The world economy has remained resilient despite the post-pandemic burst of inflation, Donald Trump’s tariffs, Russia’s ongoing war on Ukraine, the Iran war and, as a result of these two conflicts, big energy shocks, the most recent being quantitatively the biggest in history. Should the conclusion be that the economy is invulnerable or just lucky? If it is luck, how could it finally run out?
The lucid analysis in the latest Annual Economic Report from the Bank for International Settlements demonstrates that there has indeed been resilience, but also luck. Moreover, it shows, dangers are building up, notably in the interaction between fiscal and financial fragilities. One should add to this the social, financial and other vulnerabilities likely to be created, or worsened, by the triumphant march of artificial intelligence through the economy. It is not hard to imagine shocks to which the public sector’s ability to respond effectively is more limited than people currently take for granted.
Consider the impact of some recent events. Trump’s tariff war was significantly less damaging than expected on so-called liberation day (April 2 2025). This was partly because tariff levels became significantly lower than initially suggested, partly because US companies absorbed some of the cost (possibly temporarily) through lower margins and, significantly, because the tariffs were wildly discriminatory. The inevitable result was the diversion of trade from direct Chinese exports to the US to exports via other emerging economies (mostly in east Asia) able to produce using Chinese inputs. Moreover, and crucially, the rest of the world did not copy Trump’s protectionism. Sensibly, they judged it too absurd to be imitated.