Trump’s America powers ahead as Europe stalls

Capital Economics reports a stark economic divergence in Q3 2025, with the U.S. economy expanding at an annualized rate of nearly 4% due to a productivity surge driven by significant high-tech investment, including a 20% year-over-year increase in hardware spending, potentially signaling an AI-driven boost. In contrast, the Eurozone grew minimally at 0.1-0.2%, hampered by structural issues, delayed fiscal action, and rising social costs. This disparity underscores the U.S.'s unique ability to absorb innovation and its lead in AI readiness, contrasting with Europe's persistent stagnation.

Analysis

The U.S. economy demonstrated robust growth in Q3 2025, expanding by an estimated 0.9% quarter-on-quarter, or nearly 4% annualized, according to Capital Economics. This performance defied earlier predictions of a slowdown due to trade barriers and immigration policies, driven instead by a significant productivity surge of 3.5% year-on-year in the non-financial corporate sector. Headline inflation is holding around 3%, with goods inflation rising slower than expected.

This productivity is directly linked to booming high-tech investment, with hardware spending up 20% and software up 10% year-on-year, potentially signaling an AI-driven economic lift. Capital Economics projects continued business investment growth of 4.7% in 2026 and 5.2% in 2027, underscoring the U.S.'s unique capacity for innovation absorption and its leading position in AI readiness.

In stark contrast, the Eurozone registered minimal growth of 0.1-0.2% for the same period, hampered by persistent structural issues. Delayed fiscal loosening in Germany until late 2026 and rising social costs have absorbed fiscal space, while Germany's industrial base continues to shrink, highlighting Europe's ongoing economic stagnation and limited policy maneuverability.

Key Decisions for Investors

• Investors should monitor the durability of the U.S. AI investment wave and high-tech spending as key indicators for sustained productivity growth and potential outperformance in relevant sectors.
• Consider re-evaluating exposure to European markets given persistent structural headwinds, minimal growth, and delayed fiscal responses, which limit upside potential.
• Assess U.S. technology sector investments for continued strength, particularly those poised to benefit from the AI-driven economic lift and strong business investment forecasts.