Financial markets have experienced considerable gyrations in recent weeks, reflecting substantial shifts in investor expectations and heightened uncertainty, largely driven by ongoing US tariff policies. Over the past six months, consensus growth forecasts have seen notable downward revisions across most major economies, though these have been partially offset by modest upward revisions in the past month (chart 1). Concurrently, consensus inflation projections have diverged significantly, with upward pressures in the US contrasting with deflationary risks in China (chart 2). Compounding these US issues, renewed protectionism appears to be pressuring global supply chains again, potentially increasing inflation risks and sustaining elevated monetary policy uncertainty (charts 3 and 4). This week's particularly weak UK employment data highlight immediate domestic economic fragility, while longer-term economic stability remains challenged by persistently high real energy prices and complexities surrounding the energy transition (charts 5 and 6).
Introducing
Andrew Cates
in:Our Authors
Andy Cates joined Haver Analytics as a Senior Economist in 2020. Andy has more than 25 years of experience forecasting the global economic outlook and in assessing the implications for policy settings and financial markets. He has held various senior positions in London in a number of Investment Banks including as Head of Developed Markets Economics at Nomura and as Chief Eurozone Economist at RBS. These followed a spell of 21 years as Senior International Economist at UBS, 5 of which were spent in Singapore. Prior to his time in financial services Andy was a UK economist at HM Treasury in London holding positions in the domestic forecasting and macroeconomic modelling units. He has a BA in Economics from the University of York and an MSc in Economics and Econometrics from the University of Southampton.
Publications by Andrew Cates
Global| Jun 05 2025Charts of the Week: Fault Lines and Rate Cuts
Recent weeks have seen a complex recalibration in global financial markets, as investors weigh the implications of renewed US tariff actions against accumulating signs of economic softness and growing confidence in the prospect of central bank easing. As part of this recalibration, there has been heightened, if not uniformly sustained, concern about the safe-haven appeal of US assets, with long-dated Treasury yields rising at times on fiscal worries and the US dollar showing episodic vulnerability. Yet despite these concerns, consensus forecasts continue to anticipate meaningful policy rate cuts across most major economies (chart 1). Shorter-dated yields in bond markets have moved in sympathy, with 2-year Treasury yields, for example, have trending lower from mid-May, tracking a deterioration, albeit modest, in the US labour market (chart 2). Lower oil prices and a slew of negative inflation surprises have further softened inflation expectations (chart 3). In the euro area, wage growth and services inflation have also cooled, giving the ECB more latitude to reduce its policy rates again this week (chart 4). The growth backdrop, in the meantime, remains fragile, with global export demand and new manufacturing orders softening, and increasingly exposed to a drag from protectionist US trade policy (chart 5). Finally, China’s entrenched financial imbalances — persistent private sector surpluses, fiscal deficits, and external imbalances — remain a key source of domestic fragility and global distortion (chart 6).
by:Andrew Cates
|in:Economy in Brief
- Global| Jun 05 2025
Rebalancing Act: How Global Policy Shifts Are Rewriting the Rules of Capital and Trade
When the Balances Stop Balancing
In the global economy, nothing ever balances itself — it must be balanced. And the tool we use to understand that process is the financial balances identity:
(Private Sector Balance) + (Government Balance) + (Current Account Balance) = 0
This deceptively simple equation reminds us that the financial positions of households, businesses, governments, and the rest of the world are always interlinked — one sector’s deficit must be matched by a surplus elsewhere. But when policies distort trade and capital flows, they don’t eliminate this identity. They just shift the burden of adjustment — often suddenly and painfully — to another part of the system.
We’re now entering such a phase. As we explored in a previous piece (see the bond market and productivity), the global economy is confronting overlapping questions about how — and where — capital will be absorbed. That blog argued that it’s not simply a question of whether savings adjust (they must), but rather what mix of prices, policies, and expectations will force that adjustment — particularly as governments and firms simultaneously reach for the same pool of private capital to fund deficits and an AI-driven capex surge.
These concerns sit at the heart of what this next piece explores. Around the world, governments are pulling financial levers in conflicting directions. The United States is simultaneously contemplating financial transaction taxes, introducing punitive investment measures, and expanding fiscal deficits. Europe is loosening its purse strings in the name of strategic autonomy, while fast-tracking plans for a Savings and Investment Union that would re-anchor more capital within its borders. And China, still deeply mercantilist, is doubling down on export-led growth, capital controls, and state-directed investment — while keeping domestic consumption artificially suppressed.
Overlaying all this is a sharp resurgence in protectionist trade policy, with the United States now imposing tariffs across a wide swathe of imports. These frictions are not just policy noise — they are tearing at the global capital recycling mechanisms that once allowed persistent imbalances to be absorbed without systemic rupture.
As we wrote last time, markets may be pricing in an AI-led productivity renaissance — but if that narrative falters or is undercut by misaligned financial flows, the repricing could be swift and severe. And here’s the real concern: the fragile scaffolding that once allowed the world to function with these imbalances is now being dismantled — leaving a system where capital is needed in one place, unwanted in another, and increasingly blocked from flowing freely.
The United States Closes the Financial Tap
Suppose the US implements a tax on financial transactions or introduces new restrictions on foreign portfolio investment. This would mark a sharp reversal from decades of financial openness, fundamentally challenging the US model of attracting global capital to fund persistent fiscal and current account deficits.
Recent policy proposals, including those under the so-called "Big Beautiful Budget" clause and Section 899 of the Internal Revenue Code, point to a new willingness to weaponize financial channels. Section 899 allows for punitive taxation—so-called "revenge taxes"—on investors from countries deemed to have imposed discriminatory measures against the US. These steps create uncertainty for foreign capital and increase the risk premium on US assets.
If capital inflows shrink, the identity demands that either: • The current account deficit shrinks (via export gains or import compression), • The government deficit shrinks (unlikely given current policy), or • The private sector saves more than it invests.
This would strain the US economy. The dollar would likely weaken. Treasuries might lose some of their safe haven appeal, especially if yields rise to compensate for reduced foreign demand. Liquidity premia would widen. The US could no longer rely on the rest of the world to finance its deficits cheaply and reliably.
US Fiscal Expansion Without Financing
Now consider a parallel development: a renewed US fiscal expansion driven by tax cuts and defence spending. The federal deficit widens further. But with capital inflows potentially constrained, the private sector—households and corporations—must absorb the gap.
This creates a contradiction. Expansionary fiscal policy often tends to reduce household saving (more income, more consumption) and encourages firms to invest. But the financial balances identity demands the opposite: that the private sector save more to offset government dissaving and a flat or shrinking current account.
If private savings don’t rise, interest rates must. The result: pressure on equity and bond markets, and a risk that the US enters a cycle of high borrowing costs just as its productive potential hinges on long-term investment.
by:Andrew Cates
|in:Viewpoints
Global| May 29 2025Charts of the Week: The Yield Awakening
Financial markets have entered a more unsettled phase, with long-term yields, until very recently, rising notably across the US, Europe, and Japan. While inflation persistence and increased government borrowing have played a role, the moves also reflect broader concerns about global policy credibility and capital market dynamics. In the US, the unusual combination of higher yields and a weaker dollar points to growing risk premia linked to trade uncertainty and questions around institutional leadership (chart 1). At the same time, the withdrawal of central bank balance sheet support has continued to lift real yields across major economies (chart 2). Investors are also paying closer attention to savings and investment imbalances, where fewer surplus economies and persistent US deficits suggest a potentially tighter global savings environment (chart 3). Interestingly, the US stands out for a different reason: early signs of a productivity revival are emerging, possibly tied to AI investment and the broader digital infrastructure boom (chart 4). That contrasts with continued productivity stagnation in most other advanced economies (chart 5), where structural frictions and energy costs remain a drag. Indeed, the US may also be benefiting from a more fundamental edge—significantly cheaper electricity—giving it a further competitive advantage in this new capital- and data-intensive era (chart 6).
by:Andrew Cates
|in:Economy in Brief
- Global| May 28 2025
The Bond Market Is Also Asking a Bigger Question About Productivity
In Kevin Gaynor’s last post (see Crowding Out) he argued that fears of public borrowing crowding out private investment—particularly the surge in AI-driven capex—were likely misplaced. The real challenge is not whether savings will adjust—they must, by definition—but rather what shifts in prices, policy, or expectations will be required to expand household savings sufficiently to finance both government and corporate borrowing. In a world where global capital no longer flows as freely, that adjustment process becomes central.
There is also a deeper and more consequential issue lurking beneath these concerns: will the recent wave of AI-related investment actually deliver the productivity renaissance that markets now seem to be pricing in? The recent rally in equity markets—led by tech and infrastructure names—has been powered as much by narrative as by numbers, with investors embracing a vision of AI that promises to transform corporate efficiency and unlock a new era of structurally higher trend growth.
by:Andrew Cates
|in:Viewpoints
Global| May 22 2025Charts of the Week: Uncertainty Lingers
Despite escalating global economic uncertainty—driven in large part by US tariff policies—equity markets have continued to surge, seemingly shrugging off risks that would typically provoke caution. This disconnect has grown more conspicuous in the wake of last week’s downgrade by Moody’s of the US sovereign debt outlook, which underscored mounting concerns over fiscal sustainability. Beneath the surface of the market rally, however, a series of signals suggests a more nuanced and potentially fragile backdrop. A still-elevated US Economic Policy Uncertainty Index, for instance, contrasts with a moderating VIX, hinting at sanguine investors even as policy signals grow noisier (chart 1). Globally, equity markets have been responding positively to a sharp improvement in economic surprise indices (chart 2). Yet, this momentum has been highly uneven: China’s economic surprise index has soared, while the US index remains negative, signalling a big divergence in growth dynamics (chart 3). Meanwhile, US financial conditions for growth have turned modestly supportive after a long stretch of tightening, but this can be traced in part to surging equity markets (chart 4). In the meantime, Japan’s recent increase in purchases of long-term foreign debt, including U.S. Treasuries, suggests a renewed appetite for yield, but the latest data also underscore the fragility of foreign demand for US debt (chart 5). Finally, energy consumption trends offer a longer-term lens: should countries like India, Indonesia, and Bangladesh follow China’s industrialisation trajectory, the implications for global energy demand—and the world economy more generally—could be profound (chart 6). In summary, while risk assets rally, the global macro environment is anything but settled. Underneath the optimism lies a world grappling with heightened protectionism, structural constraints, divergent recoveries, and mounting fiscal and geopolitical strain.
by:Andrew Cates
|in:Economy in Brief
- Global| May 20 2025
The Age of Constraints, Part III
Geopolitics, AI, and the New Digital Divide In the final part of this series, we turn from the physical and technological constraints on growth to the geopolitical ones. Part I highlighted structural headwinds in the world’s labor, capital, and energy markets. Part II explored the potential of AI to act as a macro workaround—while warning that it is not immune to physical limits, particularly energy. Part III brings these threads together: AI is not just a labor-saving innovation or a capital redeployment tool. It is increasingly becoming a geostrategic asset—one whose deployment depends heavily on energy availability, infrastructure, and political control.
1. AI as a Tool of Statecraft What oil was to 20th-century power, processing power is becoming in the 21st. Nations are now racing to dominate the AI value chain—from chip design and fabrication, to data access, to the energy systems needed to power high-performance computing. Export controls, industrial policy, and national security reviews are no longer confined to oil tankers and pipelines—they now apply to GPUs and data centers.
The result is a world increasingly defined not by technological openness, but by fragmentation. From Trump's protectionist agenda—including tightened semiconductor export controls—to the strategic ambitions of the US CHIPS Act under the previous administration, and China’s intensified homegrown AI efforts, digital sovereignty has become an explicit geopolitical objective. The once-celebrated ideal of borderless innovation is yielding rapidly to a harsher reality: national power now hinges increasingly on digital dominance and technological self-reliance.
2. The Energy Arms Race Beneath the Silicon If the second in this series taught us anything, it’s that AI is not ethereal—it’s physical. It runs on electricity, minerals, and metals. It demands stable grids, high-capacity cooling, and energy infrastructure on a scale few countries currently possess. AI isn’t just compute-intensive. It’s energy-intensive. And that shifts the locus of global competition. The new AI geopolitics is not just a chip race. It is quite literally a power race. Countries that control abundant, cheap, and low-carbon energy will gain a disproportionate advantage in AI scalability. Those that don’t, risk falling behind, regardless of their tech ambitions.
As such, energy security is fast becoming the ultimate gating factor in the AI revolution. Just as the post-WTO growth boom in the 2000s was fueled by a surge in real energy consumption and prices, the AI boom may repeat that pattern—only faster, and more unevenly distributed.
by:Andrew Cates
|in:Viewpoints
Global| May 15 2025Charts of the Week: Sentiment Up, Forecasts Down
Financial market sentiment has improved notably in recent days, buoyed by an unexpected pause in the US-China tariff war and the May 12 announcement of significantly reduced bilateral tariff rates. This détente has eased investor fears of a deepening global trade shock and sparked a rebound in risk appetite. The shift follows several weeks of anxiety triggered by the Trump administration’s April tariff actions, which led to sharp declines in high-frequency indicators of shipping activity (chart 1). More broadly, these developments have prompted substantial downgrades to consensus GDP and inflation forecasts for 2025 and 2026. Expectations for growth and inflation weakened across most major economies, while current account projections deteriorated markedly—underscoring the perceived economic toll of disrupted trade flows and supply chains (charts 2, 3, and 4). And, notwithstanding the more recent improvement in sentiment, underlying risks to the US outlook persist, not least via still-high uncertainty. This week’s Fed Senior Loan Officer Survey additionally points to continued tight credit conditions and subdued loan demand, suggesting that monetary policy remains a drag on activity (chart 5). On a brighter note, lower oil prices have helped to anchor inflation expectations, with market-based measures—such as the US 5-year forward inflation rate—remaining relatively stable despite tariff-related volatility (chart 6).
by:Andrew Cates
|in:Economy in Brief
- Global| May 14 2025
The Age of Constraints, Part 2, AI and the Energy Reality Check
The Age of Constraints, Part 2, AI and the Energy Reality Check
If Part I of this series mapped the fractures in the global economy’s supply-side foundations—labor, capital, and energy—this second installment turns to the potential workaround: artificial intelligence.
AI has been frequently pitched as the ultimate macroeconomic escape hatch. It promises to plug labor shortfalls, redeploy idle capital, and inject new life into flagging productivity trends. And in some areas, it already is. From medical imaging to generative models in finance, AI is no longer theoretical—it’s live, scaling, and impressive.
But it’s not weightless. Or frictionless. And it is certainly not energy-free.
A look at the long-run relationship between real energy prices and global per capita energy consumption—illustrated in the chart below—potentially suggests that AI may not ease the Age of Constraints so much as intensify it. Particularly when it comes to energy.
by:Andrew Cates
|in:Viewpoints
Global| May 07 2025Charts of the Week: Relief Rally Meets Recession Risk
Financial market sentiment has rebounded in recent weeks, buoyed by signs of de-escalation in the US-led trade war and growing confidence that central banks—particularly the Federal Reserve—will step in with more rate cuts to cushion any fallout. Yet beneath the surface, a more sobering picture of the global economy persists. For example, latest PMI surveys reveal that global business expectations have slumped to their lowest levels since the pandemic, reflecting widespread unease about the growth outlook (chart 1). While supply chain pressures have so far remained contained, suggesting no repeat of the logistical chaos seen during the pandemic (chart 2), the latest Blue Chip Financial Forecasts survey reveals that forecasters are now pencilling in deeper and more widespread monetary easing than previously anticipated—an acknowledgment that demand is faltering (chart 3). Falling oil prices further reinforce this view: they are both a symptom of weakening global demand and a potential source of disinflation, reducing the urgency for central banks to maintain tight policy (chart 4). At the structural level, the US economy's increasing reliance on intangible assets—ranging from intellectual property to reputation—has made it more vulnerable to geopolitical frictions and the erosion of global trust (chart 5). This risk is compounded by America's dominant role in AI investment, a sector symbolic of both its economic strengths and its exposure to international perceptions (chart 6). The longer-term challenge, then, is not just navigating the current downturn, but ensuring that the institutional goodwill and cross-border openness that support the modern US economy are not sacrificed in a more fragmented and uncertain global order.
by:Andrew Cates
|in:Economy in Brief
- Global| May 07 2025
The Age of Constraints, Part I: The Great Economic Squeeze
Labour, Capital, and Energy in a Fractured World
The latest surge in US tariffs hasn’t yet shattered the global economy—but it has more openly revealed the fractures that were already there.
Long before the new wave of US protectionism, the world economy was drifting into a more fragmented, frictional phase. The free flow of goods, capital, labour, and energy—pillars of the late 20th-century global order—had been quietly eroding for years. What the tariffs have arguably done is to make the drift official. They have marked a turning point, not because they started something new, but because they confirmed that the previous global economic model was no longer sustainable.
Still, if US trade policies have clarified the direction of travel, they have also accelerated the journey toward fragmentation—often in ways that undermine the very resilience they claim to restore. By targeting countries and sectors, the US has reignited a zero-sum logic in global trade: one where national security concerns override economic efficiency, and where long-term cooperation is sacrificed for short-term leverage. This approach may score political points domestically, but it risks entrenching the same vulnerabilities it seeks to eliminate—raising input costs, disrupting investment, and pushing allies and adversaries alike toward parallel, disconnected systems.
Yet even without this protectionist turn, economic models were already under strain. The foundations of growth had begun to shift well before tariffs re-emerged as a policy tool. Labour markets were misaligned, with ageing workforces in some economies and idle potential in others. Capital was abundant but increasingly abstract—flowing into intangible assets and financial engineering rather than productive investment. Energy was no longer cheap, predictable, or apolitical. And trend productivity, which once rose smoothly on the back of scale and specialisation, had become choppy and contested.
This is the Age of Constraints—not a crisis, but a condition. A world where the fundamental factors of production no longer reinforce each other, but strain against one another. A world where efficiency is harder to come by, and where growth increasingly hinges not on accumulation, but on adaptation.
This commentary launches a three-part series exploring how these structural shifts—in labour, capital, and energy—are reshaping the world economy. In the next instalment, we’ll explore why artificial intelligence, is in fact a deeply pragmatic response to these constraints. But first, we must understand the systemic pressures that have brought us to this turning point.
But first, we need to understand just how deep the constraints run.
I. Labour: A Global Workforce Out of Balance
In the 20th century, labour was an abundant and cheap input. Factories expanded. Cities grew. Consumption soared. But in much of the world, that labour force is now shrinking—and ageing fast.
• Japan’s working-age population has fallen by over 10% since 2000. • China’s population began declining in 2023, with projections pointing to a loss of 400 million people by the end of the century. • Europe and South Korea face similar demographic cliffs.
At the other end of the spectrum, Africa and South Asia are entering a demographic dividend phase. Nigeria is projected to surpass the US in population by 2050. India now has more young people than any nation on earth.
by:Andrew Cates
|in:Viewpoints
Global| May 01 2025Charts of the Week: Tariff Truce, Tenuous Trust
Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.
by:Andrew Cates
|in:Economy in Brief
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