Repercussions of Tariffs in the World Economy

 

Repercussions of Tariffs in the World Economy

A tariff is a tax imposed on imported goods. At first glance, it appears to be a simple instrument: a government makes foreign products more expensive to protect domestic producers. But in a globally interconnected economy, the consequences of tariffs travel far beyond the country imposing them. A tariff can therefore function either as a protective shield or as a pressure tactic, and its ultimate consequences depend largely on its purpose, duration and the response of other countries.

When tariffs are imposed to protect local companies, they can provide domestic industries with temporary breathing space. Imported products become more expensive, allowing local manufacturers and vendors to compete more effectively. This can encourage domestic investment, employment, technological development and the creation of local supply chains. In this sense, tariffs can be useful as an industrial-policy instrument, particularly for strategic sectors.

However, protection has a cost. If domestic companies become dependent on protection instead of improving productivity, tariffs can create inefficient industries. Consumers may also pay higher prices because cheaper imported alternatives are no longer available. Companies that use imported raw materials and components face higher production costs, which can eventually be passed on to consumers.

The consequences become more complicated when tariffs are used primarily as a pressure tactic. A country may impose tariffs to force another country to change its trade, industrial or geopolitical policies. The strategy assumes that economic pain will persuade the other side to negotiate. But the targeted country may retaliate with tariffs of its own.

This creates a tariff spiral.

Country A imposes tariffs → Country B retaliates → exports decline → businesses face uncertainty → investment slows → consumers pay more → global trade weakens.

Because modern production is based on international supply chains, retaliation can affect companies that were not directly involved in the original dispute. Automobile manufacturers, technology companies, pharmaceutical producers, agriculture and energy industries can all be affected when components or commodities cross borders multiple times before reaching the final consumer.

Tariffs can also influence inflation, currencies and interest rates. Higher import prices can increase inflation. Central banks may then face a difficult choice between supporting economic growth and controlling inflation. Currency movements can further alter the competitiveness of exporters and importers.

At the global level, prolonged tariff conflicts can encourage companies to relocate production. Businesses may move factories from one country to another to avoid tariffs, creating new supply chains. This can benefit countries that offer competitive labour, infrastructure and political stability, but it can also reduce the efficiency of the global economy.

The biggest long-term repercussion is therefore economic fragmentation. The world can move from a system based primarily on efficiency and global specialization toward one increasingly based on security, strategic autonomy and geopolitical alignment.

Thus, tariffs are neither automatically good nor bad. A carefully designed tariff can protect and develop domestic capability; a tariff used merely as economic coercion can boomerang through retaliation, inflation, disrupted supply chains and slower global growth. The real question is not simply “How high is the tariff?” but “What strategic objective is the tariff designed to achieve, and what happens when the other side responds?”

 

U.S. Tariffs: From Trade Barriers to Higher Prices—Who Really Pays?

Introduction

U.S. tariffs have moved from being a trade-policy instrument to a major macroeconomic issue. The central debate is no longer simply whether tariffs reduce imports or protect domestic industries. It is whether the costs ultimately fall on foreign exporters, American businesses, retailers, or consumers. The evidence from the recent tariff cycle suggests the answer is more complicated: the burden is shared across the supply chain, while consumers bear part of it through higher prices and reduced purchasing power.

The scale of U.S. trade makes this important. In 2025, U.S. goods imports reached about $3.44 trillion, while the goods deficit rose to $1.24 trillion. At the same time, the composition of imports changed sharply: the U.S. goods deficit with China fell to $202.1 billion, while deficits with Vietnam and Taiwan increased substantially.

The tariff transmission mechanism

A tariff is formally paid by the U.S. importer at the border, not directly by the foreign government. But the economic burden can move through several stages. The importer may absorb part of the additional cost, negotiate lower prices from suppliers, or pass the increase to manufacturers and distributors. Producers may then absorb some cost through lower margins or pass it forward. Retailers face the same decision before the final price reaches consumers.

This means a 10% tariff does not necessarily produce a 10% increase in the retail price. The final effect depends on competition, supplier alternatives, exchange rates, margins, inventories and consumer demand. New York Fed research on the 2025 tariffs estimates that about 26% of the tariff increase passed through to consumer prices, with direct effects appearing quickly and indirect supply-chain effects taking roughly nine to twelve months.

 1 — U.S. trade with major partners

The first signal is the changing geography of U.S. trade. In 2025, the largest U.S. goods deficits included China at $202.1 billion, Mexico at $196.9 billion, Vietnam at $178.2 billion and Taiwan at $146.8 billion. The China deficit declined by $93.4 billion from 2024, while the Vietnam deficit increased by $54.7 billion and Taiwan's by $73.0 billion.

Chart 1 — U.S. Trade With Top Partners, 2018–2026

Source: U.S. Census Bureau / BEA.

The data illustrate an important limitation of tariffs: reducing imports from one country does not automatically eliminate the underlying U.S. demand for imported goods. Supply chains can be reorganized toward alternative countries. The growth of Vietnam and Taiwan alongside the decline in China's trade relationship is consistent with this diversification effect, although tariffs are only one of several forces shaping trade flows.

 2 — Commodity and input prices

Tariffs become particularly important when they affect goods that American manufacturers use as inputs. Steel, aluminum and copper are examples. A tariff on these materials can increase costs not only for imported metal but also for U.S. companies purchasing metal domestically, because domestic producers may face less competition from imports.

Chart 2 — Steel, Aluminum, Copper and Other Input Prices, 2018–2026
Source: U.S. Bureau of Labor Statistics PPI.

The distinction between tariff effects and general commodity inflation is essential. Commodity prices also respond to energy markets, supply disruptions, construction demand, inventories and global economic conditions. The pandemic demonstrated this dramatically. Therefore, a rise in steel or copper prices cannot automatically be attributed to tariffs. The strongest evidence comes when price movements coincide with tariff changes and are concentrated in tariff-exposed products.

 3 — Industries affected

The impact becomes clearer when commodity inputs are connected to industries. Automobiles use steel, aluminum and imported components. Electronics depend on international semiconductor and component supply chains. Appliances use metals, motors and electronic components. Construction relies on steel, aluminum, lumber and machinery. Furniture, apparel and footwear have significant exposure to imported finished products.

Chart 3 — Industries Ranked by Tariff Exposure
Source: U.S. trade and Federal Reserve/USITC research.

The earlier Section 232 steel and aluminum experience demonstrates the trade-off. U.S. International Trade Commission research found that steel and aluminum tariffs raised domestic metal prices and production, but downstream industries using those metals experienced negative production effects.

The lesson is straightforward: protecting an upstream industry can simultaneously raise costs for downstream industries.

 4 — Retail prices and inflation

The consumer impact is visible, but it is uneven. U.S. CPI inflation was 3.4% year over year in July 2026, while the PCE price index increased 3.7% and core PCE increased 3.3%.

Chart 4 — Tariff-Exposed Consumer Prices and Inflation
Source: BLS CPI; BEA PCE.

Not every increase in inflation should be labelled a tariff effect. Food, energy, housing, wages and services have their own price dynamics. The tariff effect is more visible in exposed goods. Federal Reserve research identifies appliances, electronics, clothing, footwear and other imported consumer categories as particularly sensitive to tariff exposure.

The important conclusion is therefore not that tariffs caused all inflation, but that tariffs added an additional price pressure to selected goods and supply chains.

 5 — Tariff-to-consumer price pass-through

The final question is who absorbs the cost. Federal Reserve research using household transaction data estimates retail price pass-through of roughly 15% using realized tariff rates and about 20% using a broader tariff-exposure measure. At the same time, spending on affected goods fell approximately three times as much as prices rose. Quantity reductions were concentrated in non-essential goods.

Chart 5 — Tariff → Importer → Producer → Retailer → Consumer

This shows why the economic effect extends beyond the price tag. A retailer may absorb part of a tariff through lower margins. A manufacturer may substitute suppliers. A consumer may switch brands, buy a cheaper product or postpone the purchase. Thus, the tariff burden is distributed across margins, prices and quantities rather than appearing entirely as a higher retail price.

Conclusion

U.S. tariffs are therefore much more than a tax at the border. They can reshape trade patterns, increase the cost of industrial inputs, alter business decisions and eventually influence consumer prices and spending. The evidence from the recent tariff cycle shows that the pass-through to consumers is partial, uneven and delayed, rather than one-for-one. The biggest economic question is consequently not simply whether tariffs reduce imports. It is whether the gains to protected industries outweigh the costs imposed on downstream businesses, retailers and households. In a highly interconnected economy, the answer depends on the entire supply chain—not just the customs border.

Global Economy 2026: Growth, Inflation, Trade, Energy, Food and AI — What the World’s Leading Institutions Are Telling Us

Global Economy 2026: Growth, Inflation, Trade, Energy, Food and AI

What the world's leading economic institutions are telling us—and what the data says about the future distribution of economic power

1. Introduction — The Global Economic Question

The global economy in 2026 is being shaped by several forces moving in different directions. Economic activity has demonstrated resilience, supported by technology investment, private-sector adaptability and the rapid expansion of artificial-intelligence-related demand. At the same time, geopolitical tensions, energy-market disruptions, inflationary pressures, trade fragmentation and high public debt are creating significant constraints on growth and economic policy.

The latest assessments of the world's major economic institutions show why the global economy cannot be understood through GDP growth alone. Growth, inflation, international trade, energy security, food production and technological capability are increasingly interconnected.

An energy shock can raise transportation and production costs, increase fertilizer prices and eventually affect food inflation. Higher inflation can constrain monetary policy and weaken investment. Trade restrictions can alter supply chains and investment decisions. Conversely, investment in AI, semiconductors, data centres and digital infrastructure is creating a new source of demand and potentially higher productivity.

This article examines these forces through the combined perspectives of the World Bank, IMF, Asian Development Bank, WTO, FAO and IEA, followed by comparative data, tables and graphical analysis.

The central question is:

Can the emerging AI-led investment and productivity cycle offset the pressures created by weaker global growth, energy insecurity, inflation and fragmentation of international trade?

2. What the Major Institutions Are Saying

The World Bank, IMF, ADB, WTO, FAO and IEA examine different parts of the economic system, but their assessments reveal a common theme: the global economy remains resilient, while the sources of that resilience are increasingly being tested by energy disruption, inflation, trade fragmentation and geopolitical risk. At the same time, AI is emerging as a new source of investment and productivity.

World Bank

The World Bank presents a cautious assessment of global growth. Its outlook emphasizes weak underlying momentum and the continuing risks arising from geopolitical tensions, energy prices and trade uncertainty.

At the same time, technology and AI adoption could provide an important productivity opportunity. The key issue for developing economies is whether they possess the electricity, digital infrastructure, human capital and institutions necessary to convert AI from a technology trend into an economic productivity gain.

IMF

The IMF provides a particularly important framework for understanding the current situation. Its 2026 assessment sees the global economy being influenced simultaneously by the energy shock and the technology investment boom.

The energy shock represents the downside force: higher energy prices can revive inflation, weaken household purchasing power and constrain monetary policy.

AI represents the positive force: investment in computing, semiconductors, data centres and digital infrastructure is supporting economic activity and international technology supply chains.

Thus, the IMF perspective can be summarized as:

Energy is the immediate downside risk; AI investment is an emerging growth counterforce.

Asian Development Bank

The Asian Development Bank's outlook demonstrates the continuing importance of developing Asia. Although growth is expected to moderate, the region remains significantly faster-growing than many advanced economies.

Asia's advantage comes from domestic demand, manufacturing capacity, investment and increasing technological capability. Its vulnerability comes from energy dependence, external trade conditions and geopolitical disruption.

WTO

The WTO adds the international-trade dimension. Merchandise trade is facing pressure from geopolitical tensions and energy disruption, but AI-related goods are creating an important new source of trade growth.

Semiconductors, computing equipment, data-centre infrastructure and other AI-enabling products are becoming increasingly important components of international commerce.

Therefore:

AI is no longer simply a technology story. It is becoming a trade and manufacturing story.

FAO

The Food and Agriculture Organization brings food security into the macroeconomic picture.

Agriculture depends on energy, fertilizer, transportation, water, land and weather. An energy shock can therefore become a food-price shock through higher fertilizer and transportation costs.

The relationship is:

Energy → Fertilizer → Agriculture → Food Prices → Inflation

Food security must consequently be treated as an element of economic security rather than simply as an agricultural issue.

IEA

The International Energy Agency highlights a fundamental transition in the energy system.

Renewables and nuclear are taking an increasing share of electricity generation, while solar PV has become a major source of additional electricity generation. Yet oil, gas and coal remain important to transportation, industry and energy security.

This creates a paradox:

The energy transition is accelerating, but conventional energy remains strategically important.

Table 1 — Major International Institutions: 2026 Outlook

Institution

Main Area

Key 2026 Message

Major Risk

Strategic Opportunity

World Bank

Global economy

Cautious global growth

Energy, geopolitics, weak investment

Productivity and technology

IMF

Global economy

Growth resilience with inflation risk

Energy shock and fiscal pressure

AI investment

ADB

Asia-Pacific

Asia remains a major growth centre

Energy prices and external demand

Domestic demand and technology

WTO

Global trade

Merchandise trade faces pressure

Fragmentation and energy disruption

AI-related trade

FAO

Food & agriculture

Food system remains resilient but vulnerable

Energy, fertilizer, weather

Productivity and food trade

IEA

Energy

Energy transition accelerating

Supply disruption and prices

Renewables, nuclear and electrification

3. Global Economic Power — Top 10 Economies

Economic size remains one of the most important measures of global influence. However, GDP alone does not determine future economic power.

A large economy possesses greater financial, industrial and market influence, but its future position also depends on growth, productivity, technology, energy, food security and trade.

This creates an important distinction:

Economic scale = present economic weight

Economic growth = change in future economic weight

The world's largest economies therefore need to be evaluated through both dimensions.

Table 2 — Top 10 Economies

Rank

Economy

Major Economic Strength

Growth Characteristic

1

United States

Finance, technology, AI, energy

Mature but highly productive

2

China

Manufacturing, trade, technology

High growth relative to advanced economies

3

Germany

Industry and exports

Low growth

4

Japan

Technology, capital and manufacturing

Low growth

5

India

Domestic market, services and digital economy

High growth

6

United Kingdom

Finance and services

Moderate growth

7

France

Industry, services and nuclear energy

Moderate/low growth

8

Italy

Manufacturing and exports

Low growth

9

Canada

Energy and natural resources

Moderate growth

10

Brazil

Agriculture and commodities

Emerging-market growth

Note: Rankings should be based on nominal GDP, while growth should be presented separately using real GDP. These are different measures and should not be mixed.

The central lesson is simple:

Economic size and economic momentum are not the same thing.

India illustrates the importance of this distinction particularly well. Its economic base is smaller than that of the largest advanced economies, but its comparatively rapid growth means that its share of global economic activity can increase significantly over time.

Graph 1 — 2026 Growth Outlook

Institution/Region

Growth

World Bank — Global

2.5%

IMF — Global

3.0%

WTO — Global GDP

2.8%

ADB — Developing Asia-Pacific

4.9%

Important: ADB's figure covers developing Asia-Pacific and is therefore not directly comparable with the global forecasts.

4. Global Trade — The WTO Perspective

International trade is entering a more complex phase.

The WTO's baseline forecast indicates considerably slower merchandise-trade growth in 2026 than in 2025. However, the latest quarterly evidence demonstrates that trade remains resilient in important sectors, particularly technology-related goods.

AI-enabling goods—including semiconductors and advanced computing equipment—are becoming increasingly important in international commerce.

This creates two opposing trade forces.

Energy/geopolitical disruption

→ higher costs

→ supply-chain pressure

→ weaker conventional trade

AI investment

→ semiconductor demand

→ computing equipment

→ data centres

→ technology trade

The WTO's analysis indicates that continued AI-related investment could provide meaningful support to global merchandise trade, while a sustained energy shock could reduce trade growth.

Table 3 — Global Trade Indicators

Indicator

2025

2026 Outlook

Merchandise-trade growth

4.6%

1.9%

Commercial-services trade growth

5.3%

4.8%

Global GDP growth

~2.9%

~2.8%

AI-enabling goods

Strong growth

Major growth driver

Graph 2 — Merchandise Trade Growth

2025   ███████████████████████  4.6%

2026   ██████████               1.9%

2027   █████████████            2.6%

The important conclusion is that global trade is not simply “slowing”.

Rather:

Traditional trade is facing geopolitical and energy constraints, while technology-intensive trade is expanding rapidly.

5. Food Production and Food Security

Food security is increasingly connected to the global macroeconomic system.

Agriculture depends on energy, fertilizer, transportation, water and weather. Consequently, an energy shock can raise agricultural production costs and eventually affect food prices.

FAO's cereal outlook indicates that global cereal production remains at historically high levels despite an expected decline from the exceptionally strong previous season.

Table 4 — Global Cereal Outlook

Indicator

2026/27 Outlook

Global cereal production

~2,982 million tonnes

Production change

~−2%

Global cereal utilization

~2,969 million tonnes

Global cereal stocks

~949 million tonnes

Stock-to-use ratio

~31.7%

Global cereal trade

~507 million tonnes

The data indicates that the immediate global food issue is not simply whether enough food exists.

The bigger questions are:

Where is food produced?

Who controls fertilizer and energy inputs?

Can food move efficiently across borders?

Can consumers afford it?

Therefore:

Food production + fertilizer + energy + logistics + trade = food security

This is also why agricultural strength contributes to economic resilience.

6. Global Energy Economy

Energy is perhaps the most important connecting variable in the global economic system.

It affects:

Industry → transportation → fertilizer → food → inflation → household income → monetary policy

At the same time, the global electricity system is undergoing a major structural transformation.

Solar, wind, nuclear and other low-emission sources are expanding rapidly. Yet fossil fuels remain essential to transport, industry and energy security.

Table 5 — Global Energy Indicators

Indicator

Latest Evidence

Global electricity-generation increase, 2025

>850 TWh

Solar PV generation increase

~600 TWh

Low-emission electricity share

~42%

Coal share of electricity

~34%

Data-centre electricity consumption, 2024

~415 TWh

Projected data-centre electricity consumption, 2030

~945 TWh

The most important long-term transformation is occurring in electricity.

Graph 3 — Electricity Transition

LOW-EMISSION ELECTRICITY

2025       █████████████████████  ~42%

2030       █████████████████████████  ~50%

The energy system is therefore moving from a predominantly fossil-fuel-based model toward a more electrified system.

But this transition creates a new challenge:

The future of AI and advanced manufacturing depends increasingly on reliable and affordable electricity.

7. AI — The New Economic Variable

Artificial intelligence has become much more than a technology-sector phenomenon.

It is simultaneously:

An investment story

A trade story

An electricity story

A productivity story

A national-competitiveness story

AI investment is generating demand for semiconductors, servers, data centres, networks and power infrastructure.

The IEA estimates that data centres consumed around 415 TWh of electricity in 2024, and this figure could more than double to approximately 945 TWh by 2030.

Table 6 — AI and the Economy

Indicator

Value

Data-centre electricity use, 2024

~415 TWh

Share of global electricity

~1.5%

Projected data-centre electricity use, 2030

~945 TWh

AI-related technology trade

Rapidly expanding

Key infrastructure

Chips, data centres, networks, electricity

Graph 4 — Data-Centre Electricity Demand

2024   █████████████████       ~415 TWh

2030   █████████████████████████████████████  ~945 TWh

AI therefore creates a new economic chain:

AI

↓

Semiconductors

↓

Computing infrastructure

↓

Data centres

↓

Electricity

↓

Infrastructure investment

↓

Productivity

This means that countries competing for AI investment will need more than software capabilities. They will require capital, electricity, skilled labour, digital infrastructure and institutional capacity.

8. Country Policy Response

The world's major economies are responding differently because their economic structures are different.

The United States is emphasizing technology, AI, investment and energy security.

China combines manufacturing, technology and trade strength with efforts to support domestic demand.

India is attempting to combine infrastructure development, manufacturing, digital capability and a large domestic market.

European economies face the additional challenge of maintaining industrial competitiveness while managing energy transition and fiscal constraints.

Table 7 — Comparative Policy Matrix

Economy

Monetary Focus

Fiscal Focus

Trade

Energy

AI/Technology

USA

Inflation/growth

Investment & fiscal sustainability

Strategic trade

Energy security

AI leadership

China

Stability/growth

Targeted support

Manufacturing & exports

Energy security

AI + manufacturing

India

Growth-inflation balance

Infrastructure

Manufacturing/diversification

Energy diversification

Digital + AI

Germany

ECB framework

Investment/reform

Industrial competitiveness

Transition/security

Advanced industry

Japan

Normalization

Targeted support

Supply-chain resilience

Diversification

Robotics/AI

UK

Inflation control

Fiscal discipline

Services/global trade

Transition

Digital/AI

France

ECB framework

Fiscal consolidation

Strategic trade

Nuclear + renewables

Industrial technology

Italy

ECB framework

Debt discipline

Manufacturing

Diversification

Industrial digitalization

Canada

Inflation/growth

Resource investment

Trade diversification

Energy/resources

AI infrastructure

Brazil

Inflation management

Fiscal credibility

Agriculture/commodities

Resources/bioenergy

Agri-tech/digital

The comparison shows that economic policy is increasingly organized around five forms of security:

Price security

Fiscal security

Trade security

Energy security

Technology security

9. What the Data Actually Says

The evidence demonstrates that GDP alone is insufficient to measure future economic power.

A more complete framework is:

Economic Power = Scale + Growth + Trade + Food + Energy + Technology + Capital

Economic scale determines present influence.

Growth determines how quickly that influence changes.

Trade determines integration with the global economy.

Food determines resilience against agricultural and price shocks.

Energy determines the ability to sustain production.

Technology determines future productivity.

Capital determines the ability to finance investment.

Institutions determine the ability to respond to shocks.

No major economy dominates every category.

The United States possesses extraordinary strengths in finance, technology and AI.

China possesses exceptional manufacturing and trade capabilities.

India combines a huge domestic market, relatively high growth, services, digital infrastructure and expanding manufacturing capability.

Resource-rich economies possess advantages in energy and commodities.

European and Asian advanced economies retain major industrial, financial and technological strengths.

The future competition is therefore not simply:

“Which country has the largest GDP?”

It is:

Which economies can combine growth, trade, food, energy, technology and capital into sustainable productivity?

10. Integrated Analysis — The Two Forces Shaping the Global Economy

The global economy is being pulled by two opposing forces.

Negative Force

Geopolitical disruption

↓

Energy supply risk

↓

Higher energy costs

↓

Higher production, fertilizer and transportation costs

↓

Food and goods inflation

↓

Pressure on household purchasing power

↓

Monetary-policy constraints

↓

Slower investment and trade

Positive Force

AI investment

↓

Semiconductors

↓

Computing equipment

↓

Data centres

↓

Electricity infrastructure

↓

Technology trade

↓

Productivity

↓

Economic growth

The two forces interact.

AI needs electricity.

Energy shocks make electricity and industrial production more expensive.

Therefore:

The future of AI is partly dependent on the future of energy.

This is one of the most important conclusions of the entire analysis.

The global economy is consequently neither simply slowing nor experiencing an uncomplicated AI boom.

It is undergoing a structural rebalancing.

The negative side consists of:

Energy + inflation + geopolitical risk + trade fragmentation

The positive side consists of:

AI + investment + technology + productivity

The countries best positioned for the next phase will be those capable of absorbing the negative shock while capturing the positive one.

11. Conclusion — What to Watch Next

The global economy in 2026 is entering a period in which economic power is becoming increasingly multidimensional.

GDP remains important, but it is no longer sufficient.

The major indicators to watch are:

Growth

Inflation

Trade

Energy

Food

AI

The principal downside risks are energy disruption, geopolitical tensions, trade fragmentation, inflation and fiscal pressure.

The principal sources of resilience are AI investment, technological innovation, renewable-energy expansion, domestic consumption and supply-chain diversification.

The decisive question is therefore:

Can AI-driven investment and productivity become strong enough to counterbalance the economic pressures created by energy shocks, inflation and geopolitical fragmentation?

For emerging economies, the opportunity is particularly significant. The objective is not simply faster GDP growth, but the conversion of market scale into productivity, manufacturing strength, technology capability, energy security and global economic influence.

The future of global economic power will increasingly belong not simply to the largest economies, but to economies capable of integrating growth, trade, food, energy, technology, capital and human capability into a resilient and productive economic system.

Sources for publication

World Bank — Global Economic Prospects

IMF — World Economic Outlook / IMF Data

Asian Development Bank — Asian Development Outlook

WTO — Global Trade Outlook and Statistics

FAO — Food Price Index and Cereal Supply & Demand Brief

IEA — Global Energy Review / Electricity / Energy and AI

 

Business Cycle & Economic Growth: The Two Forces Shaping the Global Economy in July–August 2026

When we bring together the economic stories appearing across the Financial Times, Forbes, Fortune and Harvard Business Review, a larger macroeconomic framework emerges.

Individual stories about AI investment, crude oil, inflation, interest rates, trade deficits, consumer spending, corporate investment and geopolitical tensions can appear unrelated. But when they are placed within the framework of the business cycle, they become part of one larger economic story.

The basic business-cycle sequence is:

Expansion → Boom → Slowdown → Recession → Recovery

The important question for the global economy in 2026 is:

Which force will dominate—AI-led expansion or the inflationary and growth-reducing effects of energy and geopolitical shocks?

This tension provides one of the most useful ways to interpret the economic developments of July–August 2026.

---

1. What Is the Business Cycle?

The business cycle refers to fluctuations in economic activity over time.

An economy does not grow at exactly the same rate every year.

Instead, economic activity typically moves through periods of:

1. Expansion
2. Peak/Boom
3. Slowdown
4. Recession
5. Recovery

These phases affect:

• GDP
• Employment
• Investment
• Consumption
• Corporate profits
• Inflation
• Interest rates
• Credit
• Trade

Therefore, the business cycle provides a framework for connecting many apparently separate economic indicators.

---

2. Expansion

During an expansion:

GDP ↑

Employment ↑

Investment ↑

Consumption ↑

Corporate Profits ↑

Businesses become more confident about future demand.

The sequence can become:

Demand ↑

↓

Production ↑

↓

Employment ↑

↓

Income ↑

↓

Consumption ↑

↓

Further Demand ↑

This creates a positive feedback loop.

---

3. Boom

If expansion becomes particularly strong, the economy may enter a boom.

At this stage:

AD ↑↑

while:

Capacity Utilisation ↑

and:

Unemployment ↓

Corporate investment may accelerate.

But a boom can create its own problems.

If demand grows faster than productive capacity:

AD ↑

↓

Supply Constraints

↓

Inflation ↑

This is where monetary policy becomes important.

The central bank may respond:

Interest Rates ↑

↓

Credit Cost ↑

↓

Consumption & Investment ↓

↓

AD ↓

The objective is to prevent an overheating economy from developing into persistent inflation.

---

4. Slowdown

A slowdown occurs when economic growth remains positive but loses momentum.

For example:

GDP Growth: 6% → 5% → 4%

The economy is still growing, but more slowly.

Possible causes include:

• Higher interest rates
• Weak consumer confidence
• Lower investment
• External demand weakness
• High inflation
• Geopolitical uncertainty
• Financial-market stress

This distinction is important:

Slowdown ≠ Recession

An economy can experience a significant slowdown without entering recession.

---

5. Recession

A recession represents a much more substantial deterioration in economic activity.

Typically, we see:

GDP ↓

Investment ↓

Employment ↓

Consumption ↓

Corporate Profits ↓

Businesses reduce production because demand has weakened.

The negative feedback loop can become:

Demand ↓

↓

Production ↓

↓

Employment ↓

↓

Income ↓

↓

Consumption ↓

↓

Demand ↓

This is why recessions can become self-reinforcing.

---

6. Recovery

Eventually, the economy begins to recover.

Recovery can be triggered by:

• Lower interest rates
• Fiscal support
• Improving consumer confidence
• Inventory rebuilding
• Stronger exports
• Rising investment
• Technological innovation

The cycle begins moving upward again:

Demand ↑

↓

Production ↑

↓

Employment ↑

↓

Income ↑

↓

Consumption ↑

This completes the basic business-cycle framework.

---

7. AI as an Expansionary Force

The most important positive force in the current cycle is arguably AI-related investment.

Companies are spending heavily on:

• Data centres
• Semiconductors
• AI servers
• Cloud infrastructure
• Electricity infrastructure
• Software
• Research and development

This produces an immediate demand effect:

AI Investment ↑

↓

I ↑

↓

Aggregate Demand ↑

↓

GDP ↑

This connects directly with the Aggregate Demand concept discussed earlier.

---

8. AI's Second Effect: Productivity

AI is potentially more important than a conventional investment boom because it can also affect the supply side.

If AI enables businesses to produce more with the same inputs:

AI Adoption ↑

↓

Productivity ↑

↓

Potential GDP ↑

↓

Long-Term Growth ↑

Therefore, AI can influence the economy through two channels.

Short Run

Investment → AD → GDP

Long Run

Productivity → Potential GDP → Real Income

This makes AI potentially a structural rather than merely cyclical force.

---

9. The Energy Shock

The major negative force is the energy and geopolitical environment.

Suppose geopolitical tensions cause:

Crude Oil Prices ↑

The immediate effect is:

Import Cost ↑

↓

Production Cost ↑

↓

Inflation ↑

This is the cost-push inflation mechanism.

But there is another effect:

Energy Cost ↑

↓

Household Purchasing Power ↓

↓

Consumption ↓

↓

AD ↓

Therefore, an oil shock can simultaneously:

Increase Inflation

and:

Reduce Economic Growth

This is precisely why energy shocks are particularly dangerous for central banks.

---

10. The Stagflationary Risk

The combination of:

Inflation ↑

and:

Growth ↓

creates stagflationary pressure.

The mechanism is:

Oil Shock

↓

Aggregate Supply ↓

↓

Prices ↑

Output ↓

This is fundamentally different from demand-driven inflation.

In a demand boom:

AD ↑ → Prices ↑ + Output ↑

In a supply shock:

AS ↓ → Prices ↑ + Output ↓

Therefore, policymakers face a much more difficult problem during supply shocks.

---

11. High Interest Rates Add Another Pressure

Suppose inflation remains elevated.

The central bank may maintain restrictive monetary policy:

Interest Rates High

↓

Borrowing Costs High

↓

Investment ↓

Housing Demand ↓

Consumer Credit ↓

↓

Aggregate Demand ↓

This creates a potential conflict with AI investment.

AI companies may continue investing because the expected returns are high.

But other businesses may reduce investment because financing has become expensive.

Thus:

AI Investment → Expansionary

while:

High Interest Rates → Contractionary

Both forces can operate simultaneously.

---

12. Geopolitical Risk

Geopolitical tensions create another layer of uncertainty.

They can affect:

• Oil
• Shipping
• Insurance
• Supply chains
• Trade
• Investment
• Capital flows
• Currency markets

The mechanism can be:

Geopolitical Risk ↑

↓

Business Uncertainty ↑

↓

Investment Decisions Delayed

↓

I ↓

↓

AD ↓

At the same time:

Geopolitical Risk ↑

↓

Energy/Shipping Costs ↑

↓

Inflation ↑

Therefore, geopolitical risk can simultaneously act as:

A demand-reducing force and a supply-side inflationary force.

---

13. Consumer Spending Is the Critical Variable

The next important question is whether households remain strong.

If:

Employment ↑

Real Wages ↑

Consumer Confidence ↑

then:

C ↑

and aggregate demand remains strong.

But if:

Food Inflation ↑

Fuel Prices ↑

Interest Rates ↑

then:

Real Purchasing Power ↓

↓

C ↓

↓

AD ↓

This is why consumer-spending data are extremely important for determining whether an economy is moving toward continued expansion or a slowdown.

---

14. Corporate Investment: The Other Critical Variable

Corporate investment can determine whether the slowdown becomes serious.

If companies continue investing:

Business Confidence ↑

↓

I ↑

↓

AD ↑

↓

Employment ↑

This can help sustain the expansion.

AI investment is particularly important because large technology companies are currently investing heavily in computing infrastructure.

But there is a risk.

If expected AI returns disappoint:

AI Investment ↓

↓

Capital Expenditure ↓

↓

AD ↓

The effect could spread to semiconductor manufacturers, construction companies, energy providers and technology suppliers.

Therefore, the AI investment cycle itself has become an important component of the global business cycle.

---

15. Trade and the Business Cycle

The external sector also matters.

During a global slowdown:

Global Demand ↓

↓

Exports ↓

↓

Net Exports ↓

↓

GDP Growth ↓

Conversely, strong global demand can support export-oriented economies.

For India, this is particularly interesting because:

Merchandise Trade Deficit

coexists with:

Services Export Strength

Therefore, India's external position must be interpreted through:

• Goods exports
• Goods imports
• Services exports
• Remittances
• Capital flows

This connects the business cycle with the current account discussed earlier.

---

16. The PMI as a Leading Indicator

One useful indicator for identifying changes in the business cycle is the Purchasing Managers' Index (PMI).

PMI provides information about business activity before official GDP statistics are released.

If manufacturing PMI falls:

New Orders ↓

Production Expectations ↓

Business Confidence ↓

This can indicate:

Manufacturing Slowdown

However, a PMI reading above 50 generally still indicates expansion in the surveyed sector; what matters is also the direction and speed of change.

Therefore:

A decline in PMI does not automatically mean recession.

It may simply indicate that expansion is becoming weaker.

---

17. Inflation and the Business Cycle

Inflation itself changes across the business cycle.

During a strong expansion:

Demand ↑

↓

Capacity Pressure ↑

↓

Inflation ↑

During a supply shock:

Costs ↑

↓

Inflation ↑

During a recession:

Demand ↓

↓

Pricing Power ↓

↓

Inflation may ↓

But supply-driven inflation can remain elevated even when growth is weak.

This is why the combination of inflation + growth is more informative than inflation alone.

---

18. The Two Forces in 2026

The current global environment can therefore be simplified into two competing forces.

Force 1: AI-Led Expansion

AI Investment ↑

↓

Corporate Capex ↑

↓

AD ↑

↓

GDP ↑

and eventually:

AI Adoption ↑

↓

Productivity ↑

↓

Potential GDP ↑

---

Force 2: Energy/Geopolitical Inflation

Geopolitical Risk ↑

↓

Oil & Freight Costs ↑

↓

Inflation ↑

↓

Real Income ↓

↓

Consumption ↓

and:

Interest Rates Remain Restrictive

↓

Investment ↓

↓

AD ↓

The global economic outcome depends on the relative strength of these two forces.

---

19. Why This Makes July–August 2026 Particularly Interesting

The major economic stories of this period can therefore be interpreted within one framework.

AI

Investment + Productivity

Oil

Cost Shock + Inflation

Interest Rates

Demand Management

Trade Deficits

External Vulnerability

Services Exports

External Support

Exchange Rate

Imported Inflation

PMI

Business-Cycle Signal

Consumer Spending

Demand Strength

Geopolitics

Supply & Investment Risk

These are not independent stories.

They are interconnected components of the same macroeconomic system.

---

20. The Business-Cycle Map

We can summarise the entire framework as:

AI Investment ↑

→ Investment ↑

→ Aggregate Demand ↑

→ GDP ↑

→ Employment/Income ↑

→ Consumption ↑

→ Expansion

But:

Oil Shock ↑

→ Production Costs ↑

→ Inflation ↑

→ Real Income ↓

→ Consumption ↓

→ Aggregate Demand ↓

At the same time:

Inflation ↑

→ Restrictive Monetary Policy

→ Investment & Consumption ↓

→ Growth ↓

Therefore:

AI is pushing the economy outward through investment and productivity, while energy and geopolitical shocks are pushing it toward higher costs and weaker demand.

---

21. The Most Important Macro Question

The central question for the global economy is therefore not simply:

"Is the economy growing?"

The more important questions are:

Is growth accelerating or slowing?

Is investment productive?

Is inflation demand-driven or supply-driven?

Are consumers maintaining purchasing power?

Are businesses continuing to invest?

Is AI generating actual productivity gains?

Are energy shocks temporary or persistent?

These questions help determine where the economy is positioned in the business cycle.

---

Conclusion

The Business Cycle provides the broadest framework for bringing together all the economic concepts discussed in this series.

The traditional cycle is:

Expansion → Boom → Slowdown → Recession → Recovery

But the current global environment is more complicated because two powerful forces are operating simultaneously.

The Expansionary Force

AI Investment ↑

→ Aggregate Demand ↑

→ GDP ↑

→ Productivity ↑

→ Potential GDP ↑

The Contractionary/Inflationary Force

Oil Shock + Geopolitical Risk ↑

→ Import Costs ↑

→ Inflation ↑

→ Real Purchasing Power ↓

→ Consumption ↓

and:

Higher/Restrictive Interest Rates

→ Investment ↓

→ Aggregate Demand ↓

The ultimate economic outcome will depend on which force proves stronger and more persistent.

If AI investment produces genuine productivity gains, it could support a new phase of structural economic expansion.

But if energy shocks remain persistent, inflation remains elevated and interest rates remain restrictive, the economy could move toward a growth slowdown with stagflationary pressure.

Therefore, the most important conclusion from the July–August 2026 macroeconomic story is:

The global economy is being pulled in two directions at the same time: an AI-led expansionary and productivity-enhancing force on one side, and an energy- and geopolitics-driven inflationary and potentially contractionary force on the other.

The balance between these two forces will determine whether the next phase of the global business cycle is characterised by continued expansion, a controlled slowdown, or a more serious economic downturn.

 

Productivity Growth — The Macroeconomic Impact of AI

Among all the macroeconomic concepts associated with the current AI boom, productivity growth is perhaps the most important.

AI is often discussed as a technology story: new models, chips, data centres, automation and software. But its deeper economic significance lies in a much broader question:

Can an economy produce more output with the same amount of inputs?

If the answer is yes, the economy is becoming more productive.

The fundamental relationship is:

Productivity ↑ → Potential GDP ↑ → Real Income ↑

This is why AI should not be viewed merely as a technological revolution. It can potentially become a macroeconomic productivity revolution.

---

1. What Is Productivity?

Productivity measures how efficiently an economy transforms inputs into output.

The simplest concept is labour productivity:

Labour Productivity = Output ÷ Labour Input

Suppose a factory produces:

1,000 units with 100 workers

Its labour productivity is:

10 units per worker.

If the same 100 workers produce:

1,500 units

then:

Productivity ↑ by 50%

No additional workers were required.

The economy has become more efficient.

---

2. The AI Productivity Mechanism

AI can potentially increase productivity by allowing workers and firms to produce more with existing resources.

The basic mechanism is:

AI Adoption

↓

Efficiency ↑

↓

Output ↑

↓

Productivity ↑

For example, an employee who previously spent three hours analysing a large dataset might use AI tools to complete the initial analysis much faster.

The worker can then devote more time to:

• Decision-making
• Problem-solving
• Client interaction
• Innovation
• Strategy

Thus, AI does not necessarily have to replace the worker to increase productivity.

It can also augment the worker.

---

3. Output Can Increase Without Proportionate Input Growth

This is the key macroeconomic idea.

Suppose:

Before AI

100 workers + 100 units of capital

→ ₹1,000 crore of output

After AI

100 workers + 100 units of capital + AI technology

→ ₹1,300 crore of output

If labour and capital have not increased proportionately, the additional output reflects an improvement in efficiency.

Therefore:

More output from broadly similar inputs = higher productivity.

This is the fundamental economic promise of AI.

---

4. Labour Productivity

AI can directly influence labour productivity.

Consider a professional-services firm.

Before AI:

10 employees → 100 client reports

After AI-assisted workflows:

10 employees → 150 client reports

The workforce has not increased.

But output has risen by 50%.

Therefore:

Output per Worker ↑

→

Labour Productivity ↑

If such improvements occur across millions of workers, the aggregate effect on the economy could become substantial.

---

5. Total Factor Productivity

A deeper concept is Total Factor Productivity (TFP).

TFP broadly captures improvements in how efficiently an economy combines:

• Labour
• Capital
• Technology
• Organisational systems

It is often described as the part of output growth that cannot be explained simply by adding more labour and capital.

In a simplified production function:

Y = A × F(K, L)

where:

• Y = Output
• K = Capital
• L = Labour
• A = Productivity/technology

AI has the potential to increase A.

Therefore:

AI → A ↑ → Potential Output ↑

This is the deeper reason economists are interested in AI.

---

6. Productivity and Potential GDP

This brings us to an important distinction.

Actual GDP

What the economy is producing today.

Potential GDP

The level of output the economy can sustainably produce using its available resources and technology.

If AI increases productivity:

Productivity ↑

↓

Potential Output ↑

↓

Potential GDP ↑

This is different from a temporary demand stimulus.

For example:

Government Spending ↑

can raise demand and actual GDP in the short run.

But:

Productivity ↑

can increase the economy's productive capacity.

That is why productivity growth is particularly important for long-term economic development.

---

7. Productivity Is Different From Aggregate Demand

This distinction connects directly with our previous concept of Aggregate Demand.

Suppose companies invest heavily in AI infrastructure.

Initially:

AI Investment ↑

↓

I ↑

↓

AD ↑

↓

GDP ↑

This is the demand effect.

But if the AI infrastructure improves efficiency:

AI Adoption ↑

↓

Productivity ↑

↓

Potential GDP ↑

This is the supply-side effect.

Therefore, AI can influence the economy through both demand and supply.

That makes it particularly important from a macroeconomic perspective.

---

8. AI Can Increase Both Demand and Supply

Consider the construction of a large AI data centre.

First effect:

The company spends billions on:

• Servers
• Chips
• Buildings
• Electricity
• Networking

Therefore:

Investment ↑ → AD ↑

But once the infrastructure becomes operational:

Computing Capacity ↑

↓

AI Services ↑

↓

Business Efficiency ↑

↓

Productivity ↑

Therefore:

Potential Output ↑

This creates an unusual situation in which the same technological investment can stimulate current demand while expanding future supply.

---

9. Productivity and Real Wages

Productivity growth is also closely connected with living standards.

If workers become more productive, businesses can potentially generate more output and value from each hour of work.

Over time:

Productivity ↑

↓

Output per Worker ↑

↓

Income-Generating Capacity ↑

↓

Real Wages Potentially ↑

↓

Real Income ↑

This is one of the fundamental reasons why productivity growth is essential for improving living standards.

However, higher productivity does not automatically guarantee that every worker receives an equivalent increase in wages. The distribution of productivity gains depends on labour-market conditions, bargaining power, skills, competition and the ownership of capital.

---

10. AI and the Cost of Production

AI can also reduce the cost of producing certain goods and services.

Suppose an enterprise can automate repetitive tasks.

Then:

Time Required per Unit of Output ↓

↓

Cost per Unit ↓

↓

Productivity ↑

If competitive pressures pass some of these savings to consumers:

Prices ↓

or:

Quality ↑ at the Same Price

Consumers therefore receive greater value.

This creates the possibility that technological progress can increase real purchasing power even without equivalent increases in nominal wages.

---

11. AI and Inflation

This is where productivity becomes particularly important for monetary policy.

Suppose wages rise by:

5%

while productivity rises by:

4%

The increase in labour cost per unit of output may be relatively limited.

But if wages rise by:

5%

while productivity rises only:

1%

then unit labour costs can increase substantially.

Therefore:

Productivity growth can help an economy accommodate wage increases without generating equivalent inflationary pressure.

This is an important reason central banks pay attention to productivity developments.

---

12. Productivity and the Supply Side

The Aggregate Supply framework helps explain this.

Suppose:

Productivity ↑

Then firms can potentially produce more at a given cost.

Therefore:

Aggregate Supply ↑

The economy can experience:

Higher Output

with:

Lower Cost Pressure

This is very different from an oil shock.

Oil Shock

Oil Price ↑ → Costs ↑ → AS ↓

Productivity Shock

Productivity ↑ → Efficiency ↑ → AS ↑

Therefore, AI could potentially act as a positive supply shock if productivity gains are sufficiently broad and persistent.

---

13. Why AI Hardware Exporters May Benefit Disproportionately

The global AI boom is not evenly distributed across countries.

Countries and companies that produce:

• Advanced semiconductors
• AI accelerators
• Semiconductor manufacturing equipment
• Data-centre infrastructure
• Advanced computing hardware

can experience a strong increase in external demand.

Therefore:

Global AI Investment ↑

↓

AI Hardware Demand ↑

↓

Exports ↑ in Producer Economies

↓

Investment & Income ↑

This can create differences in growth performance between technology-producing economies and economies that primarily import AI infrastructure.

That is one reason the AI cycle can generate growth divergence between countries.

---

14. IMF and the Technology-Led Global Upswing

The IMF's 2026 global outlook has highlighted the importance of technology-related investment and the uneven effects of the AI boom across economies.

The IMF's July 2026 World Economic Outlook update projected global growth at 3.3% in 2026, while noting that stronger-than-expected investment and technology-related developments were supporting activity.

This is significant because it suggests that AI is no longer simply a technology-sector story.

It has become part of the discussion about:

Global investment

Productivity

Trade

Capital flows

Growth

and:

Economic divergence

---

15. AI Investment and the Capital Cycle

AI also creates a powerful investment cycle.

The sequence may look like:

Expected AI Demand ↑

↓

Corporate Investment ↑

↓

Semiconductor Demand ↑

↓

Data-Centre Construction ↑

↓

Electricity Demand ↑

↓

Infrastructure Investment ↑

↓

Employment & Income ↑

This creates a broader economic multiplier.

But there is an important risk.

If investment grows much faster than actual AI-related demand:

Overinvestment ↑

↓

Excess Capacity

↓

Return on Capital ↓

↓

Corporate Investment ↓

Therefore, the AI investment boom must eventually be justified by actual productivity and revenue gains.

---

16. Productivity Versus Employment

One of the most debated questions surrounding AI is whether productivity gains will increase or reduce employment.

There are two competing mechanisms.

Displacement Effect

AI Automation ↑

↓

Demand for Certain Tasks ↓

↓

Some Jobs/Tasks Displaced

Productivity and Expansion Effect

AI Productivity ↑

↓

Production Cost ↓

↓

Prices ↓ / Output ↑

↓

Demand for Products & Services ↑

↓

New Jobs and Tasks Created

Historically, technological revolutions have produced both displacement and new forms of employment.

The final macroeconomic outcome depends on how quickly workers, firms and institutions adapt.

---

17. Skills Become More Important

AI-driven productivity does not necessarily benefit all workers equally.

Workers who can effectively combine:

Domain Knowledge + AI Skills

may become substantially more productive.

Therefore:

AI Adoption

↓

Demand for Complementary Skills ↑

↓

Productivity ↑

But workers whose tasks are highly routine may face greater disruption.

This creates an important policy requirement:

Education + Reskilling + AI Adoption

must develop together.

Otherwise, an economy may experience high technological investment without equally broad improvements in household incomes.

---

18. Productivity and Long-Term Growth

Long-run economic growth can broadly come from three sources:

1. More labour
2. More capital
3. Higher productivity

But there are limits to the first two.

A country cannot indefinitely increase growth simply by adding workers or accumulating machines.

Eventually:

More Capital → Diminishing Returns

Therefore, sustained improvements in living standards increasingly depend on:

Productivity Growth

This is why AI's greatest potential contribution may not be the immediate investment boom.

It may be its ability to increase the efficiency of the entire economy.

---

19. India's Opportunity

For India, the productivity question is particularly important.

India has a large workforce and a rapidly expanding digital economy.

AI could potentially improve productivity in:

• IT services
• Manufacturing
• Agriculture
• Banking
• Healthcare
• Education
• Logistics
• Government services
• Small and medium enterprises

For example:

AI in Agriculture

→ Better forecasting and resource allocation

AI in Manufacturing

→ Predictive maintenance and quality control

AI in Banking

→ Faster risk assessment and fraud detection

AI in Healthcare

→ Faster diagnostics and administrative efficiency

The macroeconomic potential comes from scale.

If productivity improvements spread beyond a handful of technology companies into traditional sectors, the aggregate impact could be much larger.

---

20. The Critical Question: Productivity or Just Investment?

This is perhaps the most important question for investors and policymakers.

Large AI investment does not automatically mean high productivity growth.

The real test is:

Does AI investment ultimately increase output per unit of input?

If:

AI Capex ↑

but:

Productivity does not increase

then the investment boom may eventually face questions about its economic returns.

But if:

AI Capex ↑

↓

AI Adoption ↑

↓

Efficiency ↑

↓

Productivity ↑

↓

Potential GDP ↑

then AI becomes a genuine structural growth driver.

---

Conclusion

Productivity Growth is perhaps the deepest macroeconomic concept behind the AI revolution.

The essential relationship is:

AI → Efficiency ↑ → Productivity ↑ → Potential GDP ↑ → Real Income ↑

AI therefore needs to be analysed at two levels.

Short-Term

AI Investment ↑

↓

I ↑

↓

Aggregate Demand ↑

↓

GDP Growth ↑

Long-Term

AI Adoption ↑

↓

Productivity ↑

↓

Aggregate Supply ↑

↓

Potential GDP ↑

↓

Real Income & Living Standards ↑

This distinction is crucial.

The current AI boom may initially appear in economic statistics through capital expenditure, semiconductor demand, data-centre construction and investment growth.

But the ultimate economic test will be much broader:

Can AI make workers, businesses and governments significantly more productive?

If the answer is yes, AI could become more than a technology cycle. It could represent a structural productivity shock, capable of raising potential output and living standards over an extended period.

That is why the AI story appearing in HBR, Forbes and the Financial Times should be read not merely as a story about technology companies. It is also a story about investment, productivity, potential GDP, wages, inflation, employment and the long-term growth capacity of the global economy.