Wars, tariffs and oil tensions: Why nothing can stop the global economy (for now)

“Eppur si muove!” Galileo Galilei is said to have remarked: and yet it moves. First came Russia’s invasion of Ukraine in 2022, which sent the price of gas, oil and electricity soaring just as the world was beginning to lift its head after the pandemic. Few believed a global recession could be avoided, yet it was. Then came Donald Trump’s return to the White House and his determination to impose tariffs far and wide. Fears surged once again, but the economic collapse never materialized. Then Trump himself — alongside his friend and Israeli counterpart Benjamin Netanyahu — declared war on Iran, and the turmoil ended with the Strait of Hormuz closed. There was no precedent for such a development: one-fifth of the oil and liquefied natural gas consumed by a world still addicted to fossil fuels was suddenly taken out of play. And yet the drums of recession once again faded into the distance.

Resilience is an ugly, somewhat pompous word. Yet it is also the one that best describes the current state of affairs in purely economic terms. The term is everywhere: in analysts’ reports, in forecasts by the IMF, the World Bank and the OECD, and even in the latest speeches by Christine Lagarde, the president of the European Central Bank. For good reason. The global economy is not humming along, nor is it booming enough to justify great celebration, but neither is it falling apart. The cycle goes on, in short, and with considerably more vigor than many had predicted — especially that legion of pessimists who have spent years predicting that the economy would be knocked down.

Despite all the setbacks — and there have been plenty of them — global growth is expected to hover around 3% again this year, slightly above the average of the past decade. Europe remains sluggish, yes, though with notable exceptions: Spain, Portugal, Greece and much of Eastern Europe, which continue to narrow the gap with Europe’s traditional economic powerhouses. Across the Atlantic, the United States continues to surprise on the upside. Even Latin America appears to be regaining some of its lost momentum. And China, India and much of Asia continue to do what they have done for decades, driving the global growth story that has defined the world economy since the 1990s.

The data support the case for resilience against all odds, challenging one of economics’ oldest theories: the business cycle. The current cycle, which began after the unprecedented collapse triggered by the COVID-19 lockdown, is not yet among the longest of recent decades. But it is shaping up to be. More importantly, it follows another unusually long period of growth, particularly in the United States (2009–2020), but also in Europe (2013–2020, cut short by the austerity policies in the early years of the previous decade). The coronavirus pandemic marked a watershed moment, leaving behind an unanswerable question — what would have happened otherwise? — as well as a lingering impression: that, even with slower growth, the expansionary phases of recent cycles are stretching ever longer, like chewing gum.

“Given this level of uncertainty and these shocks, both commercial and energy-related, a much larger slowdown, if not a recession, would have been the logical outcome,” Alejandro Werner, director of the Georgetown Americas Institute, concedes by phone. “Although the tariffs were smaller than initially announced, it was the largest tariff increase in modern history. Two things are clear: we have underestimated the economy’s capacity for resilience, and the private sector has adapted far better than expected.” A half-decade of economic resilience — something almost no one saw coming.

“It is surprising, yes, especially because, until the well-judged coordinated response of authorities to the pandemic, it had been one shock after another,” says Xosé Carlos Arias, author of El tiempo es oro. Economía política del nanosegundo ( Time is money. The Political Economy of the Nanosecond). “We are living through a period of profound transformation, a kind of shedding of the skin as we move toward a hyper-technological form of capitalism, and that undoubtedly plays a role. The growth of Asia in general, and Southeast Asia in particular, is another key ingredient in this entirely new equation.”

Long-term factors

In the absence of conclusive evidence, Arias is guided largely by intuition. “My sense is that several structural, long-term factors are weighing on the economy in ways we were not used to: massive investment in technology, changes in production systems, a shift in the very center of gravity of productive activity… Perhaps there is something beyond cyclical factors and into the structural realm: cycles may be getting longer. It is not yet clear, but I do think there could be something to this.”

Another important factor is the absence of unforced errors — the kind that lose tennis matches and trigger self-inflicted recessions. “Unlike what happened in the financial crisis and the Great Recession, governments and central banks, especially in Europe, have gone a stretch without making big mistakes, aside from Trump’s erratic policies,” Arias explains. “Even those most wedded to strict orthodoxy, like Germany, have been able to read the situation: that inflation is not the top priority now and that it was not the moment for a protectionist backlash after U.S. tariffs.”

On April 2 of last year, when Trump unveiled sweeping tariffs, Gian Maria Milesi-Ferretti was convinced that a severe recession was on the way. He was far from alone; that was rapidly becoming the consensus view. “Many things prevented that outcome, but what I take away above all is this: the optimism of financial markets and the investment by hyperscalers [the tech giants]. The wealth effect they have produced has undoubtedly helped sustain demand,” says the Brookings Institution researcher, who for many years was one of the chief architects of the IMF’s forecasts.

Has macroeconomic resilience been what has supported and driven stock markets, or is the causality actually the other way around: markets that failed to price in these unprecedented challenges and, through that blindness, ended up helping the broader economy? “That is something I cannot answer at this time,” Milesi-Ferretti admits from Washington.

The other major unknown lies in the sacrosanct concept of productivity, the cornerstone of healthy growth in any economy worth its salt. “The reality is that productivity has been rising since the pandemic,” Milesi-Ferretti says. “That is, before the positive effects of artificial intelligence could even be noticed.” If AI delivers on its promises, that boost will come later

“Both econometric models and we economists had anticipated a decline in activity, both from protectionism and from two back-to-back energy shocks. But that has not happened: we have had to step back, recalibrate, because the damage was nowhere near as great as we thought,” admits María Romero, chief economist at Analistas Financieros Internacionales (AFI).

She points to several factors behind this resistance, which has few precedents in recent times: fiscal policy — “since COVID-19, above all, we have relearned that it is a useful tool”—; the channeling of accumulated savings in Europe toward consumption —“especially in Spain, because in France, Germany and Italy there is plenty of savings, but it is not being used”—; and investment —“particularly in artificial intelligence and, above all, in the United States: in Europe we are not keeping pace.”

Indirect effects

From a U.S. perspective, Jared Bernstein, who chaired Joe Biden’s Council of Economic Advisers, sees another major reason for this resilience: the United States’ high level of energy production, particularly natural gas — of which it exports a smaller share than it does of other fuels. This has largely shielded the country from the Strait of Hormuz crisis and allowed it to sustain exports.

“That said, both tariffs and the war [in Iran] have had a clearly inflationary effect, and that is one of the main reasons for Trump’s unpopularity,” he stresses by email.

Bernstein warns that Europe is not as resilient to shocks because of its still heavy dependence on imported energy flows — as well as its greater exposure to international markets for goods, services and capital. Nor is much of the developing world in a particularly comfortable position.

“Many of these countries, especially in Africa, will suffer negative indirect effects, such as food shortages caused by a lack of fertilizers during the planting season,” he predicts.

He has a point. Although the Strait of Hormuz bottleneck was beginning to recede into the past — at least until the White House reignited tensions — the shortage of urea and other key agricultural inputs during the crucial planting season will be felt for months. Still, the apocalyptic scenario some had forecast has been avoided, if only at the last minute: recession is neither here nor expected.

“The repeated shocks of recent years, notably from geopolitical events, have forced companies and policymakers to become more agile. Their adaptability may mitigate the risk of recession in the coming quarters. But much hinges on how long it will take to repair oil supply disruptions and the vulnerabilities they expose,” analysts at Europe’s largest asset manager, the French firm Amundi, wrote in a revealing semiannual report titled: “Testing the Limits of Economic Resilience.” At the time, Washington had not yet abandoned the memorandum of understanding that promised peace with Iran and had allowed oil and gas tankers to resume passage through the Strait of Hormuz.

Don’t tempt fate

It would be wise not to tempt fate further. Two consecutive wars involving major fossil-fuel powers are, by definition, a drag on growth and a driver of inflation. The same is true of tariffs, the “most beautiful word” in Trump’s highly questionable vocabulary.

“Their arbitrariness has been and remains so great that the striking thing is how little effect they have had. But if he insists on continuing down this path, sooner or later something will have to give,” Arias warns.

“Let’s cross our fingers, because if anything is clear, it is that long-term challenges are greater today than yesterday. The outlook remains highly complex,” Milesi-Ferretti adds.

The other potential unforced error lies with central banks. After nearly three years operating on autopilot following the inflation shock triggered by the post-pandemic reopening and Russia’s invasion of Ukraine, policymakers in Frankfurt, London, Tokyo and even Washington are once again anxiously reassessing their positions.

The European Central Bank and the Bank of Japan both raised interest rates in June, just days before the United States and Iran reached a preliminary agreement to end the war and oil prices plunged — a move that “as a signal, can be a bit upsetting,” Arias acknowledges.

Even so, he praises the ECB’s restraint. Like European governments, he argues, it appears to have learned from the mistakes of the previous decade. “The important thing is that it did not fall into an inflationary panic spiral,” he says. “That certainly would have complicated matters.”

Nerves of steel for an age of whiplash change.

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