The Twin Pressures on Global Growth: How Geopolitical Shocks Are Suppressing the Decline in Inflation, and Why AI Is Still Struggling to Translate into Productivity Gains

The Global Economy Is Entering a New Phase of “Low Growth, High Volatility, and Slow Productivity Improvement”

Changes in the global macro environment are often not triggered by a single data point, but only become truly apparent when several forces turn at once. The latest World Economic Forum survey of chief economists is not sending a “recession signal” in the traditional sense, but rather a more troublesome combination: growth expectations revised down, inflation expectations rising again, financial market volatility increasing, while the long-term productivity hopes brought by artificial intelligence remain intact, though the pace of realization is slower than earlier this year.

This combination deserves particular attention. It means the global economy has neither returned to a post-pandemic normal nor entered a clear recovery cycle, but is beginning to operate under new constraints: geopolitical risks are being repriced into energy, food, and shipping; the fragility of trade chains has been amplified again; meanwhile, technological progress has not disappeared, but it is still not enough to quickly offset real-world shocks.

From a macro perspective, this marks a phased shift in the global economy from the narrative of “falling inflation — policy easing” to one of “external shocks — inflation rebound — policy constraints.”

Lower Growth Does Not Mean a Full-Scale Recession

One of the most important findings in the survey is that nearly 90% of the chief economists interviewed expect global growth to weaken over the next year, but only a minority believe the world will enter recession. This judgment is crucial because it suggests that the global economy is facing more of a “persistent drag” than a typical cyclical collapse.

The logic behind this is:

• Demand has not collapsed across the board, especially as economies such as the U.S. and India still have domestic demand support;
• But supply-side shocks are increasing, especially in energy, food, and transportation costs;
• Financial conditions may not tighten sharply right away, but they will become more fragile as volatility rises.

In other words, the global economy is not in free fall, but is undergoing a process in which “friction costs” continue to rise. Economic growth is therefore being suppressed, though it may not immediately tip into a deep recession.

This kind of environment is often harder to navigate than a recession. Recessions usually push policy to shift quickly, whereas a phase of low growth and high uncertainty makes it more difficult for both central banks and fiscal authorities to find a clear direction: rate cuts may boost asset prices, but they may not ease energy shocks; keeping rates high helps control inflation, but it further squeezes debt burdens.

Geopolitics Is Reshaping the Inflation Mechanism

The most closely watched variable in the survey is the impact of the situation in the Middle East and disruptions to traffic through the Strait of Hormuz on the global economy. Respondents generally believe that this shock is already more damaging than last year’s tariff frictions. If the disruption continues into the second half of the year, its impact on the global economy could be close to some of the spillover effects seen during the pandemic.

This judgment does not mean the world will repeat the collapse in demand seen in 2020, but rather that the transmission chain from geopolitics to inflation is more direct:1. Energy prices rise first, pushing up transportation, manufacturing, and electricity costs; 2. Food prices are affected next, especially in economies that rely on cross-border logistics and energy inputs; 3. Supply chains become fragile again, forcing companies to readjust inventory and transport arrangements; 4. Inflation expectations are pushed up again, and central banks must rebalance between growth and price stability.

The survey shows that the vast majority of chief economists expect global inflation to rise over the next year. This is not merely a forecast of prices, but a reminder of policy room for maneuver: as long as energy and food once again become the dominant drivers of inflation, the disinflation trend that has gradually formed over the past two years could be interrupted.

For the Federal Reserve, the European Central Bank, and emerging-market central banks alike, this poses the same question: if inflation is driven by external supply shocks, the marginal effectiveness of monetary policy will decline.

Europe’s stagflation risk is rising, and emerging markets are feeling the pressure earlier

Regional divergence is another key message of this survey. The deterioration in growth expectations is most pronounced in the Middle East and North Africa, a region once seen as a relative bright spot, which has quickly shifted in a short period to expectations of weak or even very weak growth. This reversal shows that the impact of geopolitical risk on regional economies is often not linear, but spreads simultaneously through energy, tourism, logistics, and investment sentiment.

Europe, meanwhile, faces a more classic stagflationary pressure: weak growth on one side, renewed inflation concerns on the other. For the ECB, this environment is more troublesome than high inflation alone, because the lagged effects of high interest rates have already begun to hit corporate financing and household confidence, while the new external shock does not allow policy to easily shift toward easing.

By contrast, India and the United States are expected to remain relatively resilient. The reason is not mysterious: both benefit from stronger domestic demand, investment activity, and relatively complete internal industrial-chain circulation. The United States also has the advantage of deep capital markets and the dollar’s position in the global system, while India benefits from domestic-demand expansion and medium- to long-term expectations of industrial transfer.

But “resilience” does not mean “immunity.” Once energy prices continue to rise and global interest-rate expectations fluctuate again, the slowdown in external demand will still be transmitted to these relatively stronger economies through trade, capital flows, and exchange-rate channels.

What capital markets fear more is volatility, not recession

The survey shows that respondents are increasingly expecting higher volatility in private debt markets, public debt markets, and equity markets. This is very important, because it reflects that market risk does not come only from a macroeconomic growth downturn, but also from balance-sheet fragility.

Over the past few years, the global financial system has gone through the combined effects of high interest rates, debt expansion, and asset-price repricing. Now, if inflation rises again because of geopolitical shocks, long-term interest rates may stay elevated for longer; if growth weakens at the same time, pressure in credit markets will intensify.

This is especially unfavorable for the following asset classes and sectors:

• highly leveraged private credit;
• real estate and infrastructure projects reliant on continuous financing;
• emerging markets with high external debt;
• manufacturing supply chains highly sensitive to energy and transport costs.- Highly leveraged private credit;
• Real estate and infrastructure projects dependent on continuous financing;
• Emerging markets with high external debt;
• Manufacturing chains highly sensitive to energy and transportation costs.

What the market is really facing is not a simple shift from bull to bear in one direction, but a threefold pressure of "high interest rates, rising risk premiums, and tightening liquidity." For global capital flows, this often means a greater preference for U.S. dollar assets, short-duration assets, and instruments with more certain cash flows, while high-volatility regions and highly indebted sectors are more likely to come under pressure.

AI remains a long-term pillar, but it is not a short-term hedging tool

In sharp contrast to geopolitical risks, the spread of artificial intelligence continues to accelerate. Surveys show that the vast majority of chief economists expect AI adoption to keep rising over the next year. This indicates that technological diffusion itself has not slowed, and investment from markets and businesses in AI has not stopped either.

But it is worth noting that optimism about AI-driven productivity gains has cooled, and the timing of significant productivity improvements in many industries has been pushed back. Education and information technology are still seen as sectors that will benefit relatively quickly, while engineering, construction, utilities, healthcare, and care services are considered likely to need more time before clear effects emerge.

This fits a common principle in macroeconomics: the speed of technological diffusion is not the same as the speed of improvement in productivity statistics. The reason is that for AI to truly translate into broad productivity gains, it must go through at least three stages:

1. Redesigning business processes; 2. Adjusting organizational structures and regulatory rules; 3. Restructuring workforce skills and capital allocation.

All three steps take time. In other words, AI is more likely to become a supporting force for medium- to long-term growth trends rather than an immediate tool to hedge current geopolitical shocks.

From a policy perspective, this also explains why governments are betting on both AI and industrial policy at the same time: the former represents long-term efficiency gains, while the latter seeks to rebuild domestic or regional competitiveness in an era of fragmented global supply chains.

The world economy is shifting from "globalization-driven inflation" to "geopolitics-driven inflation"

If we place this survey in a longer cycle, it actually reveals a shift in the structure of the global economy: over the past decade and a half, inflation was mainly shaped by monetary policy, demand expansion, and supply bottlenecks; now, it is increasingly influenced by geopolitics, energy security, and the restructuring of trade routes.

This means the global economy is moving from an "efficiency-first globalization" toward a "security-first regionalization." The consequences include:

• Supply chains placing more emphasis on redundancy and resilience rather than extreme cost efficiency;
• Capital allocation favoring regions that are geopolitically safer;
• Trade and investment more likely to stratify along regional blocs;
• Stronger political characteristics in energy and food prices.

This shift will not end globalization immediately, but it will change its form. Future growth will rely more on regional integration, technological upgrading, and domestic investment, rather than simply on cross-border efficiency optimization.

Conclusion: no broad recession, but the cycle has indeed become harderThe core issue in this round of the global economy is not “whether there will be a recession,” but “why growth is getting harder, policy is getting harder, and market volatility is getting greater.” The chief economists’ assessments show that the world economy still has resilience, and AI remains a long-term structural tailwind; but against the backdrop of geopolitical shocks that have not yet subsided, the potential rebound in energy and food inflation, and rising vulnerabilities in debt markets, the global economy is no longer in a simple recovery phase.

More accurately, it is entering a new macro range: low growth, high divergence, slow productivity improvement, strong volatility, weak certainty.

For central banks, this means inflation management will become more complex; for fiscal authorities, it means greater debt and subsidy pressures; for businesses, it means global positioning must price in higher uncertainty; for investors, it means the asset-pricing logic that once depended on steady global growth and a low-interest-rate environment is being rewritten.