Energy shocks challenge economic resilience
Global growth remains resilient as AI investment supports activity, but energy disruption, tighter monetary policy and weak household demand expose more vulnerabilities across the US, Europe and Asia.
Revisiting assumptions, reassessing resilience
Our June update occurred amid much improved news on the Iran war front, and our assumption at the time was that a lasting de-escalation of the conflict would allow central banks to look through the energy-related inflation spike that was already visible globally. Events have since proved that assessment overly optimistic. As we stand, there is no indication of short-term de-escalation, while recent damage to Saudi oil infrastructure highlights broadening risks. Meanwhile, adjustment channels that worked well in the early stages (i.e., the run-down of stored reserves) are being gradually exhausted. Hence, risks of more meaningful disruptions—via price as well as physical shortages—are rising. Should they fully materialize, they will not hit evenly. The US remains more insulated than Europe or Asia, though certainly not immune.
Notably, the unfolding of events so far has been sufficient to move global central banks off the sidelines. The ECB, the BoJ, and the Fed all hiked at their September meetings, and all are poised to do more. Still, markets look to us to have taken the hiking cycle expectations a bit too far. We do not believe that underlying economic momentum is sufficiently robust to withstand a full-on tightening cycle, nor do we believe rate hikes to be effective in neutralizing the sources of inflation (energy supply shock and AI demand pull).
Admittedly, economic growth has been impressively resilient so far and our global forecasts have held up surprisingly well. But this should not be read as an absence of vulnerabilities. Rather, it is the mathematical result of a seemingly relentless AI infrastructure buildout, which is a strength while happening and a potential threat to future growth, should it stall. The consumer seems pretty unhappy everywhere and real household spending remains under pressure both in Europe and Japan. Even in the US, spending resilience so far has come at the cost of declining savings. Investment momentum carries 2026, but we need consumers to come back in 2027.
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