US GDP has grown at an average annualised pace of over 4% in the last two published releases and some estimates for Q4 2025 suggest that growth could be over 5%, such as the Atlanta Fed's GDPNow estimate. That's probably too high but, even if it is, Q1 2026 could be a stormer as the impact of the government shutdown last October/November falls out and tax cuts kick in.

US Commerce Secretary Howard Lutnick said US GDP growth could be 5% for Q1. For the year as a whole Treasury Secretary Scott Bessent is calling for 4-5%; far higher than the IMF forecast of 2.4%. Could the Administration be correct and other forecasters wrong? Steven Barrow, Head of Standard Bank G10 Strategy, said it would be very possible. The AI-related boom in investment seems unlikely to end yet, tax cuts are coming through, trade has improved dramatically thanks, in part, to tariffs, and the Fed still seems to be cutting interest rates.

It is clear that the US administration's strategy is to ramp up growth as much as possible. This includes not just trade policy, but also significant deregulation and other measures such as a one-year 10% cap on credit card interest rates and an attempt to lower mortgage rates by forcing Fannie Mae and Feddie Mac to buy more mortgage bonds. The hope is clearly that rampant economic growth will arrest the slide in the president's popularity and deliver a win in November's mid-term elections.

In Steven Barrow’s opinion, this strategy is not without its risks. The main one is higher inflation. The impact of tariffs is yet to be fully felt in terms of higher prices. The dramatic AI build-out is pushing electricity prices up sharply. And the US dollar seems to be falling again which can add price pressure. Those that are optimistic about inflation point to two things.

One is the downward pressure that is filtering through to the CPI from lower rents. Rent prices are easing and these tend to impact the CPI slowly as new rental agreements are struck. The Fed targets PCE prices, not the CPI, and the weight of rent-related components in PCE prices is around a half of that used for the CPI. Hence, Steven Barrow doubts that the rental factor will be a huge source of disinflation for PCE prices.

The second issue that the inflation optimists point to is the fact that robust growth is not creating tightness in the labour market. The unemployment rate is up by around a percentage point from the cyclical low seen in 2023. That's the sort of rise that would normally be associated with a recession but the inflation doves credit AI as creating this jobless economic strength and point to the surge we have been seeing in productivity data as evidence. But while this explanation might have some merits, Steven Barrow has its doubts.

For a start, what is happening in the labor market is that firms have largely stopped hiring; they are not actively laying off workers. If they were sure that AI would deliver strong and sustained productivity gains, they would probably be shedding ‘unnecessary' workers. But they are not doing that.

Steven Barrow suspects that the uncertainty around, not just AI but also tariffs and other Administration policies, such as tough migration curbs, is making firms freeze their labour market activity. This may continue, but he feels that if the economy is bounding ahead, they will be forced to start increasing workers; something that could put upward pressure on wages and prices.

In sum, while economic growth could easily be close to or even above 3% this year, so too could inflation. If correct, it creates the risk that the Fed won't cut rates; frustrating the Administration and spilling over into higher long-term yields with 10-year treasuries scaling 5%. That forecast is way out of the realm of expectations among analysts. The median 50-person forecast by US analysts in the Bloomberg poll predicts a 4.15% 10-year rate in Q4 with even the highest forecast only 4.6%.