Global Economy Risk Assessment
Global Growth Unlikely to Slow as the AI Investment Boom Gets Underway
By The Better Policy Project | September 30, 2025
Global Risks in Transition: Growth, Tariffs, and the AI Effect
The world economy is navigating a delicate transition where old pressures and new opportunities collide. On one side, restrictive migration, geopolitical frictions, and rising tariffs are eroding potential output and amplifying stagflation risks. On the other, a powerful wave of artificial intelligence investment is reshaping capital flows, lifting equilibrium interest rates, and challenging central banks to rethink policy anchors. The result is a global landscape of heightened uncertainty: the United States wrestles with labor shortages amid booming tech investment, the euro area struggles to sustain disinflation without stalling growth, Russia walks a tightrope between fiscal stress and inflation persistence, and China seeks to cushion external shocks while fostering a long-delayed shift toward domestic demand. These contrasting dynamics underscore a central theme, policy choices now carry greater weight in determining whether economies stabilize into sustainable growth or slide deeper into fragmentation and volatility.
Global Economy Risk List
Higher Interest Rate Risks
US tariffs rise by more than expected.
Retaliatory tariffs.
Expansionary fiscal policy in the US, Germany and China.
Restrictive immigration in the US reduces labor supply.
Global equity prices reach new highs, spur a wealth effect.
Inflation expectations may not be well anchored.
Countries with low unemployment prevent wage disinflation.
Geopolitical tensions reduce global oil supply.
OPEC spare capacity falls to historic lows.
Countries allow their currencies to depreciate to partially offset US tariffs.
Fed independence questioned.
Underestimating r star that is on the rise due to AI.
Higher food prices are driven by higher meat prices.
Lower Interest Rate Risks
Global trade slows and the global economy slips into a severe growth recession.
Rerouting China’s exports to the rest of the world at a discount.
Restrictive immigration in the US lowers housing demand.
Crisis in confidence in equity markets from the US economic agenda leading to stagflation.
US fiscal sustainability concerns reach a breaking point.
Consumers lose confidence due to high levels of uncertainty leading to precautionary saving.
China’s property market worsens threatening financial stability.
Increasing non-performing loans in Russia causes a banking crisis.
AI raises potential output and higher unemployment.
United States
Restrictive immigration is lowering U.S. potential growth just as the AI investment cycle accelerates, creating an awkward policy mix: strong demand meeting a tightening supply side. Recent data show elevated interior enforcement that rhymes with the Dallas Fed’s “high deportation” path, implying a sizable hit to potential, on the order of 0.8pp relative to pre-shock estimates. In practice, growth that looks ordinary on paper can translate into excess demand pressures when potential is falling. At the same time, software and information-processing equipment investment has surged, a classic signal that equilibrium interest rates (r*) are drifting higher as capital formation opportunities expand. Markets nevertheless repriced the expected fed funds path sharply lower after tariff announcements, betting on easier policy despite firm real activity. If underlying inflation stays sticky, amplified by labor shortages, this easing narrative could prove premature. The Fed’s challenge is to acknowledge AI’s upward pull on r* without destabilizing already euphoric risk assets.
Source: Market Probability Tracker
Euro Area
Headline inflation has landed on target, but the story underneath is trickier. Services inflation remains elevated and unemployment is at historic lows, keeping wage dynamics uncomfortably firm even as growth stagnates. Q2 GDP barely expanded, and U.S. tariff uncertainty hangs over external demand just as investment and consumption soften. Fiscal policy is doing more of the lifting: Germany’s scaled-up infrastructure and defense program, part of roughly €1 trillion of European stimulus, should cushion activity in 2026, provided financing remains orderly across member states and fragmentation risks are contained. The ECB’s room to ease will partly hinge on the U.S. policy path. If U.S. rates rise and the euro weakens, that FX cushion against tariffs could also re-import price pressures, complicating the inflation-targeting task. The central dilemma: sustain disinflation without snuffing out a fragile recovery, in a union where inflation and growth experiences diverge sharply across countries.
Source: Eurostat
Russia
Russia faces entrenched stagflation risks. Civilian sectors, from manufacturing to wholesale trade, are stagnating or slipping, while defense-related production props up headline activity. Inflation has eased but is still about double the 4% target, with wage growth slowing and concentrated in defense-linked industries. Tight migration policies and sectoral labor mismatches keep labor markets taut, adding wage-push pressure. Meanwhile, external headwinds are building: sanctions, softer oil prices, and weakening private investment are squeezing revenues and confidence. The fiscal deficit has overshot plan, signaling underlying inflation persistence and narrowing room to maneuver if growth weakens further. Banking-sector stress bears watching as high lending rates dampen credit and non-performing loans rise. The policy trade-off is delicate: ease too soon and inflation or the ruble could slip; ease too late and financial strains could spread. Expect the central bank to balance gradual disinflation with targeted measures to preserve financial stability.
Source: Ministry of Finance of Russian Federation, BPP estimates
China
China’s growth is still led by exports, exposing the economy to tariff shocks and leaving the long-desired consumer rebalancing incomplete. Household spending remains subdued and private credit growth has slowed to near-cycle lows, both warning signs if exports fade as front-loaded shipments unwind. Business and consumer sentiment look hesitant, and muted lending suggests limited firepower from domestic demand alone. There is a medium-term bright spot: rapid AI investment where China appears to be keeping pace with the U.S., which could lift productivity over time. Near term, however, macro stabilization likely relies on monetary easing and exchange-rate flexibility. The overnight interbank rate indicates the PBoC retains room to cut, letting the currency act as a shock absorber if tariffs bite. That approach can cushion demand and buy time, but it is no substitute for structural reforms that strengthen consumption, credit transmission, and private-sector confidence.
Source: NBS
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