Economic Crosscurrents Mount as Energy Shock Meets AI Wave

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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. 

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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.

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Adding pressure to energy supplies is a factor outside of any policy maker’s control: India’s electricity demand climbed to a record amid blistering heat waves.

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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. 

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“We are confronting systemic, long-lasting disruptions to global energy and trade networks, not just temporary volatility,” ADB President Masato Kanda said in a statement.

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Nations in Africa and Latin America are also bracing for a jolt of inflation.

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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.

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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. 

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Rate Outlook

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For monetary policymakers, it’s an environment to proceed cautiously. 

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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.

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Swap market pricing implies the Fed will hold interest rates steady this year, having previously priced at least two 2026 rate cuts. 

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The move is more pronounced in the jurisdictions most exposed to the energy shock. Traders are betting on three quarter-point rate hikes from the ECB this year, compared to none before the conflict. Equivalent pricing for the Bank of England has flipped from two cuts to as many as three hikes.

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In Australia, economists widely expect the central bank will be forced to deliver another interest-rate hike next week to curb inflation, even as consumer sentiment wobbles as fuel bills climb. 

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In Brazil, the central bank cut its key interest rate by a quarter point for the second straight meeting but signaled no commitment to more easing amid a wariness about accelerating inflation. 

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More worried about prices was the State Bank of Pakistan, which raised its benchmark rate for the first time in almost three years.

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The trade-exposed British economy is especially at risk and could slip into recession later this year and be forced to hike interest rates aggressively to contain inflation, the National Institute of Economic and Social Research warned. 

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Such a path might be uneven if the UK sees more reports like one Friday showing strong growth at Britain’s factories in April, with new orders, exports and employment all rising. Some of that strength likely reflects firms stocking up ahead of potential supply disruptions and households bringing forward purchases as rate hikes loom.

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While some signals are flashing red and others green, several appear to be flukes tied to wartime disruptions, geopolitical uncertainty and American tariffs.

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In the category of trade deficits, Qatar posted its first on record as exports plunged, and Hong Kong’s was the widest in at least 74 years as imports surged by the most in more than three decades.

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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.

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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.

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—With assistance from Greg Ritchie, Reade Pickert, Laura Curtis and Irina Anghel.

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(Adds UK chart, details in final five paragraphs)

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