When AI euphoria collides with an oil crisis: the years 1999 and 1990 are replaying simultaneously

The eurozone’s 2026 GDP growth forecast has been downgraded to 0.5%, from 1.1% previously; 2027 growth is projected at 1.1%. Q2 GDP is expected to contract by 0.1% quarter-on-quarter, while baseline Q3 growth is zero—bringing the region perilously close to technical recession. Rising energy prices are fueling inflation and eroding real incomes; business investment is dampened by uncertainty; household savings rates are rising; financial conditions are tightening; and external demand is weighed down by slowing global growth. Inflationary pressures are clearly resurging. The eurozone’s Harmonized Index of Consumer Prices (HICP) is forecast to average 3.1% this year and 2.5% in 2027; core HICP is expected to remain steady at 2.4% in both years. The European Central Bank (ECB), originally expected to hold rates steady, is now projected to hike its deposit rate by 50 basis points this summer—lifting it to 2.50%. Germany retains fiscal stimulus as a stabilizer, but soaring energy costs and weakening private consumption will constrain growth this year. Germany’s 2026 GDP growth is forecast at 0.5%; under normalized external conditions and boosted by fiscal spending, it is expected to rebound to 1.3% in 2027. Germany’s general government deficit-to-GDP ratio is projected to rise to 4.1% this year. The UK entered the energy shock from a relatively stronger starting point. Robust Q1 growth and inventory-driven manufacturing activity support a 2026 GDP growth forecast of 1.0%, rising to 1.2% in 2027. Yet from summer onward, high energy prices and second-round price increases will squeeze household spending. CPI is projected at 3.2% this year and 2.7% next year; the Bank of England is expected to hold its policy rate steady at 3.75% this year, then cut rates in 2027. Unemployment is forecast to rise to 5.4% by late summer. Asia diverges: China’s exports remain resilient; Japan’s outlook is rewritten by oil prices Asia tells no single story. China’s export growth forecast has been raised to 12%; imports surged 25% year-on-year in the first four months, driven largely by raw materials and upstream inputs. AI investment, green transition initiatives, and expanding market share in emerging economies underpin export resilience. China’s reflation process is also accelerating faster than previously anticipated: the PPI rose from −1.9% in December last year to +2.8% in March this year, with the full-year average projected at 3.5%. India faces greater exposure to oil prices and monsoon variability. FY27 real GDP growth has been revised down from a pre-war forecast of 7.5% to 6.7%; if monsoon rains fall short of expectations, growth could dip further to 6.3%. CPI inflation is projected to rise to 4.9%. The Reserve Bank of India (RBI) has brought forward its rate-hiking cycle to October–December 2026—two hikes of 25 basis points each—pushing the repo rate to 5.75% by year-end, and further up to 6.25% by mid-2027. Japan’s outlook has been markedly rewritten by oil prices. Its 2026 GDP growth forecast has been lowered to 0.7%, and inflation forecasts have been substantially upgraded. Core-core CPI may climb to around 3.5% by early 2027. In response, the Bank of Japan is accelerating its tightening pace: beginning in July 2026, it will raise rates once per quarter, lifting the policy rate to 1.75% by April 2027. Asset prices remain broadly bullish—but bonds and European credit face greater headwinds Yield curves are trending toward modest sell-offs. The 10-year U.S. Treasury yield target has been raised to 4.70%; the 10-year German Bund yield target to 3.20%. This reflects the Federal Reserve’s pause on rate cuts, the ECB’s earlier-than-expected hikes, and a higher neutral interest rate.

Three central banks, three distinct dilemmas: the U.S. fears inflation, China fears exchange-rate pressure, and India fears both

During the first week of August, the U.S. Federal Reserve, the People’s Bank of China (PBOC), and the Reserve Bank of India (RBI) almost simultaneously announced their latest monetary policy decisions—and all three held rates steady. The Fed maintained its target federal funds rate range at 3.50%–3.75%, marking its fifth consecutive hold. China’s Loan Prime Rate (LPR) remained unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor—the 14th straight month without adjustment. India’s repo rate stayed at 5.25%, the fourth consecutive hold. Three ‘no-changes’—but for three entirely different reasons. The Fed isn’t unwilling to cut. With inflation at 3.5%, it remains nearly double the 2% target. Chair Powell signaled hawkishness, raising market expectations for a September hike. The Fed is effectively trapped by inflation: cutting risks reigniting price pressures; hiking risks triggering recession. The PBOC isn’t unwilling to cut either. The 2024 Central Economic Work Conference set the tone of “appropriately loose” monetary policy—but no price-based easing tools have yet been deployed. The constraint lies in the exchange rate. On August 4, the USD/CNY rate stood at 6.7471, with the renminbi having appreciated 6.15% over the past 12 months. As the U.S. dollar remains strong, further RMB rate cuts would narrow the Sino-U.S. interest rate differential, intensifying capital outflow pressures. The PBOC is thus caught between two risks: cutting invites capital flight; not cutting leaves the economy starved of cheaper funding. India faces the greatest dilemma. The RBI held its repo rate at 5.25% for the fourth time in August. On one side, June CPI jumped to 4.38%—the highest in 17 months and the first breach of the RBI’s 4% inflation target. On the other, India’s economy remains among the world’s fastest-growing—but its stock market is correcting, and foreign capital is withdrawing. Cutting rates risks losing control of inflation; hiking risks bursting asset bubbles. India is squeezed in the middle—afraid to move in either direction. Superficially, these three central banks confront distinct domestic challenges. Fundamentally, however, they reflect the same underlying reality: the global monetary system is undergoing rebalancing. The IMF’s latest forecast projects global growth at 3.0% in 2026—half a percentage point lower than the 3.5% average for 2024–2025. Growth is slowing, inflation dynamics are fragmenting, and countries’ macroeconomic pressures are no longer synchronized. The Fed contends with persistent inflation; China grapples with weak domestic demand; India is pulled in opposite directions by inflation and growth.