towards the end of 2027, provided broader inflationary pressures remain contained.

America's AI Boom Supports Growth

The United States continues to benefit from substantial investment in artificial intelligence. Private demand remains relatively strong, while household consumption has shown resilience despite economic uncertainty. The labour market is stable, although hiring demand remains subdued.

Inflation is gradually declining, but elevated food and energy prices have slowed progress. Economists expect inflation to approach the Federal Reserve's 2% target during the second quarter of 2027. Another interest rate increase is anticipated in December 2026, potentially leaving the upper boundary of the federal funds rate at 4.25% until late 2027.

China's Recovery Remains Uneven

China's economic activity is showing signs of improvement following disappointing indicators in July and August. Government support measures are beginning to influence growth, while exports continue to benefit from international demand linked to artificial intelligence investment.

However, the economy faces persistent imbalances between domestic production and consumption. Manufacturing capacity remains strong, but insufficient domestic demand creates additional pressure on businesses and contributes to international trade tensions.

Diviney's analysis indicates that Beijing's recent measures are primarily aimed at maintaining economic stability, with deeper structural challenges still unresolved.

Britain Prepares For Higher Rates

The British economy has performed better than expected in recent months, although persistent energy inflation remains a concern. The Bank of England is expected to increase interest rates by 0.25 percentage points in November 2026, followed by another increase of the same size in February 2027.

However, weaker labour market conditions make a substantial acceleration in wage growth less likely than during the inflationary surge of 2022–2023. If energy pressures ease, interest rate reductions could begin in the final quarter of 2027.

What Lies Ahead For Global Markets?

Government bond yields have increased across major economies, reflecting concerns about inflation, public finances and future monetary policy. The euro has also weakened against the US dollar, influenced by interest rate expectations and uncertainty in France. Despite these pressures, economists maintain a forecast of $1.15 per euro by the end of 2026.

Diviney's broader outlook suggests that the global economy has sufficient investment momentum to withstand current challenges, although its resilience will face a more demanding test next year.

The coming months will reveal whether inflation can ease without significantly weakening employment, investment and economic growth.