Governments Can’t Take Their Resilience for Granted

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Somewhat unexpectedly, the global economy has weathered the challenges of the past few years extraordinarily well. Following the pandemic, shock followed shock — Russia’s war on Ukraine, Washington’s rejection of rule-based liberal trade, then most recently the war with Iran. Any one of these might’ve led you to expect a severe economic setback, let alone all three combined. Yet global output kept on growing.

The International Monetary Fund’s new World Economic Outlook grapples with this puzzle — and sounds a warning that governments would be wise to heed. The system’s resilience has indeed been impressive, but there are limits.

Steady growth against the odds has surprised the IMF’s economists as much as anyone: They’ve underestimated year-ahead global growth in every annual forecast since 2023. They currently expect output to expand by a respectable 3.1% this year and 3.4% in 2027, noting that some countries are doing better than others. The pattern has shifted in favor of those, like the US, with two key characteristics: limited exposure to the energy-price shocks caused by the conflict with Iran and maximum exposure to the rise in demand driven by investment in AI-related goods and infrastructure.

There are lessons for policy in both sources of resilience.

More efficient use of clean energy isn’t just vital for the sake of the environment; done right, it also makes economies stronger in other ways. Diversification from fossil fuels to renewables has greatly reduced dependence on oil. And the world uses much less energy per unit of gross domestic product than it did, for instance, in the 1970s, when oil-price shocks wreaked economic havoc. In addition, thanks to more sophisticated supply chains, buyers and sellers of energy now adjust more flexibly to oil-price hikes. Although the closure of the Strait of Hormuz blocked a route carrying a quarter of the global maritime trade in oil, supplies were quickly rerouted and inventories drawn down, softening the impact.

Energywise, the boom in AI threatens to be a mixed blessing. As the technology rolls out, it will require vast amounts of energy, and the potentially enormous offsetting benefits of greater productivity and efficiency (including in the use of energy) are still speculative. Even if AI raises long-term growth rates, as seems likely, it may fail to justify investors’ recent exuberance — conceivably pushing its short-term growth-boosting effects into reverse.

The risk of a setback driven by a more sober appraisal of AI investment, perhaps amplified by financial fragility due to excessive private debt, underlines another policy prescription: Governments need to restore their ability to support their economies should the need arise. At the moment, their capacity to respond to downturns with strong fiscal stimulus — as they did during the pandemic — is in doubt.

Far from reining in borrowing after Covid, many governments let deficits keep growing. In many cases, countries with historically high ratios of public debt are discussing how to stabilize those burdens rather than how to reduce them. Others, notably the US (which is running a deficit of 6% of GDP despite moderate growth and full employment), are ignoring the subject altogether. Bear in mind as well that demographic pressures and the need to spend more on defense are certain to compound the problem.

Consider the recent rise in global bond yields a red flag. Across the globe, fiscal capacity — an indispensable component of economic resilience — is stretched to the limit. Before it’s tested again, governments need to spend less, collect more revenue and restore their ability to act.