America’s Growth Masks Deeper Structural Risks
AI investment continues to power the US economy, but widening imbalances and geopolitical instability could expose both America and Europe to a far more fragile outlook. A commentary by Marco Buti, and Moreno Bertoldi
Last week, fresh data on US economic growth in the first quarter of this year were released. While it is always wise to follow the principle of “never infer a trend from a single observation”, the figures nonetheless provide useful indications about the state of the American economy and the possible implications for Europe.
US economic growth, running at an annualised rate of 2 per cent, was slightly below expectations but remains far from weak.
Private consumption — historically the main engine of American growth — has continued to slow, however, and if the conflict in the Middle East persists, the deceleration is likely to continue in coming quarters, particularly because of renewed inflationary pressures. Unsurprisingly, the US consumer confidence index fell in April to one of the lowest levels ever recorded.
What has kept the American economy afloat is investment, which rose by 8.7 per cent, particularly in artificial intelligence and advanced technologies. In the first quarter, investment contributed 1.5 percentage points to US growth, compared with one percentage point from consumption, despite the latter accounting for roughly 70 per cent of GDP. In the current environment, AI investment represents a major source of strength for the US economy.
According to an analysis by Moody’s Analytics, artificial intelligence alone accounted for roughly one-quarter of total US growth in 2025 and is expected to make a similar contribution this year. These investments have so far allowed the economy to absorb a large share of the negative shocks generated by Donald Trump’s policies.
Yet continued growth does not mean that storm clouds are not gathering on the horizon.
First, Trump’s tariffs have failed to reduce the US current-account imbalance, which is being fuelled by the investment boom itself. At the same time, the tax cuts contained in the One Big Beautiful Bill Act, together with rising military expenditure and the reimbursement of tariffs declared unconstitutional by the Supreme Court, could push the US fiscal deficit to 7 per cent of GDP in 2026.
These “twin deficits”, combined with the likely subordination of the Federal Reserve to political power, risk undermining appetite for US Treasury securities and tightening financial conditions across the American economy.
Although the baseline scenario for this year remains one of US growth around 2 per cent, recession risks are increasing — especially if the conflict with Iran drags on — and are now estimated at between 30 and 40 per cent, compared with around 15 per cent under normal conditions.
On this side of the Atlantic, the question is whether the European Union will catch pneumonia from an American cold.
Data on consumption, consumer confidence and recession risks all suggest that the economic outlook will continue to deteriorate. With growth weakening and inflation beginning to rise again, Europe must prepare for a difficult year.
A stronger focus on investment could nonetheless increase resilience and absorb at least part of the external shocks. Had Europe followed the agenda outlined in the Draghi report, it might today find itself in a stronger position than the United States: growth above the stagnant annualised 0.4 per cent recorded in the first quarter, combined with lower exposure to speculative AI bubbles and less dependence on fossil fuels.
The coming years under Donald Trump are likely to be characterised by uncertainty and volatility.
For that reason, it is more important than ever to rapidly lay the foundations for strengthening the domestic drivers of European growth through an industrial policy at EU level capable of reviving investment in advanced technologies and green sectors while pursuing distinctly European innovation trajectories.
Finally, the growing structural imbalances of the American economy risk making the international role of the dollar significantly less reliable over the medium term while increasing global financial instability.
To protect itself against these risks — and seize the opportunities that may arise from them — the EU must move beyond the “low-responsibility model” that has so far defined its posture and instead emerge as an international actor capable of filling the spaces the United States is beginning to leave vacant.
That requires the creation of a central fiscal capacity and the introduction of a European safe asset — both essential steps for strengthening the international role of the euro.
A previous version of this article was published by Il Sole 24 Ore
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
