Panetta: Global economy resilient, new conflicts fuel inflation

The global economy demonstrated unexpected resilience in 2025, growing by 3.4 percent, partly fueled by artificial intelligence investments and China's 5 percent expansion.

However, the Persian Gulf conflict dramatically altered the outlook, with the Strait of Hormuz blockade causing severe energy commodity price surges for oil and gas.

These pressures are extending to raw materials, notably fertilizers, threatening food security by early next year.

Consumer prices and short-term inflation expectations are now rising globally, pushing up interest rates across all maturities.

The economic outlook has sharply deteriorated, with the IMF forecasting 2026 global growth to drop to 3.1 percent and inflation to reach 4.4 percent, nearly a full percentage point higher than prior estimates.

Global trade grew 5 percent in 2025, partly from AI-related goods and re-directed flows.

Protectionist policies did not reduce imbalances; the US goods trade deficit remained stable, while China's surpluses expanded.

International current account balances widened to their highest since the global financial crisis, with the US holding two-thirds of the global deficit and China one-third of the surplus.

These imbalances, fueled by the US public deficit and China's export model, pose material risks to financial stability.

A sustained adjustment requires major, coordinated policy corrections across the US, China, and Europe to reduce these risks.