The global economy is adapting to new technologies and geopolitical changes
28 NOV, 2025
By Karsten Junius, CFA, Chief Economist at J. Safra Sarasin
Despite numerous political challenges, the global economy has shown surprising resilience. Given the high level of political uncertainty, trade wars, the disruption of U.S. institutions, and the sharp increase in tariffs for American consumers, a U.S. recession this year would have been easy to justify. Yet it did not occur, and we do not expect one next year either.
Several factors explain this phenomenon. The European Union (EU) and other countries have largely avoided imposing retaliatory tariffs. Global supply chains are adapting more quickly than expected, helping maintain trade volume growth. In addition, the investment boom linked to artificial intelligence (AI) has strongly boosted GDP, particularly in the United States, more than offsetting other negative factors. Capital expenditure on IT equipment and software alone added about one percentage point to U.S. growth in the first half of this year.
Chinese exports to the U.S. have decreased. However, part of this trade has simply been rerouted through other emerging markets, whose exports to the U.S. have increased. As a result, the U.S. current account deficit will continue to widen this year despite tariffs. In a multipolar world, global trade does not necessarily have to shrink in absolute terms: protectionism can reduce efficiency and slow productivity gains, but it also encourages firms to diversify supply chains rather than depend on a single country or company.
Next year appears likely to bring greater political support for growth. The U.S. administration, facing midterm elections in the autumn, will want to strengthen confidence. The timing of this year’s tariff increases and the tax cuts expected next year under the “One Big Beautiful Bill Act” fits perfectly with the electoral calendar—producing a fiscal drag this year and stimulus next year.
Fiscal expansion will also stimulate growth in the euro area, particularly in Germany and the Netherlands, where spending on defense and infrastructure is rising. Inflation—once fueled by the pandemic and the excessive policies of 2022–23—has fallen close to central bank targets. Average policy rates will be lower next year, offering modest support everywhere except Japan, where another rate hike is likely. We expect stable rates in the euro area and Switzerland, where monetary policy is already neutral or slightly expansionary, and rate cuts in the U.S. and U.K., where it remains restrictive.
Fiscal and monetary largesse prevented a global recession during and after the pandemic, but at the cost of higher government bond yields. In several countries, including France, the U.K., and Italy, real bond yields now exceed real GDP growth. When real yields exceed real growth, governments must run primary surpluses to stabilize debt ratios; otherwise, interest expenses outpace revenues.
Italy has managed this successfully in the past. France and the U.K. have not. Meanwhile, the United States is running deficits so large that debt continues to grow even when growth exceeds yields. It is encouraging that Greece and Portugal, once emblematic examples of debt crises, now enjoy significant fiscal room thanks to successful reforms. This suggests that other countries can also improve their fiscal positions if markets force them to do so. But the “political pain” of such adjustments could lead to new power dynamics. Parties at the extremes—right or left—could still gain ground.
