Imbalances in the US and China are jeopardising the global economy

The global economy appears to be weathering the economic and geopolitical turbulence of recent months better than expected – from the Trump administration’s tariffs to the rise in energy prices caused by the conflict in Iran. Advanced economies have seen a slight increase in their growth rate, whilst as recently as six months ago the International Monetary Fund was forecasting a slowdown of around 0.5 per cent of GDP compared with 2025. It is important to analyse the causes of this resilience, not least to understand how sustainable it is.

Among the key factors cited in the IMF’s annual report are the reduced dependence of industrialised economies on oil compared with the start of the century, the greater adaptability and sound financial health of companies, as well as strong growth in the technology sector – particularly in the field of artificial intelligence, which is driving investment.

However, the most significant factor – one that is often underestimated – concerns the economic policies, particularly fiscal policies, implemented in the major countries, starting with the United States and China.

In the United States, the general government deficit is expected to rise this year to 8.5 per cent of GDP, up from 7.1 per cent last year. This is mainly due to the measures implemented by the US administration in an election year, which are pushing the deficit to its highest levels since the pandemic.

This expansion is all the more remarkable given that it is taking place against the backdrop of an economy at full employment. Public debt is forecast to rise this year to 127 per cent of GDP, 20 percentage points higher than at the end of the last decade. And it could reach 140 per cent by the end of the decade in the absence of corrective measures, which are, however, difficult to implement in the current political climate. Without this fiscal support, US growth would probably be lower than the 2.3 per cent forecast for this year and next.

The US economy also benefited from the monetary easing implemented by the Federal Reserve up until last September, with a reduction in the policy rate from 5.5 per cent to 3.75 per cent. With the benefit of hindsight, and looking at the most recent inflation figures, those decisions – in particular the three rate cuts decided upon at the end of 2025 – have proved to be misguided. So-called core inflation – that is, inflation excluding the most volatile components – has risen above 3 per cent. The latest consumer expectations for next year point to inflation approaching 4 per cent.

It is now clear that the rise in prices is not solely due to temporary factors linked to energy price rises, but also to the new Administration’s stimulus measures aimed at supporting aggregate demand. Under these circumstances, interest rates are bound to rise, exerting a restrictive effect on the most vulnerable sectors of the US economy, starting with the property sector.

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. As in this case too, this slowdown is being mitigated by substantial public support stemming from public debt that has risen to 8 per cent of GDP. Public funds are being used to support businesses in the face of falling domestic demand. Monetary policy remains expansionary, but inflation remains low because domestic consumption is stagnating. Economic growth is driven almost exclusively by exports, for as long as foreign markets remain open.

Finally, in Europe, growth stands at just over 1 per cent a year, against a backdrop of less expansionary economic policies, particularly in countries with higher levels of debt that must continue to consolidate their public finances. There remains limited scope to offset the impact of rising energy prices on household purchasing power.

Overall, the resilience of the global economy appears fragile. This is mainly due to expansionary fiscal and monetary policies in the United States and China, which are, however, unsustainable in the long term and are leading to growing imbalances in international payments. The US current account deficit is forecast to rise this year to 4 per cent of gross domestic product, whilst China is expected to post a surplus of the same magnitude.

Correcting these imbalances would require very different policies in the United States and China, which are, however, difficult to implement given domestic constraints. The imbalances therefore continue to widen, jeopardising the stability of the global economy.