Unwrapping the Global Economy

In this episode of Inside Economics, host Mark Zandi welcomes Gaurav Ganguly, head of International Economics at Moody's Analytics, along with regular co-hosts Marissa DiNatale and Chris Drudis. The conversation centers on the global economy's unexpected resilience in the face of significant headwinds.

The hosts begin with a stock market quiz, challenging Gaurav to identify which countries experienced the strongest and weakest equity market performance year-to-date in 2025. Gaurav correctly identifies Japan as the strongest performer (up 37% in local currency terms) and France as the weakest (down 5%). The discussion reveals that Japan's surge is driven by AI infrastructure build-out and export booms benefiting East Asian suppliers of chips and equipment, while France stagnates due to near-zero economic growth and political paralysis.

Gaurav emphasizes that the global economy, despite facing substantial shocks—including US tariffs beginning in early 2025 ("Liberation Day" in April), the ongoing Russia-Ukraine war disrupting energy and agricultural markets, Iran conflict tensions, and US-China tensions—has maintained growth at or near potential rates (approximately 2.5% on a PPP basis, 3% on a market basis) with relatively stable unemployment near full employment levels.

The panel identifies several factors explaining this resilience. First, AI serves as a major growth driver, particularly in East Asian economies (Japan, South Korea, Taiwan, Mexico) that supply equipment and components for US data center buildouts. Second, policymakers have demonstrated adaptive capacity, exemplified by Europe's rapid deployment of regasification terminals following the 2022 energy crisis and the implementation of fiscal support measures. Third, both firms and consumers have remained resilient: European firms have adapted strategies despite trade war pressures, and European consumers have provided modest growth support. Fourth, sovereign wealth funds and fiscal buffers in Middle Eastern countries have prevented economic freefall despite regional conflicts. Finally, monetary policy has maintained appropriate stance without creating additional supply shocks.

However, the discussion identifies significant threats to continued resilience. Long-term interest rates have risen globally and dramatically, with France up 132 basis points, Italy up 108, the US up 107, and South Korea up 101 basis points since year-end. The panel debates the drivers of these increases, concluding that while US rates provide a benchmark effect, the primary drivers are global uncertainty stemming from geopolitical conflicts (particularly the Iran war), inflation concerns across multiple economies, rising energy prices from the Ukraine war, supply chain disruptions, and elevated debt levels globally. Notably, growth expectations do not appear to be the primary driver, as rate increases are geographically widespread despite vastly different growth outlooks.

Marissa contributes a striking statistic: the Federal Reserve mentioned AI 24 times in its most recent meeting minutes (compared to 26 times in July, up from just 2 times a year ago). This reflects the Fed's concern about AI driving both growth and inflation simultaneously—through wealth effects, consumer spending, infrastructure investment, and electronic price pressures.

The panel expresses concern that rising yields, particularly in countries with limited fiscal space (France, UK), will bite into growth and constrain policymakers' ability to support economies. Gaurav notes that higher yields will particularly affect countries with high debt-to-GDP ratios and political instability, as demonstrated by France's wider sovereign spreads relative to Germany.

A notable segment addresses the global political shift toward right-wing parties. The panel observes movements toward right-wing parties in France (Marine Le Pen), Germany (Alternative for Germany), Brazil (Bolsonaro), the UK (Reform Party), and Latin America. Gaurav reframes this not simply as a rightward shift but as broader voter dissatisfaction with centrist parties that have governed while economic discontentment and political disenchantment have grown. He notes counterbalancing movements toward far-left parties in some cases (Germany, France), suggesting the primary phenomenon is anti-establishment sentiment rather than purely ideological rightward movement.

The panel identifies the economic implications of this political shift: while some right-wing governments (like Italy's Meloni) have pursued orthodox policies, there is significant risk around nationalism, protectionism, and particularly anti-immigration sentiment. Gaurav emphasizes that reduced immigration flows represent a longer-term corrosive threat to growth, particularly given Europe's negative demographics. The panel agrees that restricted immigration could undermine innovation, entrepreneurship, and economic dynamism.

The episode includes a statistics game where panelists propose economic data points for others to identify. Marissa highlights AI's prominence in Fed discussions, Chris notes BofA data showing consumer spending up 6.2% year-over-year with particular strength at lower income levels, and Gaurav presents the Eurozone inflation rate at 3.8%. The conversation also features a listener question about which single economic statistic panelists would want to know with perfect accuracy: Gaurav selects the French-German bond spread, Chris chooses consumer sentiment, Marissa picks GDP, and Mark opts for the unemployment rate.

The panel concludes by identifying key economic developments to watch in the coming week: European Council discussions (Gaurav), CPI data release (Chris and Marissa), Fed independence concerns following administration investigations of Fed Governor Lisa Cook (Marissa), and Strait of Hormuz tensions affecting oil prices (Mark).