Solid Growth And Cooling Inflation: 3 Calls For The US

(MENAFN- ING) How to read our three calls for 2027 Source: ING

"> ING's base call: Solid growth and cooling inflation remains our call

We continue to expect respectable US growth of 2-2.5% over the next couple of years, but with ongoing bifurcation. Wealth gains are supporting spending among higher-income households, while weaker wage growth is pressuring middle- and lower-income households.

Within business investment, tech-related capex shows little sign of slowing, but appears to be cannibalising investment spending elsewhere and is contributing to the low-hire, low-fire economy. Manufacturing is similarly K-shaped: high-value-added advanced manufacturing is growing strongly and adding jobs, while more commoditised, labour-intensive manufacturing struggles. The growth story's lack of breadth is a slight concern and creates vulnerabilities, particularly if asset prices correct.

Inflation remains above target but should ease as energy costs fall and rents cool. More significantly, labour costs are the biggest cost input for corporate America. With wage growth dropping to 3%, we see just one more Fed rate rise – in December – before a long pause for most of 2027.

Our risky call: Constrained Trump goes all-in for regime change in Iran

With President Trump constrained by a Democratic-led Congress, foreign and trade policy remain key sources of risk to our base case. For example, Iran hawks within the Administration could convince him that diplomacy won't work, meaning regime change in Iran is required. Disruption in the Gulf would then intensify, with energy prices spiking. At the same time, President Trump could demand NATO involvement, applying onerous tariffs on imports from members that refuse to participate in the conflict with Iran.

In this scenario, rising inflation could prompt the Fed to raise rates above 5%. Government borrowing would rise on military spending, but Treasury yields would be held down by 'safe-haven' buying as equity markets plunge. Recession risks would then mount through demand destruction as unemployment climbs. Iran would eventually be weakened sufficiently that attacks cease and energy flows resume. Oil, natural gas and fertiliser prices would then subside, with inflation falling rapidly. Monetary policy would be eased aggressively, but it would be too little, too late to prevent a painful downturn for the global economy.

Our bold call: Party like it's 1999? US growth hits 5% in 2027

US GDP growth averaged 4.5% in the four years before the dotcom crash in 2000. Yet for all the talk of the surge in AI-related investment spending in the current cycle, the economy has only averaged 2.7% annual growth since ChatGPT launched four years ago. In our bold call, that would change in 2027.

In this scenario, AI unleashes a wave of productivity improvements and technological advancement across sectors more rapidly than currently envisaged. Prices fall and real wages surge. Rather than using the productivity gains to justify job cuts, companies reorient their workforce to do much more. Tax revenues surge while AI adoption in government creates huge efficiency savings and a re-evaluation of the fiscal outlook. Lower deficits, lower debt projections and lower inflation prompt Treasury yields to plunge. The Fed cuts rates while mortgage rates drop below 4%, triggering a recovery in the residential property market. The economy booms broadly, with equity markets soaring to new highs.

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