America’s economy looks set to accelerate

“I conceive 2026 tin be a real goodness year.” What could be a slurred festive toast is in fact the cheerful forecast of Scott Bessent, America’s treasury secretary, who expects the calendar’s turn to herald faster economic growth. His optimism has foundation. The effects of the One Big Beautiful Bill Act (BBB), a tax-cutting law enacted in July, will soon start to be felt. Americans will receive refunds that reflect retroactive tax cuts on income from 2025. They will also find that levies on monthly earnings have fallen. According to Piper Sandler, an investment bank, these “two years of tax cuts in one” are worth about $191bn.

Such tax-cutting should be enough to boost GDP by 0.3%—a reasonable stimulus given the economy probably grew by 1.9% in 2025.And it is just one of several factors that could prove Mr Bessent right. The consensus among economists surveyed by the Federal Reserve Bank of Philadelphia in November was that growth would slow to 1.8% in 2026, as haphazard policymaking and tariffs weighed on the economy. Could their gloom prove misplaced?

America grew at a healthy annualised pace of 4.3% in the third quarter of 2025, according to data released on December 23rd. Yet a record 43-day shutdown of the federal government in October and November will have slowed the economy to a far slower pace over the subsequent months. In the new year, barring another shutdown, government spending should return in full force. This could provide an impulse to growth worth 0.6% of GDP, according to the Hutchins Centre, a think-tank, on top of the tax refunds.

At the same time, the administration has weakened tax enforcement. Deep cuts to the Internal Revenue Service mean that receipts are likely to be lost as more people cheat on their payments. If rules of thumb from past research are used, the effect could be worth an additional 0.25% of GDP, if not more, calculates Adam Posen of the Peterson Institute for International Economics, another think-tank.

In theory, tariffs should prevent acceleration.If duties were to stay constant, they would raise $215bn in 2026, according to the Congressional Budget Office, up from $114bn in 2025. Such levies do not directly hit consumers, but as they are passed on through higher prices, they erode shoppers’ purchasing power over time. Because of tariff revenue both the IMF and the OECD forecast that America’s primary budget deficit, which excludes interest payments, will shrink in 2026—a fiscal contraction rather than a stimulus.

Yet these forecasts do not account for the probable fate of about half the tariffs at the Supreme Court. In a case for which a judgment could come at any moment, the court is likely to rule that levies imposed under the International Emergency Economic Powers Act are unlawful. That would have two consequences. The first is another set of refunds, this time to companies that paid unlawful tariffs in 2025, which could be worth about 0.5% of GDP. The second is to disrupt tariff revenue in 2026. Although the administration will be able to rely on other authorities to plug a lot of the gaps, “it will be challenging to raise as much tariff revenue”, write Piper Sandler’s economists, since many of the alternatives are cumbersome. As such, the striking down of tariffs could make the overall stance of the budget stimulative.

Thus America might enter 2026 with both the monetary and fiscal cannons firing. On December 10th the Federal Reserve cut interest rates to 3.5-3.75%, the lowest since 2022. As recently as September 2024 rates were 1.75 percentage points higher. The subsequent loosening is still working its way through the economy.

More cuts are likely in 2026. President Donald Trump will name someone to replace Jerome Powell as Fed chairman in May. He is choosing from a shortlist of doves. And he may be able to nominate dovish governors to the Fed, too. In January the Supreme Court will hear a case pitting Mr Trump against Lisa Cook, a governor he is trying to sack. If the court sides with the president, a seat will open up. Another will be available in May if Mr Powell also vacates his position on the board, which otherwise runs until 2028. Although Mr Trump remains unlikely to capture the Fed completely, he will probably be able to tilt the central bank towards looser policy.

That would lower the risk of a stockmarket crash—the most obvious threat to the economy. Although warnings of an artificial-intelligence bubble are everywhere, and some AI-related stocks have tumbled, the consensus on Wall Street is that the S&P 500 index of stocks will rise by 9% in 2026. Should that come to pass, it would support household wealth and therefore consumer spending. It would also probably mean that the AI investment boom would be sustained. Capital spending of all sorts has received more favourable tax treatment since the BBB passed.

For all these reasons a vocal minority of analysts say that 2026 will be a year of strong economic growth. Some expect it to be an international story. GlobalData TS Lombard, a research firm, points to fiscal expansion in Germany and consumption-boosting reforms in China as factors that will contribute. Japan, too, is likely to see stimulus, which could come to 0.4% of GDP, under its new government. Lower oil prices will provide a further boost. A barrel of Brent crude now costs $61, near a four-year low, largely owing to healthy supply. Labour markets are a dark spot, but more because of low hiring than lay-offs. “Sentiment will pick up next year and support both solid GDP and job growth,” argue economists at JPMorgan Chase, a bank.

Go!

At the Fed’s meeting in December, the median rate-setter predicted American growth of 2.3%. Would such an acceleration be sustainable? Inflation remains too high—and the public is angry about prices. Strong wage growth suggests that the labour market is not too soft, despite low hiring. That makes it an odd time for a combined fiscal-monetary stimulus, which might reignite worries about the government’s indebtedness. Mr Trump’s picks for the Fed could erode the credibility of its 2% inflation target, which could in turn lead to a risk premium emerging on Treasury bonds. Higher long-term interest rates would raise the cost of capital and undo the benefits of fiscal loosening.

Yet in recent years the global economy has shrugged off dour predictions about the impact of snarled supply chains, high interest rates, the Russian-Ukraine war and, to a degree, tariffs. There is currently no big shock for it to survive, and plenty of scope for it to outperform. Mr Bessent has reason for new-year cheer.

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