The global economy’s dilemma: geopolitical shocks, a resurgence of inflation, and the delayed realization of AI productivity gains

The Global Economy’s Dilemma: Geopolitical Shocks, a Resurgence of Inflation, and the Delayed Realization of AI Productivity

The global economy is entering a stage that is harder to explain with a single narrative. Over the past year, markets had at one point built expectations around “inflation easing — rates peaking — growth recovering modestly,” but the latest survey of chief economists shows that this framework is being rewritten by geopolitics, energy prices, and supply-chain disruptions. Concerns about slowing growth are rising, expectations of higher inflation are strengthening, and while artificial intelligence is still seen as a medium-term support for growth, it is no longer viewed as a万能 variable capable of quickly offsetting external shocks.

This means the center of gravity in global economic discussion is shifting: the question is no longer simply whether the economy can avoid recession, but whether the world economy is moving from an era of low inflation and abundant liquidity toward one with greater volatility, sharper divergence, and tighter policy constraints.

Slower growth does not mean recession, but it does mean the cycle’s center of gravity is shifting lower

The survey shows that the vast majority of chief economists interviewed expect global growth to weaken over the next 12 months, but only a minority believe the world will fall into recession. This is an important judgment, because it suggests that the current risk is closer to “growth stall” than to “systemic collapse.”

In other words, the global economy has not entered a 2008-style financial crisis, nor is it necessarily repeating the synchronized contraction of 2020, but it is confronting a more difficult state:

• insufficient growth momentum;
• renewed upward pressure on inflation;
• policy room squeezed by earlier tightening;
• geopolitical shocks increasing the uncertainty premium.

This kind of environment is often less friendly to financial markets, because it weakens the one-way expectation that “slower growth will quickly lead to rate cuts.” If inflation rises again due to energy or logistics shocks, central banks will find it harder to pivot rapidly toward easing, and global capital markets will therefore face a longer period of valuation repricing.

The transmission chain of the Middle East shock: energy, food, logistics, and inflation expectations

What matters most in this survey is not only the downgrade to global growth expectations, but also the broad-based rise in inflation expectations. The vast majority of respondents expect global inflation to rise over the next year, and the core logic behind this is not complicated: geopolitical shocks first hit energy, then spread through transportation, chemicals, food, and manufacturing inputs into the wider price system.

For the global economy, energy has never been just a commodity price variable; it is a central transmission node of the macro cycle. Rising oil and gas prices affect at once:

1. corporate costs; 2. households’ real income; 3. transportation and insurance costs; 4. foreign exchange and fiscal stability in emerging markets; 5. central banks’ assessment of the inflation path.

If the energy shock lasts for a long time, inflation will no longer be a local phenomenon, but will once again become a shared constraint on global policy. In particular, for Europe, parts of the emerging world, and energy-importing countries, this shock will squeeze real purchasing power and weigh on industrial and consumer recovery.

Europe’s pressure is not simply slower growth, but a renewed approach to stagflation riskIn this round of risk repricing, Europe is facing not a normal cyclical slowdown, but a stagflation risk in which weak growth and rebounding inflation overlap. For the European Central Bank, this means the policy dilemma is deepening: if it eases too quickly in response to the downturn in growth, it could amplify a renewed surge in inflation; if it remains relatively tight, it will further suppress already fragile domestic demand and manufacturing.

The fragility of the European economy is also reflected at the structural level:

• Energy dependence remains high;
• Manufacturing is more sensitive to external demand and input prices;
• Fiscal space is uneven across member states;
• Debt burdens make a long period of high interest rates harder to bear.

This is why geopolitical shocks are not just a matter of short-term market volatility, but also a structural issue for the European economy. They will force policymakers to revisit supply chain security, energy autonomy, fiscal coordination, and industrial reallocation.

Vulnerability in Emerging Markets Returns: Exchange Rates, Inflation, and External Financing Costs

Another notable signal in the survey is that inflation expectations in sub-Saharan Africa rose to the highest among all regions. This kind of regional divergence shows that global shocks are not distributed evenly; instead, they are re-layered along exchange rates, import dependence, fiscal capacity, and external financing conditions.

For emerging markets, rising energy prices often magnify risks through three channels:

• Local-currency depreciation pushes up import inflation;
• Capital outflows raise financing costs;
• Fiscal subsidies and debt pressures increase simultaneously.

If U.S. and European interest rates stay elevated for longer, emerging markets will face both “external price shocks” and “internal financial constraints” at the same time. This means future global capital flows may tilt further toward high-credit, highly liquid assets, while becoming more demanding for economies with weaker external accounts and thinner fiscal buffers.

Relative Resilience in the United States and India, But Resilience Does Not Mean Immunity

The survey suggests that the United States and India are relatively more resilient, a judgment that is consistent with the current global demand structure. The U.S. resilience comes from domestic demand, the depth of its capital markets, and technology investment; India benefits from stronger internal demand, demographics, and the investment cycle.

But relative resilience should not be misread as “immunity.” For the United States, if rising energy prices push inflation higher again, expectations for rate cuts will be delayed, and the period of elevated real interest rates may last longer, affecting consumption, real estate, and financing conditions. For India, higher imported energy costs would likewise test its current account and inflation management capacity.

This shows that in a fragmented world, no economy can be completely independent of the global price chain. Resilience means a stronger ability to withstand pressure, not freedom from external shocks.

AI Remains a Growth Support, But Its Macro Payoff Is Arriving More Slowly

If geopolitics represents downside risk, artificial intelligence remains one of the few upside variables in the global economy. The survey shows that the vast majority of chief economists expect AI adoption to continue increasing over the next year. This is not surprising: in capital markets, software, cloud services, data centers, and corporate automation investment, AI has already become the core of a new long-term narrative.But more importantly, respondents have become more cautious about the pace at which AI will deliver productivity gains. In other words, the market is shifting from the narrative that “AI will change everything” to the more grounded view that “AI will change a lot, but it will not immediately transform the macro data.”

There are at least three reasons behind this:

• AI diffusion requires capital expenditure, organizational restructuring, and regulatory adaptation;
• Improvements in productivity statistics often lag behind technology adoption;
• The benefits are uneven across industries, and transmission is slower in areas such as infrastructure, healthcare, construction, and utilities.

This means AI is more like a long- to medium-term supply-side transformation than a macro stabilizer that can offset geopolitical shocks in the short term. It will raise potential output, but may not be enough to quickly offset inflation and cost pressures within the current cycle.

The real risk to global markets: policy and asset pricing are both harder in a high-volatility environment

The rising expectation of market volatility mentioned in the survey is especially worth attention. Volatility in private debt, public debt, and equity markets may all intensify, which suggests that the risk is not confined to commodity markets but may spread along the financing chain into the broader financial system.

With high interest rates not yet fully behind us and geopolitical shocks re-emerging, what markets fear most is not a selloff in a single asset, but a “simultaneous repricing”:

• commodity price repricing;
• inflation path repricing;
• central bank rate-cut path repricing;
• credit spread repricing;
• equity valuation repricing.

Such multiple repricings will make capital markets more fragile and more dependent on liquidity support. In other words, the global financial system is shifting from the valuation expansion driven by the low-rate environment of the past decade to a phase that is more sensitive to cash flow, debt sustainability, and geopolitical risk premiums.

Conclusion: the global economy is entering a “fragmented inflation cycle”

Taken together, this survey reveals not a simple cyclical fluctuation, but a change in the way the global economy operates. Slowing growth, rising inflation, policy constraints, regional divergence, and AI-driven transformation are happening at the same time, creating a more complex macro mix.

Over the next period, the global economy is most likely to face not a broad recession, but a more common and harder-to-manage state: weak growth, elevated inflation, slow rate cuts, more selective capital, and wider regional disparities.

This means the world economy is entering a “fragmented inflation cycle” — geopolitics determines short-term shocks, energy and logistics determine price transmission, central banks determine financial conditions, and AI determines the long-term ceiling for productivity. Whoever can find a more stable balance among these four factors is more likely to remain resilient in the new cycle.

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The global economy is facing multiple pressures from geopolitical shocks, a rebound in inflation, and delayed realization of AI-driven productivity gains. Based on the latest Chief Economists Survey, this article analyzes slowing growth, stagflation risks in Europe, emerging-market vulnerabilities, central bank policy dilemmas, and the restructuring of global capital flows, rebuilding the core logic of the current macro cycle.

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