Growth holds but inflation risks reshape outlook
Global growth remains resilient but uneven as inflation pressures persist. AI-driven investment, geopolitical risks, and policy uncertainty shape economic outlooks across major regions.
At the time at our last update, the Iran war was in its early days. It is now winding down. We work with the core assumption that the ceasefire agreement will turn into a stable peace that allows unhindered energy flow through the Straits of Hormuz. Already, oil prices have retraced about 80-85% of the war-driven spike. This is good news insofar as it guarantees a near term pullback in headline inflation globally, but also because it eliminates the more dire supply-shortage type scenarios that investors and policymakers alike had worried about. There has also been considerable price relief in other important areas such as fertilizers.
Assuming these improvements hold, the ultimate impact of the war will likely be minimal in respect to global growth and sharp but temporary in respect to inflation. At the same time, even more powerful AI-related forces are supporting investment, demand, and simultaneously fueling inflationary pressures in parts of the global supply chain. The net effect is a notably more hawkish tilt to monetary policy globally. Some central banks such as the ECB have already hiked in response to the energy price shock, while others such as the Fed are for now observing the updrift in inflation with concern.
The boom in AI-related activity masks some real vulnerabilities elsewhere, accentuating a K-shaped dynamic across not only investment segments but even across economies. This complicates monetary policymaking—and macro policymaking in general—since rate hikes are unlikely to effectively slow the AI boom yet could further weaken already struggling sectors such as housing.
Meanwhile, global trade imbalances remain an area of concern, with China’s global manufacturing dominance continuing to intensify.
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