“The SA economy registered its sixth consecutive quarter of quarterly growth, booking a better-than-expected 0.5% expansion in Q1. Annually, real GDP growth registered 2.1%. This follows an (unrevised) 0.4% expansion in 2025Q4. However, while the headline GDP outcome was encouraging, the composition of growth was less so.”
“We introduce an improved measure of geopolitical risk that builds on Caldara and Iacoviello (2022) and uses artificial intelligence to evaluate newspaper content. Our approach replaces keyword matching with semantic understanding: instead of searching for specific word combinations, we use one of the flagship ChatGPT models (GPT-4o mini) to read newspaper articles and assess their geopolitical risk intensity.”
After the ECB raised interest rates as expected, more central banks are up next in the coming week. Among them is the US Federal Reserve.
Yesterday’s release of data on consumer prices in May (with inflation compared to May 2025 at a high 4.2 percent) was followed today by the latest figures on producer prices in May. Here too, there was a clear increase that exceeded expectations.
After inflation in the US has been too high for years now, one would actually expect the US Federal Reserve to decide on a rate hike soon. That’s very unlikely for the coming week. But it’s to be expected at one of the next meetings.
“Global growth is forecast at 2.5% in 2026, down from 2.9% in 2025. This is the lowest rate since the onset of the pandemic — with nearly two-thirds of economies seeing their forecasts downgraded since January.”
“We jointly estimate growth in occupational wage premia as well as time-varying occupation-specific life-cycle profiles for Swedish workers 1996–2013. Our novel identification strategy is based on re-centering of life-cycle profiles around their flat spot. We document a substantial increase in between-occupation wage inequality due to differential growth in premia, and show that changes in worker composition partly counteracted this trend. The association of wage premium growth and employment growth is positive, suggesting that premium growth is predominantly driven by demand-side factors. We also find that wage growth due to occupation-specific skill acquisition was more dispersed in the early years of the sample period. Our results are robust to varying the assumed flat spot over a reasonable range, as well as to allowing for occupation-level changes in returns to cognitive and psycho-social skills. The results suggest that Swedish wage setting institutions have not prevented wages and quantities from adjusting to technological change or consumer demand shifts.”
“As public debt in emerging markets (EMs) and low-income countries (LICs) has surged since the COVID-19 pandemic, so has the exposure of domestic banks to their sovereigns—raising concerns of destabilizing feedback loops if fiscal conditions deteriorate. This paper provides a comprehensive analysis of this sovereign-bank nexus using a new granular dataset covering over 120 EMs and LICs, combined with IMF Financial Soundness Indicators. We document a marked post-pandemic strengthening of the nexus, particularly in Sub-Saharan Africa and the Middle East and Central Asia, and show that public debt levels, deposit rates, and nonperforming loans are its most robust correlates. While we find no broad evidence of financial repression, higher sovereign refinancing needs significantly increase banks’ government debt holdings in countries with substantial state-owned bank presence. Sensitivity analysis illustrates that the consequences of a strong nexus can be severe: even a moderate domestic debt restructuring could render several banking systems undercapitalized, underscoring that high reported capital ratios in strong-nexus countries may provide a false sense of security.”
“The inflation surge of 2022–2023, and the risk of recurrence following the outbreak of conflict in the Middle East in early 2026, raises fundamental questions about the appropriate monetary policy response to supply-driven inflation. We examine the anatomy of both inflationary episodes, the challenges in distinguishing between supply and demand shocks in real time, the adequacy of the ECB’s response to the 2022–2023 energy crisis, and the lessons that can be drawn for responding to the current inflationary pressures.”
U.S. Job Market “Pushes Past Shocks and Strains Employers added 172,000 jobs in May, adding to a vigorous pace of hiring in recent months. But wage growth is not keeping up with higher prices and consumers remain pessimistic.”
While there are certain measurement issues and special effects that seem to overstate the decline, there is solid evidence for a considerable decrease in the labor share in the United States.
While there are certain measurement issues and special effects that seem to overstate the decline, there is solid evidence for a considerable decrease in the labor share in the United States.
Edmund Phelps, RIP
A giant of macroeconomics has left us.
In his book, “My Journeys in Economic Theory,” Edmund Phelps “tells the story of his role in reshaping economic theory, offering a powerful personal account of a creative and rewarding career.”
“At its core, this book shares the joy of intellectual achievement: the excitement of coming up with a new idea that radically departs from prevailing views and the satisfaction of exercising one’s own ingenuity instead of applying or developing others’ models. Telling the story of a life packed with intellectual adventure, My Journeys in Economic Theory provides a profound vision of a dynamic, modern economy that offers lives rich with creativity and meaning.”
The Bureau for Economic Research has revised its economic outlook for South Africa
We have revised our near-term growth outlook to reflect a more challenging global and domestic environment, while our medium-term trajectory remains broadly unchanged. Economic Outlook outlines the key drivers shaping the forecast, including elevated geopolitical risk, renewed inflation pressures, and constrained policy space. South Africa’s recovery has lost momentum amid higher fuel costs, weaker consumer demand, and ongoing structural constraints. As a result, growth is expected to remain subdued, with risks to the outlook increasingly skewed to the downside.
“When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and explore optimal policy under various assumptions on how agents form their expectations and the sophistication with which those expectations account for the central bank’s announced policies. While our analysis covers a wide range of potential specifications, our baseline results focus on level-k thinking (LKT) – a form of bounded rationality that enjoys significant support in the experimental literature and encompasses both adaptive expectations (AE) and rational expectations (RE) as special cases. Nonetheless, we show that the optimal policy under LKT is qualitatively very different from its analogues under AE and RE, exhibiting abrupt pivots in the policy stance. In particular, it is optimal for the central bank to initially look through supply shocks until a threshold is reached, then pivot discontinuously to a more hawkish anti-inflationary stance. We find that such pivots can, if optimally executed, be compatible with soft landings in the sense that most (or even all) of the reduction in inflation occurs through re-anchoring of expectations rather than economic slack. We also discuss risks and why policy errors in terms of tightening too late or too slowly can be especially costly in such an environment.”
“Central banks’ purchases and repatriation of gold are on the rise, and both should be viewed as a symptom of deglobalization. They signal the advent of a more geopolitically fragmented world in which cross-border transactions of all kinds are poised to become more difficult and costly.”
“In March 2026, the Strait of Hormuz is closed. The shutdown blocks roughly one-fifth of the world’s oil and one-quarter of its liquefied natural gas, triggering severe welfare losses in energy-dependent developing countries worldwide. Standard trade models underestimate the impact because they miss the bottleneck mechanism: energy disruptions cascade through chemicals and fertilizer production into food prices, amplifying losses for the world’s poorest countries. Developing countries that depend on imported energy and fertilizers—particularly in South Asia, sub-Saharan Africa, and the Middle East—face the steepest food price increases and welfare losses. The aggregate global costs are moderate, but the burden falls disproportionately on the world’s poorest: the USA loses just −0.07%, while countries in South Asia and Africa face losses 10–20 times larger. A prolonged closure allows some market adjustment, but structural damage persists—and the timing during peak Northern hemisphere planting season compounds the food security risk.”
“This article introduces the BIS Time-series Regression Oracle (BISTRO), a general purpose time series model for macroeconomic forecasting. Building on the transformer architecture underlying LLMs, BISTRO is fine-tuned on the large repository of macroeconomic data maintained at the BIS. We put the model through its paces by assessing how well it forecasts the 2021 inflation surge. In contrast to standard benchmarks, which mechanically project a reversion to the mean, BISTRO correctly anticipates the persistence of the inflation wave. This highlights its ability to adapt to unfamiliar patterns in the data. Thus, BISTRO holds promise for producing reliable baseline forecasts and for scenario analysis.”
“Forecasting the Economic Effects of AI” by Ezra Karger, Otto Kuusela, Jason Abaluck, Kevin Bryan, Basil Halperin, Todd Jones, Connacher Murphy, Phil Trammell, Matt Reynolds, Dan Mayland, Ria Viswanathan, Ananaya Mittal, Rebecca Ceppas de Castro, Josh Rosenberg, and Philip E. Tetlock.
“We elicit forecasts of how AI will affect the U.S. economy, comparing the beliefs of five groups: academic economists, employees at AI companies, policy researchers focused on AI, highly accurate forecasters, and the general public. The median respondent in each group expects substantial advances in AI capabilities by 2030, small declines in labor force participation consistent with demographic shifts, and an annual GDP growth rate of 2.5%, which exceeds both the typical medium-run (2.0%) and long-run (1.7%) baseline forecasts from government agencies and private-sector forecasters.”
Global Economy: The global economy has shown resilience amid headwinds, but the dampening effects of high oil prices, supply chain stress, geopolitical uncertainty, and potential food shortages are considerable.
We expect global economic output to increase by 2.9 percent in 2026 (-0.2 percent compared to our previous forecast). In a more severe scenario with oil prices persistently above $100 per barrel, stagflationary scenarios would become relevant for several countries. Global GDP growth would then drop to 2.6 percent in 2026.
“Large stocks of public and external debt tempt policymakers to extract resources from their creditors. This article characterizes three broad forms of financial repression that serve this purpose. The first consists of direct taxation of the financial sector through levies on financial transactions, banks’ income, or pension-fund assets. The second is a sudden and sufficiently persistent devaluation of the currency. The third raises the demand for the non-monetary services provided by different types of government liabilities while keeping their supply scarce, thereby creating yield discounts. Reviewing historical experience, including recent years, the article concludes that each of these revenue sources can occasionally be large, but that policies designed to exploit them often fail. Financial repression is an alluring but ultimately illusory temptation: yielding to it typically generates substantial efficiency losses while producing only limited revenue.”
“…we show that higher supply chain uncertainty increases the sensitivity and persistence of inflation to transitory energy shocks, and relate these findings to the 2021–23 inflation episode. Our findings call for a reconsideration of the so-called “look-through” approach of monetary policy to supply shocks.”
“Business cycles are increasingly driven by global shocks, rather than the domestic demand shocks prominent in earlier decades, posing challenges for central banks seeking to meet domestic mandates and communicate their policy decisions. This paper analyzes the evolving influence and characteristics of global and domestic shocks in advanced economies from 1970-2024 using a new FAVAR model that decomposes movements in interest rates, inflation, and output growth into four global shocks (demand, supply, oil, and monetary policy) and three domestic shocks (demand, supply, and monetary policy). We find that the role of global shocks has increased sharply over time and that their characteristics differ from those of domestic shocks across multiple dimensions. Compared to domestic shocks, global shocks have a larger supply component, higher variance, more persistent effects on inflation, and are more asymmetric (contributing more to tightening than to easing phases of monetary policy). As global supply shocks have become more prominent, central banks have also been less willing to “look through” their effects on inflation than for comparable domestic shocks. The distinct characteristics and rising influence of global shocks-particularly global supply shocks-have significant implications for modeling monetary policy and designing central bank frameworks.”
“…we shed light on the aggregate and distributional effects of occupation-specific advances in AI: wages in administrative services grow the least, ripple effects on less exposed occupations are substantial, AI modestly compresses the returns to education, and, on average, disproportionately benefits lower-income groups.”
David Autor: “The most widely discussed findings document a slower pace of hiring of young workers in occupations that seem exposed to A.I., such as computer programming and customer support. But the hiring downturn starts in the spring of 2022, before the release of ChatGPT in November of 2022. The timing is a puzzle.”
In November, U.S. inflation was somewhat lower than expected (2.7% compared with November 2024). It will be interesting to see whether the downward trend continues in January. For the moment, caution is warranted. The government shutdown directly affected data collection and economic indicators. Currently, it’s challenging to accurately interpret the U.S. economy.
The BLS report will certainly bolster the case for those advocating further interest rate cuts.
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The current issue of the International Productivity Monitor is super interesting. For instance, the article “Adult Skills and Productivity: New Evidence from PIAAC 2023” by Dan Andrews, Balázs Égert and Christine de La Maisonneuve.
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Thought-provoking (irrespective of whether you agree)!
“For decades, undergraduate economics educators have followed a well-worn playbook featuring textbooks, lectures and problem sets. Students have passively listened, taken notes and studied for exams. AI disrupts this educational process. Some students are using this tool as a substitute for their own precious time. What is our best response? This paper provides a prospective analysis of how to restructure every phase of the undergraduate economics experience to improve the major and better prepare students for their uncertain future.”
“This paper strengthens the evidence base for semiconductor policy by mapping global semiconductor wafer fabrication capacity by economy, process node density, process technology and business model, building on the newly assembled OECD Semiconductor Production Database. The results show that semiconductor production capacity is highly geographically concentrated and underscore the importance of distinguishing between different semiconductor types and the limited scope for substitutability of production between fabrication plants. This structural rigidity creates bottlenecks that can amplify the impact of supply disruptions and limit the scope for remedial actions.”
“Non-bank financial institutions (NBFIs) have grown significantly in recent years, mainly driven by the growth of investment funds, including hedge funds. These changes reflect the role of bond markets, which have expanded on the back of surging government debt. The rise of NBFIs adds uncertainty to monetary policy transmission, as there could be dampening and amplifying effects. Investment funds appear to strengthen transmission while at the same time making it less stable.”
“A paradox is playing out in developing economies. On the bright side, inflation is abating. The oppressive interest rates of the last five years have begun to ease, which implies that the crushing debt service burdens of the last few years might start to shrink. For the right price, foreign bond investors are willing to provide financing again, enabling many countries to stave off default. For most countries, however, these are small consolations—not enough to overcome the grave setbacks of this decade. As this report documents, the upheavals of the early 2020s produced a financial riptide like no other: between 2022 and 2024, about US$741 billion more flowed out of developing economies in debt repayments and interest than flowed into them in the form of new financing. It was the largest debt-related outflow in more than 50 years. The human toll has been steep: among the 22 most highly indebted countries, one out of every two people today cannot afford the minimum daily diet necessary for lasting health.”
The US economy is currently experiencing significant challenges. Despite these challenges, it has performed surprisingly well given the high uncertainty regarding tariff policies, and also actually higher tariffs. However, we expect what we call a mild stagflationary episode, in which meager economic growth and somewhat elevated inflation will occur together.
Due to the shutdown in the U.S., we currently have no data on economic growth in the third quarter of 2025. The available data published before the shutdown suggests solid growth, although growth is likely to be lower than in the second quarter. The shutdown will negatively impact economic development in the fourth quarter. In any case, only minimal growth was expected for this quarter. We now anticipate stagnation in the fourth quarter. The US economy remains robust, but currently relies heavily on AI-driven investments and affluent households who continue to consume.
In the second quarter of 2025, the economy still expanded by 0.9 percent (3.8 percent annualized). Private consumption rose robustly (+0.6 percent), while private investment expanded at a high rate (+1.8 percent). Inventories decreased at the same time as imports significantly dropped. This is due to the fact that, ahead of the higher tariffs adopted in spring, imports surged, leading to temporarily higher inventories. This was reversed in the second quarter. Public consumption was flat in the second quarter of 2025.
Clear signs of weakness now appear. As labor market data show, net job growth was very low. Official data from the Bureau of Labor Statistics are only available up to August. In the summer months, only 88,000 new jobs were created. Most of these gains came from the health care sector. The manufacturing sector continued to lose jobs. During the shutdown, the private alternative from the ADP Research Institute provides data for the US labor market in September and October. These data point to a continued weak labor market. However, it is important to note that population growth has slowed due to new immigration/emigration policies. The breakeven rate of monthly payroll growth needed to keep up with the labor force has considerably fallen from roughly 165,000 jobs in early 2024 to approximately 85,000 jobs (according to Kolko, 2025) or even only 30,000 jobs (according to the Dallas Fed). Discussions about the independence of the Fed and statistical agencies further contribute to uncertainty and a less optimistic outlook for the US economy.
Tariffs have dramatically increased in the past months, and there is still very high uncertainty regarding the further evolution of tariffs. The Yale Budget Lab estimates that the effective average tariff rate is now at approximately 18 percent, the highest tariff rate since the 1930s. In the coming months, inflation will be increasingly affected by these higher tariffs. Weaker demand may somewhat dampen inflationary pressures. Nevertheless, a stagflationary scenario for the US economy is a risk to consider. This puts the Fed into a dilemma. A weaker economy calls for interest rate cuts, while inflation persistently exceeds the Fed target and may further increase again in the wake of tariffs.
We anticipate a mild stagflationary episode in which meager economic growth and somewhat elevated inflation will occur together next winter. In our baseline scenario, the economy will experience stagnation but not fall into a recession. Inflation will first increase in the remaining months of 2025. However, we think inflation will gradually decline in 2026 since the tariff shocks coincide with weak demand and still elevated interest rates. Expansionary fiscal policy and interest rate cuts will help the economy become somewhat more dynamic in 2026, mainly in the second half of 2026. We currently expect one more interest rate cut in 2025.
Average annual GDP growth will be modest in 2025 and 2026, with growth rates of 1.7% and 1.2%. We expect no recession in our baseline scenario, though the economy will stagnate for approximately three quarters before becoming more dynamic in 2027, achieving 1.8% growth. The unemployment rate will moderately increase in the coming months. Inflation will stay elevated in 2025 and 2026 before approaching the 2% inflation target.
