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The global economy is muddling through against the odds. But a storm is coming | Larry Elliott
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The global economy has defied expectations this year, muddling through two regional wars, an energy shock, rising inflation, and US-China trade tensions without a full-blown crisis. Finance ministers and central bank governors at the IMF annual meeting in Bangkok face a calmer situation than in 2008. The IMF credits countries with resilience against severe headwinds and upgraded its UK growth forecast.
This resilience breaks historical precedent. Past oil shocks of similar magnitude caused immediate damage. Three factors have muted inflation and kept growth robust. Massive AI investment, especially in the US, has made America the fastest-growing G7 economy.
Countries have drawn down oil inventories, easing the loss of Middle Eastern crude. Without that release, oil prices would have risen more sharply. China’s strategy of exporting cheap goods has also pushed down import prices elsewhere.
Yet flashpoints are everywhere. The Middle East conflict is deteriorating and spreading to Saudi Arabia, while oil stocks run low. Donald Trump has drawn the US into a forever war he once condemned. Cheap Chinese goods threaten Western manufacturing jobs, with Germany especially vulnerable.
US AI investment has raised borrowing costs and starved non-AI sectors of capital. Governments face pressure to cut spending or raise taxes to impress bond markets. IMF head Kristalina Georgieva and Bank of England governor Andrew Bailey urge tighter fiscal policy. But voters want more, not less, and austerity backlash could be brutal.
Governments also face pressure to boost national self-sufficiency amid fragile supply chains. Student protests in India and France highlight demands for state intervention. Yet state capacity is weaker than leaders admit.
With globalization retreating, multilateral cooperation is urgently needed but absent. The WTO is moribund, and the IMF and World Bank hesitate to challenge Trump’s erratic behavior. Hopes that a new US president will revive partnership are unrealistic.
