Global economic outlook

The global outlook continues to be shaped by two competing factors. First, the conflict in Iran remains unresolved and the Strait of Hormuz is still largely closed. Oil prices have generally traded at or below $90/barrel in recent weeks, reflecting signals that the U.S. continues to seek an exit from the conflict. Second, despite headwinds from the conflict, the global economy continues to expand at a solid pace. Global growth this year is running at a 2.6% pace, down a notch from last year but still solid given the magnitude of the shocks.

The global services PMI (Purchasing Managers Indexes) has rebounded after retreating at the onset of the Iran conflict and remains comfortably above 50. The manufacturing PMI has also posted solid readings, with support from surging AI spending as the global electronics PMI has risen sharply. Central banks have pivoted toward tighter policy in response to the oil shock. For the Fed, Chair Warsh has underscored his commitment to return inflation to 2%, but the lack of details on his strategy has left markets uneasy.

The assessment of post-pandemic growth performance highlights divergent outcomes. The U.S. has clearly outperformed, while Germany and the UK have underperformed. On a per-capita basis, Japan trails only the United States. For emerging Asia, it is surprising to see the rapid growth rates these economies have achieved. In contrast, Latin America has produced softer growth outcomes that are far weaker than in emerging Asia, and Mexico’s per-capita GDP has essentially stagnated.

The global manufacturing PMI has given back some ground over the past couple of months but remains strong relative to its lackluster readings over the past several years. This improved performance is driven in large measure by the burgeoning global AI sector. The electronics PMI has risen sharply in recent months, and key AI-producing economies including Taiwan, Japan, Korea, and the United States have seen particular gains over the past six months. Rapidly expanding AI investment particularly in the U.S. and correspondingly buoyant AI exports from some emerging Asian economies has been a powerful engine of global growth.

Since the onset of the Iran conflict, inflation forecasts have been marked up, currently the global headline inflation is running at 3.4%, up from 2.8% last year and roughly 75 bp higher than expected before the conflict. Oil-importing countries such as the Philippines, Thailand, and Italy have been particularly hard hit. And projections for core inflation are also higher, reflecting lingering pressures on supply chains. especially for petrochemicals, fertilizers, and aluminum. Specifically, core inflation projections have been raised a full percentage point for Brazil, and roughly ½ ppt for Korea, Thailand, Australia, the euro area, the US, and Japan.

The trajectory of policy under the Warsh Fed remains a meaningful question mark for the U.S. economy and for the global economy more broadly. U.S. inflation has run above the Fed’s 2% target over the past five years. In response, Chairman Warsh has underscored his commitment to bring inflation back down to the Fed’s 2% target. But in line with his desire to reduce forward guidance, he has been willing to offer little insight regarding his envisioned strategy for reducing inflation, and this has left investors confused and groping for answers. These dynamics were particularly evident during Warsh’s press conference that followed the Fed’s July meeting. In tandem with these developments, the 30-year U.S. Treasury yield has touched its highest level in more than 20 years. The question going into 2027 is whether rate hikes will be necessary. In Europe, the challenges facing monetary policy seem less acute than in the U.S. and Japan.

The main takeaway is that these countries sort themselves into three groups. The comparatively strong growers consist of the U.S., Australia, and Canada. These countries have seen cumulative expansion of 11% to 16%, which implies average annual growth of 1.6% to 2.3%. The middle tier of DMs includes the euro area, the UK, and Japan. In these economies, growth has averaged 80 to 110 bp annually. Finally, Germany has recorded a particularly weak outturn of just 1.75% cumulative growth. The U.S. GDP per capita has expanded by 13% since the pandemic, while Germany has stagnated. This is a marked reversal of the 2010s, when German per capita growth roughly matched and at times even exceeded that of the U.S. Clearly, the German economy has sputtered severely in recent years as it has faced increased competition with China, a costly energy strategy, decaying infrastructure, and difficulties competing in emerging tech-intensive sectors.

Regarding the major emerging Asian economies, as with the DMs, these countries can be divided into several groups. First, Vietnam, Taiwan, China, and India have seen red-hot cumulative growth of well over 30% during this period. In other words, the pace of their expansion has been two to three times as rapid as the U.S., the DM economy with the strongest performance. It’s also striking that GDP in Vietnam, Taiwan and India have all outpaced that in China through this period. Korea’s growth, in contrast, has been steady, but softer than other countries in the region. That said, Korean performance has about matched the strongest performing DMs; these countries may be more relevant comparators, given Korea’s relatively high level of income and more mature economy.

Looking at four major Latin American countries, Brazil, Mexico, Colombia, and Chile. An immediate observation is that these countries are growing much more slowly than the Asian EMs. Instead, their growth rates resemble those recorded by the DMs. Consistent with this, the trajectories of real GDP in Chile, Colombia, and Brazil are all roughly similar to that of the United States.

Bottom line, for the DMs, there are strong evidence of U.S. outperformance in the years since the pandemic. In contrast, there are marked underperformances by Germany and, to a lesser extent, the United Kingdom. Another key finding is that on a per capita basis, the Japanese economy has performed well, outpaced only by the U.S. For emerging Asia, it is worth nothing the rapid growth rates that these economies. For Latin America, the findings are concerning. These countries are generally growing like DMs, with outcomes far softer than in emerging Asia. Mexico’s performance has been softer still, with per capita GDP essentially stagnating in recent years. And given pressures from Trump’s tariff campaign, the headwinds on Mexico’s economy are likely to continue through the next several years. Overall, the global economy is doing well with much resiliency across the board. Growth is primarily coming from Asia, the U.S. is doing surprisingly well, and Germany and the UK are struggling.