The U.S. economy grew robustly in the third quarter of 2025, expanding at a faster-than-expected 4.3% annual rate, driven by strong consumer spending on services...

As we start out on 2026, there’s likely to be a good deal of speculation that the US economy will enjoy a strong start to the year thanks largely to two fiscal issues: the snap-back following the end of the government shutdown and the impact of tax cuts under Trump’s one big, beautiful bill. But while these fiscal factors may well aid the US economy, some of the biggest fiscal impetus still seems to lie outside the US.

There’s little doubting that the US could get off to a strong economic start in 2026 thanks to fiscal factors. For instance, the Hutchins Centre, estimates that the ending of the government shutdown and tax cuts from Trump’s tax package will boost growth by 2.3% points in the first quarter of 2026. Clearly any such surge in GDP will likely follow a depressed GDP reading for Q4 but that’s like ancient history now.

Instead, the market will be trying to ascertain just how strong growth could be in 2026 and whether this could have a bearing on employment and hence the Federal Reserve’s easing strategy. Interestingly, the same Hutchins Center analysis suggests that fiscal conditions through the remainder of 2026 and into 2027 will detract from GDP growth. This, of course, is under the assumption of no material changes in fiscal policy, but that looks a safe bet given the political paralysis that seems likely ahead of midterm elections in November.

Another point to bear in mind is that if the Trump Administration loses its tariff case in the Supreme Court, it could have to pay back tariffs already collected, so tightening fiscal conditions still more. Most probably, there will be no payback even if Trump loses the case.  And any cessation of tariff revenues as a result of the ruling will probably be a temporary phenomenon, as the Administration is likely to switch to another tariff law in order to get tariff revenue going again. Nonetheless, the point that we’d make here is that any fiscal-enhanced boost to growth early in 2026 could well provide false optimism about the year as a whole.

While there has undoubtedly been much fuss made of things like US tariff revenues and the effects of the one big, beautiful bill from the US Administration, it is fiscal policy elsewhere that could prove more significant.

First on the list here is Germany, thanks to last year’s decision to ease up on the much-maligned debt brake and to increase defence commitments in line with many other European countries. To see this, we can use IMF calculations for the core budget balances in the US and Germany in coming years. The ‘core’ definition of the budget that we have chosen is the cyclically adjusted primary deficit as a proportion of potential GDP.

The IMF puts the gap between the US and German core budgets at some 3.25% for 2025, as the US deficit of 4.2% of GDP was far in excess of Germany’s 0.9%. But in 2026, the IMF sees the gap close to 2% as the US core deficit shrinks slightly to 4% while Germany’s expands sharply to 1.9%. Moreover, this gap closes still further in future years to just 0.6 percentage points of GDP by 2029 (3.6% in the US and 3% in Germany).

Now clearly the lift to growth from an increase in defense and infrastructure spending (as in Germany) will be different to fiscal easing driven by tax cuts (as in the US), but the magnitude of the change in Germany’s core fiscal position is so large relative to that of the US that we think it should be here where we look for the longer-term growth boost, not the US. This could be of considerable importance when it comes to the pricing of things like currencies and stocks.

Last year, we saw the US growth advantage over many countries shrink and this decline in exceptionalism may have been a factor in the US dollar’s slide and underperformance of US equities. If the same decline in exceptionalism persists into 2026, we might well expect the same financial market implications – or at least when it comes to euro/US dollar and eurozone stocks relative to US equities.