Global Economy Shows Resilience Amid Shocks and Rising Interest Rates

The global economy is currently experiencing a robust growth cycle, with GDP growth showing remarkable resilience to shocks. Despite a sharp rise in oil prices, the negative impact on growth has been offset by various reflationary forces, as evidenced by the second-quarter figures. The driving force behind this growth cycle is artificial intelligence (AI), which is fueling a broader push for capital goods investment among the world’s major economies.

Household consumption and inflation levels differ between the US and Europe, despite both regions facing similar energy price shocks. In the US, inflation and consumption remain higher, necessitating monetary tightening. Inflation is exceeding the target set by three of the four central banks examined, those in the US, the UK, and the Eurozone, and is expected to peak in the fourth quarter of 2026 or the first quarter of 2027. However, there is a risk that energy inflation could spread to other components in the future.

The conflict in Iran has acted as a catalyst, leading to a rise in energy prices and contributing to the recent increase in long-term interest rates. Additionally, high fiscal deficits in several economies are a concern, particularly as public debt-to-GDP ratios are increasing in the US, the UK, France, and Germany, while stabilizing or decreasing in Italy, Spain, and Japan. The rise in long-term interest rates is expected to weigh on public finances, complicating fiscal arithmetic by 2030.

Overall, despite these challenges, major economies like the US, the Eurozone, Germany, France, Italy, Spain, the UK, and Japan are demonstrating resilience, with growth remaining intact or on track despite various shocks.