The World Economy’s Resilience Rests on Borrowed Money
Fiscal and monetary support in the US and China is sustaining growth but widening global imbalances. by Lorenzo Bini Smaghi
The global economy appears to be weathering the economic and geopolitical turmoil of recent months - from the Trump administration’s tariffs to the rise in energy prices caused by the conflict in Iran - better than expected. Growth in advanced economies has picked up slightly, whereas as recently as six months ago the International Monetary Fund forecast a slowdown of around 0.5 percentage points compared with 2025.
It is important to examine the reasons for this resilience, not least to understand whether it can be sustained.
Among the main factors cited in the IMF’s annual report are the reduced dependence of industrialised economies on oil compared with the beginning of the century, the greater adaptability and sound financial health of companies, and the rapid growth of the technology sector, particularly in artificial intelligence, which is driving investment.
However, the most important factor, often underestimated, concerns economic policies, particularly fiscal policy, in the major economies, starting with the United States and China.
In the United States, the general government deficit is expected to rise to 8.5 per cent of gross domestic product this year, from 7.1 per cent last year. This is mainly the result of measures introduced by the US administration in an election year, taking the deficit to its highest level since the pandemic.
The expansion is even more striking because it comes at a time when the economy is at full employment. Public debt is expected to rise to 127 per cent of GDP this year, 20 percentage points above its level at the end of the previous decade. It is projected to reach 140 per cent by the end of this decade in the absence of corrective measures, which would nevertheless be difficult to implement in the current political environment.
Without this fiscal support, US growth would probably be lower than the 2.3 per cent forecast for both this year and next.
The US economy has also benefited from the monetary easing undertaken by the Federal Reserve up to last September, with the policy rate reduced from 5.5 per cent to 3.75 per cent. In hindsight, the most recent inflation data show that those decisions, particularly the three rate cuts made at the end of 2025, were mistaken. Core inflation, which excludes the most volatile components, has risen above 3 per cent. The latest figures on consumers’ expectations point to inflation approaching 4 per cent over the next year.
It is now clear that the rise in prices is due not only to temporary factors associated with higher energy prices, but also to the new administration’s measures to stimulate aggregate demand.
In these conditions, interest rates can only rise, with a restrictive effect on the more vulnerable sectors of the US economy, starting with real estate.
In China, growth is slowing from 5 per cent in 2025 to 4.5 per cent this year and 4 per cent next year, according to official figures. Here too, the slowdown is being cushioned by substantial public support, financed by borrowing that has risen to 8 per cent of GDP. Public funds are being used to support companies in the face of declining domestic demand. Monetary policy remains expansionary, but inflation is still low because domestic consumption is stagnating. Economic growth is sustained almost entirely by exports, for as long as foreign markets remain open.
In Europe, meanwhile, growth is running at just over 1 per cent a year, amid cautious economic policies, particularly in the more heavily indebted countries, which must continue reducing their budget deficits. The scope to offset the effect of higher energy prices on households’ purchasing power remains limited.
Overall, the resilience of the global economy looks fragile. It is due mainly to expansionary fiscal and monetary policies in the US and China, which cannot be sustained indefinitely and are producing growing imbalances in international payments. The US current account deficit is expected to rise to 4 per cent of GDP this year, alongside a Chinese surplus of the same magnitude.
Correcting these imbalances would require very different policies in the US and China, which are nevertheless difficult to implement given domestic constraints.
The imbalances therefore continue to widen, putting the stability of the global economy at risk.
A previous version of this article was published in the Italian daily Il Foglio
IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
