Weekly Global Economic Update

Week of May 04, 2026

• Oil prices rise, and so do equity prices
• Central bankers choose to wait and see
• What will AI do to our work and leisure choices?

Oil prices rise, and so do equity prices

• Last week, the price of Brent crude hit US$126 per barrel—the highest in four years—before reverting to a lower, but still elevated, level. My view is that oil prices are on a knife’s edge and could move materially in either direction, depending on whether the Strait of Hormuz is opened soon or not. The reason is that, if the strait is reopened quickly and credibly, market concerns about supply disruption should also ease. In that case, the price will likely gradually decline as supply chains are reactivated and oil starts to flow to its customers.

On the other hand, if it becomes clear that the strait is not likely to reopen soon, the world might have to contend with a physical shortage. The International Energy Agency has estimated that global supply is down by about 11 million barrels per day while demand is down about 4 million barrels per day. Although there can be a temporary positive impact from dipping into reserves, those reserves can be used up quickly. If that happens, there could be a significant gap between supply and demand that can only be resolved by a decline in demand. That, in turn, typically requires a higher price to discourage consumption of oil. And that is starting to happen.

Investors understand that, if the strait remains closed for a prolonged period, demand for oil must decline. The problem is that demand for oil is not very sensitive to price movements. If the price of gasoline rises, a person who must drive to work and who has no public-transport alternative will likely continue driving to work. Thus, for demand to fall sufficiently, the price of oil must rise high enough to shift consumer and business behaviors. How far that will be is hard to estimate. Some estimates suggest a price of more than US$200 per barrel. If that occurs, it could lead to a sharp rise in global inflation, a shift toward tighter monetary policy, a significant decline in consumer purchasing power, and possibly contribute to recessions in major economies.

Although the price of crude oil is rising again, it is notable that US equity prices are still moving upward. A disconnect appears to have developed between oil prices and equity prices as investors seem to be ignoring the conflict in the Middle East and focusing on artificial intelligence. 

Despite the rise in oil prices, US equity investors remain sanguine: They appear to be betting that, even if the oil-price situation contributes to an economic slowdown, it will not likely undermine the continued rollout of AI. Moreover, they seem confident that the AI rollout will be profitable. Among the 500 companies listed on the S&P 500 index, the best-performing cohort in April has been information technology companies. The second best was communication services companies. Either this is a bubble or investors have dramatically revised their profitability expectations from their AI investments.

On the other hand, if oil prices rise further, thereby creating a far more inflationary environment, and assuming that the US Federal Reserve responds by tightening monetary policy, the result will likely be a rise in long-term borrowing costs. That, in turn, could have negative consequences for the ability of tech companies to service their large and growing debts. In that case, equity investors might downwardly revise their expectations regarding tech-company profitability, which could result in sharp declines in valuations.

Central bankers choose to wait and see

• At its April meeting, the 12-member Federal Open Market Committee of the US Federal Reserve left the benchmark interest rate unchanged. However, the decision involved a high degree of division, with four members dissenting—the highest since 1992. One member voted to cut the benchmark interest rate by 25 basis points. Three others agreed to keep the rate unchanged but disagreed with the Fed’s statement, which they viewed as leaning toward future easing. Specifically, those three members took issue with the following sentence: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks."

This was the last decision by the Federal Open Market Committee under the leadership of US Fed Chair Jerome Powell. It appears highly likely that the US Senate will soon confirm Kevin Warsh as the next chair. He will enter at a time of uncertainty and division within the Federal Reserve. In its statement, the Fed noted that “developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.”

Meanwhile, the European Central Bank chose to leave its benchmark interest rate unchanged on the same day the European Commission reported that, in the eurozone, inflation accelerated in April and real economic growth was weak in the first quarter of 2026. Although headline inflation surged to 3% percent in April from 2.6% in March and 1.9% in February, core inflation (which excludes the impact of energy and food prices) fell in April. Thus, underlying inflation remained relatively tame, and so far, not yet affected by the energy-price shock. In addition, real gross domestic product was up just 0.1% in the Eurozone between the fourth quarter of 2025 and the first quarter of 2026, indicating weakness. As such, the European Central Bank chose a wait-and-see approach to monetary policy. Christine Lagarde, president of the European Central Bank, said that “inflation is in a good place.” Thus, tightening did not yet appear to be necessary. Still, futures markets are pricing in possible interest-rate increases later this year.

• Not surprisingly, the Bank of Japan left its benchmark interest rate unchanged. It had previously signaled an intention to gradually tighten monetary policy in the face of higher-than-desired inflation. Moreover, it was keen to normalize monetary policy after a prolonged period of abnormally low interest rates. Yet, the crisis in the Middle East appears to have has gotten in the way. Although the conflict will likely boost inflation, it could also cause slower economic growth, which is a concern for the central bank. Thus, it has also taken a wait-and-see approach.

Still, the decision of the Bank of Japan Policy Committee was far from unanimous. Members voted 6 to 3 to keep the rate unchanged. The dissenters, however, wanted to increase the benchmark interest rate from 0.75% to 1%.

Meanwhile, Governor Ueda said that he does not want to see the central bank fall behind the curve. Yet, he also said that “given the high level of uncertainty around the conflict in the Middle East, the likelihood of achieving our forecasts has declined.” He was alluding to the central bank’s goal of bringing inflation toward its 2% target. He said he “wants to spend a little more time scrutinizing how the Middle East conflict affects the economy and prices, and whether the risk to growth and inflation could change.”

Governor Ueda also said that the Bank of Japan needs to determine if the inflationary impact of higher oil prices will be a temporary phenomenon, in which case, longer-term inflation is not a concern. On the other hand, he said that “if those shocks feed through into second-round effects on underlying inflation, interest rates will need to be raised.” Investors now see a strong likelihood of the Bank of Japan increasing the benchmark interest rate at its next meeting in June.

Japan currently faces inflation that is higher than its central bank’s target. Moreover, Japan is especially vulnerable to events in the Middle East, given the large volume of crude oil it imports from that region. Yet, the vulnerability is not just about inflation. The Bank of Japan said that “the rise in crude oil prices reflecting the impact of the situation in the Middle East is expected to push down corporate profits and households’ real income.” In other words, there is a risk of both inflation and slower economic growth, which creates a dilemma for the central bank.

What will AI do to our work and leisure choices?

Ian Stewart, chief economist of Deloitte UK, discusses the potential economic and societal impact of AI. He suggests that AI will likely not replace the role of humans.

Could we be approaching a world that John Maynard Keynes imagined in his 1930 essay, “Economic possibilities for our grandchildren,” in which he speculated that technology would solve the “economic problem” and leave his descendants working a 15-hour week?
 
If the past is a guide, the answer is probably “no.” History suggests that people, society, and institutions have a remarkable ability to absorb and exploit new technologies without abolishing work. Over time, technological change has been associated with growing—not falling—employment. 
 
First, and most importantly, human desires are not fixed: A static view imagines a list of progressively more difficult tasks that machines conquer until nothing remains for humans to do. That has not been the experience. Mass mechanization destroyed jobs on a vast scale, collapsing the number of people needed to produce the necessities of food and shelter. But instead of universal idleness, rising incomes created new jobs elsewhere, providing everything from health care to holidays. When one set of wants is satisfied, new wants appear. In the modern world, the “economic problem” is increasingly not one of material scarcity; it is the open-ended nature of human aspiration.
 
Second, those aspirations are unlikely to be met fully by machines. Humans value, and want to be with, others. Even if AI systems become technically superior, it does not follow that people will prefer machine-only provisions. The doctor, lawyer, or waiter does more than just process and act on information. They judge mood, and interpret, persuade, and encourage. Dario Amodei himself has noted that although AI has become highly capable at reading scans, radiologists have not disappeared because part of the role involves explaining the results to patients and planning future care. 
 
Third, technology, by raising productivity and cutting prices, can bolster demand. If AI reduces the cost of, say, making cat videos for social media, we will likely consume more of them. Cheaper computing did not eliminate work in the tech sector; it helped create whole new industries. The same holds in travel, communications, health care, and finance. If AI makes a vast array of services cheaper, we may consume more of them and, if history is any guide, will create new complementary jobs, many in roles that are not yet imagined. 
 
Fourth, technology often falls short of its theoretical potential. Sometimes the frictions and hassles associated with using tech are just too great. Often the tech underperforms humans. The QR code menu is one example. During the pandemic, many restaurants switched to using QR codes to reduce human interaction and the risk of infection. The technology works—it is cheap and it reduces labor. Yet, five years later, the human waiter still rules the roost in most restaurants because ordering food is also a social process and part of the experience of eating out.

Or consider the role of the barista: Machines make excellent coffee. Yet customers continue to pay for staffed cafés because they prefer dealing with a human being and like the ambience and reassurance that comes from having staff around. Businesses do not just maximize efficiency to minimize cost; they optimize across an array of factors. AI will face the same frictions, especially in sectors where errors are costly or where consumers prefer dealing with humans. 
 
This is not to be complacent about the effect AI is likely to have on the labor market, however. Disruption is already happening, especially in some entry-level jobs, including software engineering. Tasks will be automated—jobs will be lost and many more will change. The adjustment could come quickly, especially for structured, routine, cognitive work. But the idea that better machines mean the end of human economic usefulness is a stretch. AI will change the nature of work. It is much less clear that it will end the human desire to work for, and with, others.