~With contributions from Vivien Lee, Aaron Ma and Eric Savoie

Our monthly economic webcast for February is now available, entitled “Positive on earnings and growth.”

Equity markets saw plenty of churn and bouts of selling in the first half of February due to the so-called “AI scare trade”: the release of powerful new AI models that caused investors to downgrade the future profitability of some software and service companies (see next chart).

Powerful new AI models caused investors to re-evaluate some companies’ business models

As of 02/17/2026. Index incorporates firms potentially impacted by the latest developments from AI labs such as Anthropic and OpenAI. Sources: Bloomberg, Morgan Stanley, Macrobond, RBC GAM

The latest versions of ChatGPT and Claude have made a major leap forward relative to prior generations. So have variants designed specifically to write code. Experts say AI is developing faster than expected in part because the newest models contributed to their own coding and training. AI is now helping to develop itself. This could lead to larger and more frequent jumps in model proficiency.

This latest episode serves as an important reminder that AI will create both winners and losers. The privately held developers of those models (OpenAI and Anthropic) are surely more valuable today. Parts of the publicly traded AI ecosystem will also benefit from growing demand for increasingly powerful tools.

At times, the losers may outweigh the winners in equity markets – particularly as some of the winners aren’t publicly traded – even if AI is ultimately a net positive over time.

But there are also plenty of companies whose business models will be disrupted by these developments. Software companies whose products might be displaced by ultra-fast and capable AI-coded solutions, and any number of services companies that could face competition from new AI tools, are at risk of losing market share and pricing power.

At times, the losers may outweigh the winners in equity markets – particularly as some of the winners aren’t publicly traded – even if AI is ultimately a net positive over time.

This disruption won’t happen overnight but could become apparent somewhat sooner than previously thought. Recent price action might be overdone and has at a minimum painted with too broad a brush. Some software companies should still enjoy significant moats in the face of AI disruption.

Meanwhile, increasingly capable models support our relative optimism on potential productivity gains and also help justify significant AI CapEx, although power constraints could dampen the latter. More on that later in this report.

-JN

Even if certain pockets of the stock market have been under pressure as per the software discussion above, the broader equity market has been relatively resilient. This perhaps reflects that the macro backdrop remains consistent with a positive environment for risk taking.

Historically, stocks have generally done well when the economy was growing. They’ve performed even better when that growth was paired with interest rate cuts. The 2x2 matrix below lists return statistics since the mid-1900s for stocks, bonds and a balanced portfolio in the four possible combinations of the economy growing vs. contracting and monetary policy easing vs. tightening.

In regimes in which the economy was growing and interest rates were falling, the S&P 500 delivered gains averaging 11.7% per year and U.S. 10-year bonds delivered average annual gains of 9.8% – the best combined return stats of the four quadrants.

Money policy and economic regime matrix

Performance stats of stocks, bonds and 60% stocks/40% bonds portfolio

As of 02/02/2026. Daily S&P 500 data begins in 1955 and U.S. 10-year bond data begins in 1962. Return and standard deviation is annualized. Min and Max are the cumulative returns for continuous days in the regime. The % of time figures don’t add up to 100% because there are some periods where monetary policy is neither tightening nor easing. These periods were excluded from the analysis. Source: RBC GAM

Also worth noting are the stock and bond return stats for some of the other growth and monetary policy permutations. The worst quadrant for investors in the matrix, featuring negative returns for both stocks and bonds, is when the economy was in recession and yet the central bank was hiking interest rates. But this is a combination that seldom occurs, representing just 0.2% of the time in our analysis.

The two other remaining regimes – ones in which the economy is contracting while interest rates are falling, or the economy is growing while interest rates are rising – showed divergent performance between stocks and bonds, but 60/40 balanced portfolios still managed to deliver mid-single-digit returns in both cases. (Note that the recession plus rate cut combination has an especially high variance, making predictions in that quadrant less precise).

Should the present monetary easing environment remain in place, it is also possible to examine the outlook using a road map approach. This provides further perspective as to what investors may expect should history repeat itself.

The next chart plots the historical experience of a 60% stocks/40% bonds portfolio through past periods of monetary easing. The zero point on the x-axis reflects the date of the first rate cut for all of the 12 observed easing cycles since the mid-1970s. The various lines on the chart group these cycles based on whether the economy entered recession or avoided one.

Performance of 60/40 balanced portfolio often rises after first Fed funds rate cut

As of 02/09/2026. Balanced portfolio is 60% S&P 500 and 40% Bloomberg U.S. Treasury Index. Source: RBC GAM

So far, the current cycle is tracking the median experience of past such cycles and indicates the potential for continued gains ahead. The no-recession track – the one we believe the economy to be on – offers the most promising upside.

In short, these two pieces of analysis argue that an environment of continued economic growth, especially if combined with falling short-term interest rates, establishes the conditions for favourable investment returns across both stocks and bonds in the quarters ahead.

-ES

Our updated economic forecasts are broadly positive and, we think, worth sharing (see next table). Properly interpreting new economic forecasts requires the evaluation of five key factors: to what extent the forecast has changed, the new forecast level, the expected economic momentum from one year to the next, the relative outlook across countries, and, above all, how the new forecast compares to the consensus.

Our economic outlook remains broadly positive

As at 02/17/2026. Sources: RBC GAM, Bloomberg

1)      Forecast change

For five of the six developed regions examined, our 2026 GDP forecast is more optimistic than it was the quarter before. Canada is an exception. This is in part based on a weak handoff from the final quarter of 2025 and in part because trade policy uncertainty related to USMCA negotiations appear set to persist for longer than we had once thought.

A key motivation for the upgraded forecasts is that many countries reported fairly promising economic data over the past few months. Prominently, the U.S. managed a giant jump in the January Institute for Supply Management (ISM) Manufacturing and also a rare month of more than 100,000 net new jobs created.

2)      New forecast levels

The new growth forecasts for all six markets are slightly to significantly above their potential growth rates. This might seem surprising when the likes of Canada is forecast to grow at just 1.4% Q4/Q4 in 2026. But without any population growth, that is actually a solid outcome.

Key to this outlook is the expectation that a variety of tailwinds will fill the economic sails, including monetary stimulus, fiscal stimulus, positive stock market wealth effects, AI spending and AI-driven productivity gains.

3)      Economic momentum

We expect U.S. economic growth to continue roughly unchanged at a handsome +2.5% annual growth rate in 2026. However, our forecasts for the other five markets all constitute a sizeable improvement relative to the more subdued growth achieved in 2025 – positive economic momentum (see next chart). The momentum is then more mixed from 2026 to 2027.

Apart from U.S., RBC GAM forecasts sustained GDP growth for developed markets in 2026/2027

Forecasts as of 02/06/2026. Source: RBC GAM

4)      Relative performance

Comparing across countries, the U.S. is set to remain the fastest growing nation, but to a less exceptional degree than in prior years. The U.S. growth advantage over its average developed peer shrinks from +1.3ppt in 2025 to just +0.8ppt in 2026. South Korea also looks particularly good for 2026.

5)      Versus the consensus

Except for Canada, the examined economies can all boast above-consensus forecasts. In theory, this is the most important criteria since in a perfect world, financial markets should already have priced in everything else.

Emerging market rundown

Briefly, and without going through the entire process a second time, our major emerging market forecasts (see next chart) have also mostly enjoyed slight upgrades over the past quarter (except Brazil).

• The absolute growth rates are mostly decent by their historical standards (except Russia).

• Economic momentum is roughly neutral.

• India is set to lead with China second.

• Most of the EM forecasts have alighted slightly above the consensus (except Russia).

India is set to lead emerging markets GDP outlook, with China second

Consensus forecast as of January 2026. Numbers shown in chart are current RBC GAM forecast as of 02/06/2026. Old forecast as of 10/24/2025. Sources: Bloomberg, RBC GAM

Overall

Returning to the table at the top of this section, the column on the far right is labelled “OVERALL.” It represents a simple average of the five aforementioned factors. While unsophisticated, this helpfully reiterates the message of a constructive economic view that should be supportive of risk assets.

-EL

U.S. electricity consumption is rising anew after more than a decade of stagnation (see next chart). The biggest contributor to the increase is the proliferation of energy-hungry data centres, driven by growing demand for cloud computing and AI training and inference. Utilities and hyperscalers are scrambling to add capacity but supply is struggling to keep up with demand. Rising consumer electricity prices have become a political issue and local resistance to data centre projects is growing.

Power might be the single biggest constraint to tech companies’ ambitious CapEx plans: the International Energy Agency (IEA) thinks one-fifth of global data centre investment is at risk of delay due to grid bottlenecks. China doesn’t face this challenge – it has invested heavily in new capacity and now generates more than twice as much electricity as the U.S.

The White House faces a tough balancing act to improve electricity affordability without hindering domestic investment and shrinking the country’s sizeable lead in the data centre buildout.

After a decade of stagnation, U.S. electricity consumption is once again rising

As of September 2025. Sources: Energy Information Administration (EIA), Macrobond, RBC GAM

The U.S. Department of Energy estimates data centre power consumption grew by 18% annually between 2018 and 2023, while overall electricity demand was flat. The share of electricity used by data centres more than doubled to 4.4% from 1.9% over that period and could rise to 6.7-12% by 2028 depending on factors like GPU shipments, energy efficiency, utilization rates and cooling requirements. While GPUs are becoming 38% more energy efficient every year, installed capacity is growing by 2.3x annually, driving overall consumption higher.

In response to growing demand, electricity investment has accelerated, rising at an inflation-adjusted rate of 6% annually over the past five years. It accounted for nearly 5% of private CapEx in 2024, the highest share since 1985 (see next chart).

That helped utility-scale generation capacity grow at the fastest pace in more than a decade. But much of the increase came from solar and wind projects. The addition is less impressive when adjusting for intermittency and reliability. Reduced federal funding for green energy projects could slow the pace of new investment.

U.S. electricity investment has accelerated in recent years

As of 2024. Sources: U.S. Bureau of Economic Analysis (BEA), Macrobond, RBC GAM

Berkeley Labs estimates more than 10,000 power projects were seeking grid interconnection in the U.S. as of the end of 2024. That represented 1,400 GW of new generation (about 35x the net capacity added in 2024) and 890 GW of storage.

But history suggests just a fraction of those projects will ultimately become operational. Only 13% of interconnection requests between 2000-19 reached commercial operations by the end of 2024, while 77% were withdrawn and 10% are still active. Billions of dollars in clean energy projects were canceled last year due to loss of federal funding.

Making matters worse, the time it takes to add new power plants to the grid has lengthened considerably. It has risen from less than two years in the early 2000s to more than four years recently (see next chart). Adding new transmission infrastructure can take a decade.

Meanwhile, electricity demand can rise much more quickly: data centres can be built in about two years. The Federal Energy Regulatory Commission (FERC) made rule changes in 2023 to address the backlog of interconnection requestions and streamline the process for adding new resources to the grid, but experts say it’s too early to judge their effectiveness. Further rule changes were proposed in 2025.

It can take more than 4 years to bring new power generation online in the U.S.

As of 02/04/2026. Sources: Berkeley Lab, RBC GAM

To get around these delays, more data centres are being built with behind-the-grid power generation. Natural gas-fired turbines are particularly popular, but prices have doubled in recent years and delivery times now stretch out to several years. Nuclear is making a comeback, with Microsoft and Constellation Energy planning to restart a reactor at Three Mile Island. Google and NextEra Energy are looking to reopen a plant in Iowa – but there is only so much latent capacity. Other patchwork solutions include fuel cells and conversion of Bitcoin mining sites.

Most new data centres still get their power from the grid, and the cost of upgrading electricity infrastructure is generally spread across ratepayers, including households and small businesses. While some utilities charge higher rates for data centres, pricing doesn’t fully cover the cost of new infrastructure. And when utilities purchase electricity on the open market, data centre-driven demand pushes prices higher for all customers.

That has contributed to a one-third increase in residential electricity prices over the past five years – more than 1.5x as fast as the overall CPI (Consumer Price Index). To be fair, the sharpest increase in prices occurred before data centre construction really began to accelerate (see next chart). Russia’s invasion of Ukraine, which caused a spike in natural gas prices, was a key source of energy inflation in 2022.

Data centre construction is one factor contributing to higher U.S. electricity prices

As of December 2025. Sources: U.S. Bureau of Labor Statistics (BLS), U.S. Bureau of Economic Analyses (BEA), Macrobond, RBC GAM

But the data centre effect is notable. Bloomberg reports wholesale electricity prices increased by as much as 267% over five years in areas located near significant data centre activity. A Carnegie Mellon study estimates data centres and cryptocurrency mining could lead to an 8% increase in average electricity generation costs by 2030. The increase could exceed 25% in markets with a high concentration of data centres, like Virginia.

Rising electricity prices are becoming a political issue. They likely contributed to Democratic victories in some state elections last fall. As part of a growing focus on affordability, the White House has called on tech companies to “pay their own way” and is reportedly working on an agreement that would see data centre developers fully cover the cost of new energy infrastructure. Some hyperscalers are already pledging to do so, although an opaque rate-setting process makes that difficult to verify.

Higher electricity prices aren’t just putting politicians’ jobs at risk. Data Center Watch reports that 20 projects representing nearly $100 billion in potential investment were blocked or delayed by local opposition in Q2/25 alone.

More broadly, implementing such an agreement will require coordination between grid operators, utilities, state regulators, tech companies and other data centre developers.

For households, electricity represents just 2.5% of the CPI basket, so only contributed 15 bps to the latest year-over-year inflation print. But it is a highly visible, recurring and necessary expense.

Thus electricity prices might make a greater contribution to perceived affordability challenges, which have sapped consumer confidence. Just as electricity prices were an issue in last year’s state elections, they could play a role in this year’s mid-terms, particularly in states that have seen substantial price hikes.

Higher electricity prices aren’t just putting politicians’ jobs at risk. Data Center Watch reports that 20 projects representing nearly $100 billion in potential investment were blocked or delayed by local opposition in Q2/25 alone.

The U.S.’s power challenges contrast with China, where electricity generation has grown by nearly 9% annually over the past 25 years (see next chart). Since 2021 alone, China added more generation capacity than the U.S. has in its history. A major investment push, a streamlined approval process, and an “all of the above” approach embracing both renewables and fossil fuel generation has helped the country add capacity at an unprecedented pace.

BloombergNEF predicts China’s lead will continue to grow over the next five years with almost six times as much new capacity added relative to the U.S. While data centre investment by Chinese tech companies hasn’t kept pace with U.S. hyperscalers and access to leading edge chips is a challenge, China’s significantly greater power capacity could be a key advantage in the race for AI supremacy.

China’s rapidly rising electricity supply is a key advantage in the AI race

As of 2024. Sources: Energy Institute, Macrobond, RBC GAM

Back in the U.S., the latest round of quarterly earnings saw yet another upward revision to AI CapEx estimates. Consensus for 2026 spending by the big 5 hyperscalers now exceeds $650 billion, a more than 50% increase relative to last year. But if tech companies are unable to follow through on that investment due to power constraints – and thus unable to monetize growing cloud service backlogs in a timely manner – valuations could be at risk. 

This issue is well known and should be reflected to some extent in current prices and earnings expectations, but there could be room for disappointment and re-pricing if markets are too optimistic about the potential for new capacity to resolve power bottlenecks.

And with the computing power required to train frontier models growing by 5x per year, capacity constraints could act as a headwind to model development and the pace of improvement in AI capabilities more generally. Less capacity for inference would also mean slower diffusion of productivity-boosting AI tools to other sectors of the economy.

-JN

The evolving global order is never far from mind during this remarkable period of flux. The world has already transitioned from a hegemonic world to a multipolar one now that China rivals the U.S. More recently, the world has been rapidly abandoning the rules-based order for a power-based one.

A third key change to the global order – and one that is partially informed by the prior two – is the steady erosion of America’s long-vaunted exceptionalism. This change is being spurred by a variety of forces:

• The U.S. has opted to relinquish its prior control over the global order, preferring not to be the world’s policeman or to lead integration efforts.

• Domestically, the combination of fiscal excesses, political polarization and policy uncertainty paints a less compelling picture.

• From an economic standpoint, the U.S. growth advantage is shrinking slightly (though not gone).

• U.S. public policy has been wielded antagonistically toward the rest of the world and the rest of the world has responded by losing trust in the U.S.

It is this last point – the rest of the world’s loss of trust in the U.S. – that we will explore further here. Such assertions usually involve hand-waving but little empirical data. Let us correct that.

International surveys clearly show a marked deterioration in attitudes toward the U.S. The Democracy Perceptions Index shows that whereas the U.S. was previously viewed quite positively by the world and far more positively than China or Russia, the reverse is now true (see next chart). Attitudes toward the U.S. have degraded from strongly positive in 2024 to slightly negative in 2025. Conversely, both Russia and China have enjoyed increases over the past several years, such that the net perception of China is not merely higher than the U.S. but now outright positive. The perception of the U.S. is now not much greater than of Russia.

The U.S. is now viewed less favourably than China in international surveys

As at 02/02/2026. Sources: Democracy Perceptions Index, RBC GAM

A different survey – this one by the Pew Research Centre – allows the tracking of how different countries view the U.S. (see next chart). Of the 24 countries examined, 19 became less favourable about the U.S. from 2024 to 2025. The result is that fully 12 of the 24 countries now have a negative attitude toward the U.S., with another two conveying a neutral attitude.

As such, just 42% of the countries have a favourable view of the U.S. today. Prior close partners including Mexico, Canada and large swaths of the European Union are now quite unfavourable.

Attitudes of different countries toward the U.S. are generally worsening

As of 02/05/2026. Sources: Pew Research Centre, RBC GAM

Implications

There are several investment and economic implications, though with the caveat that these effects are unlikely to be immediate and decisive. Instead they’ll likely flow (and occasionally partially ebb) over a period of years.

1. Declining U.S. exceptionalism supports the view that the U.S. dollar has further room to decline over the coming years. If a country is neither liked nor trusted, the inflow of capital should decrease. Indeed, there is already mounting evidence that this is happening – albeit over a longer time frame. For example, use of the U.S. dollar in currency reserves is declining. Simultaneously, the popularity of gold is increasing (see next chart).

2. A relatively steep yield curve makes sense given U.S. political and fiscal risks, and when foreign investors are more cautious about the U.S.

3. U.S. risk premiums should be slightly higher than otherwise, meaning slightly less friendly credit spreads and stock market valuations.

4. It would make sense if the U.S. economy were slightly diminished by these developments. However, a weaker dollar could paper over much of it, and there are of course many other economic tailwinds and headwinds to tally up.

Reserves diversifying away from USD, with gold the main beneficiary

As of Q2 2025. Gold valued at market price. Source: IMF, Macrobond, RBC GAM

Durability

Should investors expect that these themes will reverse in 2029? Perhaps partially, but we posit that these changes will be sticky, for several reasons:

• The multipolar world is here to stay because China isn’t going anywhere.

• It isn’t automatic that future U.S. political leaders will reverse course. A Republican president might feel compelled to honour President Trump’s legacy, while the Democratic Party has not actually been especially pro-trade in recent decades, and public attitudes toward immigration have soured across political stripes.
  
  Further, do not underestimate the power of political inertia, or the extent to which the elements that benefit from this new regime will advocate for its continuation.

• U.S. reputational damage will take a long time to undo, even if recent antagonism were to end. Soft power is easily lost but not easily regained.

• The rules-based order took generations to construct; it will not easily be restored now that countries have seen how simple it is for great powers to undermine it.

• The rest of the world has snapped awake and now recognizes its vulnerability. Other countries cannot afford to be so reliant on the U.S. from a military and economic perspective and will not soon slumber again.

• The rise of populism is not limited to the U.S. It is also visible in Europe and a variety of other markets. This means that a return to multilateralism may be viewed skeptically by more than just the U.S.

  -EL

Asia has long been the darling of the economics world due to its reliably rapid growth, whereas Africa has long been viewed much more skeptically.

Given that, it is nothing short of astonishing that Sub-Saharan Africa’s economy is now growing nearly as quickly as Emerging and Developing Asia. What’s more, according to International Monetary Fund (IMF) forecasts, Africa is set to outgrow its Asian counterpart by 2030 (with 4.6% annual GDP growth versus 4.5% in Asia in 2030, as per the next chart).

Africa is set to outgrow Asia by 2030

As of 02/13/2026. International Monetary Fund (IMF) forecast is dashed line. Sources: IMF, Macrobond, RBC GAM

How can Africa possibly be expected to keep up when Asia has so many prominent economic powerhouses including India, the Philippines, Vietnam, Indonesia and China?

The answer is that Africa also has a host of less heralded but equally fast-moving economies, including Ethiopia, Ivory Coast, Tanzania, Ghana, Kenya and Nigeria. These are already expanding nicely today, and the IMF projects that by 2030, six of the ten fastest growing major economies on the two continents will be in Africa rather than Asia (see next chart).

Most African countries are expected to grow faster than Asian countries in 2030

IMF forecast for 2030 as of October 2025. Sources: IMF World Economic Outlook, Macrobond, RBC GAM

What will allow Africa to achieve this relatively rapid growth? Let’s explore four key factors:

1. This scenario represents less of an improvement from pre-existing conditions than you might think: Africa has been growing quickly ever since the pandemic.

2. Whereas Asia is growing disproportionately thanks to rising productivity but comparatively little population growth. Stylistically, the region reports about 3.5-4.0% annual productivity growth and about 0.5-1.0% population growth. Africa is the reverse. It is on track for about 2.5% population growth per year plus a less impressive 1.5-2.5% annual productivity growth. So rapid population growth is Africa’s main driver.

   In fairness, investors, policymakers and the public would all prefer rapidly rising productivity over a rapidly rising population. That favours Asia. But Africa’s fast-growing and young population may foreshadow larger productivity gains to come as that generation hits the workforce and gains experience. And even if it doesn’t, many business sectors are geared toward a country’s raw population, including real estate, utilities and staples.

   Incredibly, the UN forecasts that Africa’s population will rise from an already significant 18% of the world to a dominating 38-40% by the end of the century. That’s a lot of prospective customers and workers.

3. The African economy is benefiting from strong global demand for resources and is particularly well positioned to benefit from surging base and precious metals prices. Sub-Saharan Africa produces about 30% of the world’s gold.

4. Africa is on average much poorer than Asia. Absent major policy mistakes, Africa should be capable of maintaining a rapid economic growth rate for decades, whereas some Asian economies such as China are naturally decelerating as their prosperity rises.

Alongside these growth drivers are a variety of risks.

• Africa traditionally suffers from a weaker rule of law, higher corruption, poorer corporate governance and less regime stability than Asia.

• It is also exposed to the highly cyclical resource sector.

• Given its relatively lower level of development, its currency swings tend to be more severe, inflation is more volatile, and market liquidity and depth is shallower.

This is why every Sub-Saharan African market except for South Africa is deemed a frontier market rather than an emerging market.

Financial markets are not ignorant of Africa’s promise. The S&P All Sub-Saharan Africa (ex-South Africa) stock index rose by a remarkable 85% over the past year, though that has resulted in a relatively lofty 17.6x trailing P/E that isn’t much lower than the tech-heavy MSCI EM Asia P/E of 18.9x.

The point in all of this is that Africa’s economy is moving more quickly than you might have assumed. Its financial markets are also having a moment. We have argued in the past that the current quarter century (2025 to 2049) is likely to belong to developing Asia, while the one after (2050 to 2074) could belong to Africa. But there is a risk we are too pessimistic and that Africa’s time is somewhat closer at hand.

-EL

Is the U.S. economy outgrowing China? Yes, but more importantly, no.

Let’s explain that riddle. U.S. nominal GDP growth has actually been reliably ahead of Chinese nominal GDP growth since the fourth quarter of 2021 – for more than four years (see next chart). In the latest quarter, U.S. annual nominal GDP growth was +5.4% vs +3.9% in China. That never used to happen, as the next chart shows.

U.S. nominal GDP growth is outpacing China

China as of Q4 2025, U.S. as of Q3 2025. Sources: China National Bureau of Statistics (NBS), U.S. BEA, Macrobond, RBC GAM

On the other hand, U.S. real GDP growth (adjusted for inflation) remains substantially slower than China. In fact, the U.S. is expanding at not much more than half the Chinese clip. And this is ultimately what matters most since it captures the rate at which the productive capacity of an economy is actually going up.

The difference between nominal GDP growth and real GDP growth is, of course, the rate at which prices are rising. It just so happens to be the case that U.S. inflation is positive and even a bit elevated, while China is flirting with deflation – to the point that Chinese real GDP growth is actually faster than Chinese nominal GDP growth (see next chart). (You know China’s nominal GDP growth numbers are weird when even Japan has approximately kept pace with China over the past three years!) There is nothing particular to celebrate about being the country with the higher inflation rate.

China’s nominal GDP growth is now lower than real growth (GDP adjusted for inflation)

As of Q4 2025. Sources: NBS, Macrobond, RBC GAM

But, for all of that, there are a few small ways that having a faster nominal GDP growth rate delivers an advantage.

A country’s fiscal finances often improve when nominal GDP is strong, even if real GDP growth is nothing special. This is because government revenues rise approximately in line with nominal GDP, while many fiscal obligations are fixed.

Faster nominal GDP growth can also drive faster corporate revenue growth and corporate earnings growth. In theory it is real earnings that should ultimately matter, but try telling that to financial markets excited by strong earnings numbers, or investors excited by a higher nominal stock index.

As such, the U.S. can bask in its slightly improved fiscal and financial market outcomes, but China’s rapid real GDP growth is still indisputably the more important accomplishment.

-EL & VL

The Reserve Bank of Australia (RBA) raised its cash rate by 25 bps in February, becoming the first developed market central bank to reverse course on post-pandemic rate cuts (the Bank of Japan is also raising rates but didn’t hike in 2022-23). The futures market points to another rate increase in May (see next chart).

Smaller central banks can be quicker to act and sometimes lead their larger counterparts in monetary policy pivots. The RBA started cutting rates about two months ahead of the Fed in 2019. The Bank of Canada (BoC) led the Fed slightly in raising rates (including by larger increments) in 2022.

So, it’s worth asking whether the RBA’s move is a sign that G7 central banks might soon be following suit with rate hikes of their own.

Unlike other central banks, the Reserve Bank of Australia is starting to reverse rate cuts

As of 02/12/2026. Dotted lines indicate futures pricing. Sources: Bloomberg, RBC GAM

Aside from Japan, we think the answer is “no.” Our forecast is for the BoC and European Central Bank (ECB) to remain on hold this year, while the Fed and Bank of England (BoE) are likely to cut by another 50 bps.

Looking at the RBA’s justification for raising interest rates, there are key differences relative to the situations facing other G7 central banks:

Australian inflation “picked up materially in the second half of 2025” and is “likely to remain above target for some time.” Trimmed mean inflation, the RBA’s preferred core measure, accelerated by half a percent in the second half of last year. At 3.3% year-over-year it now sits above the central bank’s 2-3% target range.

The RBA sees this rate rising further to 3.7% mid-year and only expects a return to sub-3% inflation in 2027. This contrasts with other developed markets where inflation is still high but slowing (the U.S. and UK) or stabilizing close to central banks’ targets (Canada and the Eurozone).

The RBA described labour market conditions as “a little tight.” Australia’s unemployment rate has declined in recent months. It is now below the RBA’s estimate of the rate consistent with full employment and stable inflation.

Unemployment rates in Canada and the U.S. have also declined recently. The Eurozone’s is the lowest in the currency bloc’s history, while the UK’s jobless rate has been rising. In all cases, though, recent readings are around (U.S. and Eurozone) or slightly above (Canada and the UK) estimates of long-run sustainable levels, suggesting labour markets aren’t overly tight.

Activity and prices in Australia’s housing market – one of the economy’s most interest-rate sensitive sectors – “are continuing to pick up.” That’s not the case in other markets.

Housing remains weak in Canada and the U.S. The UK market has generally softened but is showing signs of stabilization, and the Eurozone’s housing recovery is losing some momentum. Australia is seeing faster home price growth than all of the G7 countries and is the only one of those markets with a positive “exuberance” index (according to the Federal Reserve Bank of Dallas) suggesting prices might be getting ahead of fundamentals.

The RBA says uncertainty has had “little or no depressing effect on the Australian economy.” This stands in stark contrast with Canada – another small, open, commodity exporting country. The BoC’s latest policy statement noted, “U.S. trade restrictions and uncertainty continue to disrupt growth in Canada.” Ongoing concerns about the future of USMCA, which looks less and less likely to be resolved by mid-year, are one of the key reasons we think the BoC will remain on the sidelines in 2026.

While we think these differences make other central banks unlikely to follow the RBA’s lead, the factors noted above suggest where there might be some risk of a hawkish turn. Central banks may be willing to tolerate above-target inflation as long as the trend is in the right direction, but there could be limited tolerance for rising inflation when the price level is already so high. Further improvement in labour market conditions would be welcome, but if unemployment rates fall further, the U.S. and Eurozone might not be too far from “tight” job markets.

For the BoC, a resolution of trade policy uncertainty that helps confidence and investment improve could lay the groundwork for modest tightening that returns the policy rate to a more neutral level.

-JN

The latest estimates of Q4 GDP growth allow us to close the books on 2025. The UK economy expanded by 1.0% last year while the Eurozone grew by 1.3%, both on a Q4/Q4 basis (our preferred measure). The rate of potential growth for both economies is likely somewhere in the 1.3% range, making 2025 a disappointing year for the UK but a roughly average one in the Eurozone. We think there is room for improvement in both economies in 2026:

Monetary policy has become less restrictive. The ECB appears to be firmly on hold, having cut its deposit rate in half from 4% to 2%. Monetary policy is now neutral – neither stimulating nor slowing growth – and the effects of those earlier rate cuts are still filtering through the economy. The market is even pricing in some risk of another rate cut if currency appreciation pushes inflation further below target this year.

The BoE has been slower to dial back its restrictiveness but lowered its Bank Rate in December and looks set to do so again in March – somewhat sooner than previously thought. We think another cut is on the way after that, which would bring interest rates to a more neutral level. Again, the lagged effect of past rate cuts will be supportive in 2026.

Fiscal policy is outright stimulative in the Eurozone and less of a drag in the UK than previously feared. Germany is ramping up infrastructure spending, defense outlays are on the rise across Europe, and there is a push to start public works projects before unspent pandemic recovery funds expire.

In the UK, last fall’s budget managed to put off necessary fiscal consolidation without running afoul of debt-wary Gilt investors. There is even a modest increase in near-term welfare spending and affordability measures. Less uncertainty about fiscal policy in the UK should also be supportive of business CapEx – PMIs have improved since the budget and hit a 17-month high in January.

We think consumers can do a bit more of the heavy lifting this year. Slower inflation should help ease affordability challenges. Eurozone inflation has even slipped modestly below the ECB’s 2% target and is likely to remain there throughout the year. A healthy labour market – unemployment is the lowest in the currency bloc’s history – is also supporting wage growth.

In the UK, wage and price inflation are slowing simultaneously, although budget measures should cause a step down in inflation in the spring. Consumers in both economies increased their savings in recent years (see next chart), but the UK’s savings rate is starting to come down and we think there’s scope for the Eurozone to move in that direction as consumer confidence improves. That would unlock additional spending above and beyond income-driven consumption.

Eurozone and UK household savings rates have room to come down, supporting spending

As of Q3 2025. Sources: UK Office for National Statistics (ONS), Eurostat, Macrobond, RBC GAM

There are certainly risks to the outlook. The euro is already up 13% year-over-year and further appreciation could add to the manufacturing sector’s competitiveness challenges. The rollout of German infrastructure spending has been slower than expected and could be delayed further, although we are starting to see signs of that fiscal impulse coming through.

In the UK, political uncertainty has resurfaced with questions around PM Starmer’s leadership. Any change in fiscal direction risks upsetting the Gilt market and tightening financial conditions. In both economies, if consumers remain cautious, spending could disappoint.

Overall, though, we think there is upside risk to consensus forecasts for 1.4% growth (Q4/Q4) in both the UK and Eurozone this year.

-JN