Economic Crosscurrents Mount as Energy and AI Sectors Converge

Global Economy at a Crossroads: AI Boom vs. Energy Shock

The global economy is facing a stark contrast in fortunes, with the AI investment boom driving growth in some corners and the energy shock from the Iran war hindering it in others. A recent flurry of data underscores the complex and opposing forces at play.

Growth Spots

Growth in Taiwan jumped almost 14% last quarter, the fastest expansion since 1987, while South Korea's exports advanced by almost 50% for a second straight month in April. Chip exports surged 173% from a year earlier, driving the growth. By contrast, the Bank of Japan this week slashed its economic growth forecasts and held interest rates steady, with weakness in the yen triggering a rare intervention. Factory output fell in March in Japan, where fears of food and beverage price increases due to a shortage of a key ingredient used in plastic packaging are growing.

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Energy Crisis Hits Hard

Asia sits at the epicenter of both the power crunch that's sinking growth prospects, threatening shortages and sparking inflation concerns, and the growth tailwind fueled by the buildup in data storage capacity and artificial intelligence. The economic reverberations are going global, with policymakers from New Zealand to Norway bracing for impact and investors betting on winners and losers.

Regional Disparities

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In China, exports kept factories humming in April even as construction suffered its biggest slump since the early stages of the Covid pandemic and the services sector fell back into contraction. Disparities in gross domestic product were evident across Europe, where Spain, Germany, and Italy's economies in the first quarter outperformed while France's stalled. European Commission President Ursula von der Leyen warned the continent may spend years grappling with fallout.

US Economy

In the US, orders for business equipment increased in March by the most since mid-2020. The AI boom also bolstered GDP in the first quarter, offsetting the slowdown seen in consumer spending growth. Meantime, rising costs for gasoline — now around 2022 levels — helped send a measure of consumer sentiment tumbling to a record low in April.

Rate Outlook

For monetary policymakers, it's an environment to proceed cautiously. The US Federal Reserve, the European Central Bank, and the Bank of England all held policy steady this week as they assess the war's impact on their economies. Swap market pricing implies the Fed will hold interest rates steady this year, having previously priced at least two 2026 rate cuts. The move is more pronounced in the jurisdictions most exposed to the energy shock.

Energy Crisis Deepens

The price pressures are most acute in South Asia, where households and businesses are highly dependent on energy imports and food inputs like fertilizers, which are in short supply. In India, the world's most populous country, fuel shortages are starting to spur consumers to line up for gasoline and diesel, and the country's currency dropped to a record low on concern about the economy's exposure to the energy crisis. Adding pressure to energy supplies is a factor outside of any policymaker's control: India's electricity demand climbed to a record amid blistering heat waves.

Global Outlook

The Asian Development Bank revised its outlook for Asia's economic growth this year to 4.7%, down from 5.1% seen less than three weeks ago. Nations in Africa and Latin America are also bracing for a jolt of inflation. Kenya's annual inflation climbed to its highest level in two years, and is expected to accelerate further, according to its Treasury Secretary. South Africa extended cuts to fuel taxes to ease gains in domestic gasoline and diesel prices.

Monetary Policy

For monetary policymakers, it's an environment to proceed cautiously. The US Federal Reserve, the European Central Bank, and the Bank of England all held policy steady this week as they assess the war's impact on their economies. Swap market pricing implies the Fed will hold interest rates steady this year, having previously priced at least two 2026 rate cuts. The move is more pronounced in the jurisdictions most exposed to the energy shock.

Inflation Concerns

Inflation is a growing concern, with Kenya's annual inflation climbing to its highest level in two years. South Africa extended cuts to fuel taxes to ease gains in domestic gasoline and diesel prices. Mexico's economy contracted by the most in nearly six years in the first quarter despite President Claudia Sheinbaum's efforts to boost local and foreign investment to stimulate growth.

Trade Imbalances

Qatar posted its first trade deficit on record as exports plunged, and Hong Kong's trade deficit was the widest in at least 74 years as imports surged by the most in more than three decades. Recent figures showed a sharp fall in UK exports to the US as President Donald Trump's tariffs took hold, turning British trade surpluses into deficits in a reversal of transatlantic trade dynamics.

Safe Havens

Singapore is seeing a surge of haven money as the war pushes investors to look for stability. Foreign deposits in the city-state's banks climbed to the highest level since records began in 2021, according to data released Thursday by the Monetary Authority of Singapore.