MARGIN OF SAFETY

In recent years, the global economy has been subjected to a series of challenges, which have put it to the test. The pandemic and disruptions to supply chains were followed by an inflationary surge, sharp interest-rate increases, trade restrictions and fresh energy shocks. Each successive shock has prompted economists to revise their forecasts and once again voice concerns about the risk of a significant slowdown. However, a global recession has so far been avoided. Furthermore, recent estimates from international organisations indicate that the economy is adapting to adverse conditions more quickly than anticipated.

Growth despite setbacks

The International Monetary Fund forecasts global growth of around 3% in 2026. While this figure cannot be described as high, the fact that growth is continuing is far more important in the current circumstances. The IMF acknowledges that the global economy has weathered the energy shock better than initially expected, thanks to the use of accumulated oil and gas reserves, the search for new energy sources and measures to manage demand. The current investment boom, centred on artificial intelligence, is providing further support for economic activity.

The key feature of the current situation, therefore, is not the absence of problems but the economy's ability to continue growing despite them. The issue now is how sustainable this growth is, and what price must be paid to preserve this balance.

Experts have identified energy as one of the primary sources of uncertainty. The recent disruption to established supplies, the rise in oil and gas prices, and the need to restructure supply routes are having a significant impact on businesses and consumers alike, resulting in increased costs. However, the global economy's response to these shocks is now noticeably different from that seen during the classic oil crises of the past.

Over recent years, governments and companies have learned to switch suppliers and routes more quickly, diversify energy sources, build up reserves and reduce consumption wherever possible. The IMF identifies these mechanisms as among the reasons for the unexpected resilience of the global economy. Rather than delivering a single, immediate blow to production, the effects of an energy shock are spread across different markets and gradually absorbed by the economic system. However, the capacity to adapt is not unlimited: strategic reserves will have to be replenished, while strong demand for electricity from new technology sectors is creating an additional burden.

Global trade is also continuing to surprise. The World Trade Organization’s (WTO) barometer, published on September 9, rose to 102 points, compared with 101.7 in June. A reading above 100 means that trade in goods is growing faster than its medium-term trend. One leading indicator in particular—the export-orders index—reached 103.5 points, pointing to continued growth in the coming months.

It is also noteworthy that artificial intelligence has become one of the sources of this activity. This is already evident in trade statistics. The strongest component of the latest WTO barometer was the index for trade in electronic components, at 104.9 points. The organisation directly links its high reading to sustained demand for goods needed to develop AI. The IMF, too, has highlighted the rapid growth of investment in artificial intelligence, including the energy infrastructure required to power data centres. This investment cycle is providing particularly visible support to the economies of the US and countries integrated into technology manufacturing chains, notably South Korea.

The result is a somewhat unusual picture. Factors that should have sharply slowed the global economy are indeed reducing its pace, but so far they have not halted growth.

Red lines

Furthermore, experts have highlighted that economic resilience is becoming increasingly expensive. Inflation is its most vulnerable manifestation. Rising energy costs have a detrimental effect on the economic chain, resulting in higher transport and production costs, increased business costs and ultimately higher consumer costs. The energy factor is therefore complicating the task of central banks, which until recently had expected to gradually conclude their efforts to deal with the consequences of the previous inflationary wave.

This has been particularly evident in Europe. On September 10, the European Central Bank increased all three key interest rates by 25 basis points. The deposit facility rate rose to 2.5%, while the rate on the main refinancing operations increased to 2.65%. The regulator anticipates average inflation in the eurozone to reach 3% in 2026, 2.5% in 2027 and 2.1% in 2028—almost attaining its target.

This creates a challenging combination: the economy is demonstrating resilience, but money is becoming more expensive again. High interest rates have consequences for a wide range of economic activities, including mortgages, consumer lending, investment costs and the servicing of government debt.

Government debt has become a vulnerability in the current model of resilience. According to the IMF, the global total has approached 100% of global GDP and has already exceeded the peaks recorded after the Second World War. The fund has also drawn attention to a characteristic feature of debt dynamics in recent decades: after every major crisis, debt rises sharply, but once conditions normalise, it hardly ever returns to its previous level.

The problem is not confined to the magnitude of the debt. When financial resources are abundant, even significant financial obligations can be managed effectively within a government budget. The situation is a different one when interest rates are rising at the same time. An increasing share of government revenue is then directed not towards infrastructure, education or economic development, but towards servicing obligations that have already accumulated.

This gradually reduces the room for manoeuvre in responding to the next crisis. After the global financial crisis and during the pandemic, governments were able to increase spending sharply, while central banks reduced the cost of money to virtually zero. Repeating that combination is considerably more difficult today. High inflation limits the scope for cutting interest rates, while enormous debt limits the ability to expand fiscal stimulus indefinitely.

There is another reason why official growth statistics do not always correspond to consumers’ perceptions. A 3% expansion of the global economy does not mean a 3% improvement in every person’s welfare. GDP may grow because of investment, the technology sector or exports, while an individual household is simultaneously facing higher energy, food, mortgage and consumer-credit costs. The paradox of “the economy is growing, but the sense of crisis remains” is therefore entirely understandable.

In short, the system continues to function, but it is doing so with more expensive energy, more expensive money and far less scope for governments to offset the effects of new shocks.