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No. 105
Diverging Cycles, Distinct Constraints: The United States, Europe and China
Macroeconomic Developments and Structural Reforms
Alfred SCHIPKE, Jason FURMAN, Moritz SCHULARICK, HUANG Yiping and GUO Kai, 16 July 2026
The world economy is not just moving through a familiar business cycle; it is also being gradually reshaped by broader forces. Geopolitics and technological change are increasingly influencing decisions where firms invest, which technologies matter most, and how much countries are willing to depend on one another. These shifts are increasingly visible alongside the more familiar business cycle.
On the geopolitical side, export controls, tariffs, and industrial policy are becoming more prevalent, from the United States’ focus on semiconductors and critical minerals to Europe’s concerns about Chinese competition in advanced manufacturing to China’s own push into artificial intelligence (AI) and other priority sectors. Tensions in the Middle East and around the Strait of Hormuz show how quickly such pressures can spread globally. At the same time, efforts to manage these issues collectively have become more difficult, even as the underlying imbalances they are meant to address persist.
Technology, particularly the continued build-out of AI, is having a similar reshaping effect. It is already a driver of investment in the United States, a strategic priority in China, and part of the reasoning behind Europe’s push to direct new defence spending toward frontier technologies. These forces are not separate from the cyclical picture – they are increasingly part of it.
The macroeconomic outlook for the United States, Europe, and China is increasingly shaped by renewed inflation pressures, geopolitical shocks, technological change, and intensifying global competition. In the United States, the economic narrative has shifted from concerns about a weakening labour market to concerns about persistent inflation, even as employment remains resilient and investment linked to artificial intelligence continues to support demand. In Europe, growth has weakened but remains broadly stable, with the outlook shaped by the fading energy shock, higher defence spending, resilient labour markets, and the deeper challenge of restoring competitiveness in the face of China’s rise in advanced manufacturing. China’s economy remains uneven: AI-related exports and internationally competitive sectors are performing strongly, while domestic demand, household consumption, property activity, and credit demand remain softer. Recent rural banking consolidation also points to efforts to manage financial stability risks more quietly, while the broader structural challenge remains how to support innovation, resolve excess capacity, and allow weaker firms to exit more effectively. Overall, the outlook is one of resilience but also divergence: major economies are still growing, but each faces a different mix of inflation, productivity, financial stability, competitiveness, and policy trade-offs.
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