Weekly Global Economic Update
What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
Why has the US dollar appreciated this year?
- The value of the US dollar fell sharply in 2025, compared to major currencies, following the imposition of historically high US tariffs. One possible explanation is that investors expected that, if the United States restricts imports and the volume of US trade with the rest of the world falters, demand for US dollars could decline with it. Thus, this may have contributed to selling pressure on the dollar. However, in 2026, the dollar has rebounded. There are several possible explanations.
First, there has been a substantial inflow of capital from global investors into the US equity market, which was likely fueled, in part, by enthusiasm about AI. As such, foreign holdings of US equities have risen sharply while foreign holdings of US bonds have been more stable. And, naturally, the inflow of capital into AI-related equities has contributed to the rise in those equity prices. Enthusiasm begets enthusiasm. Thus, if there is an AI bubble that bursts, thereby leading to a sharp decline in asset prices, it could also place downward pressure on the US dollar.
Also, it is possible that this year’s inflow into US equities was fueled, in part, by the uncertainty created by the conflict in the Middle East, which has had a more onerous impact on the economies of Europe and Asia than the United States. That maybe partly due to the relative leeway of the United States when it comes to natural gas. Thus, investors might have chosen to boost their exposure to the United States at a time when parts of Europe and Asia faced a sharp rise in the price of liquefied natural gas.
Second, the higher-value US dollar could partly be due to the higher price of oil. Historically, oil has been traded in US dollars. Thus, when the price of oil rises, there is increased demand for US dollars, potentially leading to a higher value for the dollar. Thus, all other things being equal, it is reasonable to expect that, if the price of oil should fall, the value of the dollar may decline.
Third, the strength of the US dollar might reflect economic and political weakness elsewhere. Several major countries have lately seen either political or social uncertainty (France), rising bond yields due to concerns about fiscal probity (France, the United Kingdom, and Japan), or concerns about their ability to grow due to weak productivity gains (Canada and much of Western Europe).
Any of these situations could contribute to a decline in the value of that country’s currency. In comparison, the United States might be seen as a safer bet given relatively stronger economic growth and relative political and social stability. Plus, even though the United States has a large budget deficit, its position as issuer of the world’s leading currency helps offset concerns about fiscal probity.
Fourth, the strengthening of the US dollar might have to do with an expected tightening of US monetary policy. Recall that, at the start of this year, investors largely expected an easing of US monetary policy. Yet the conflict in the Middle East, and the ensuing rise in oil prices and higher inflation, contributed to a dramatic shift in expectations. Indeed, the Federal Reserve has already raised its benchmark interest rate once this year. And although it left that rate unchanged at the time of writing, it is still expected to implement further tightening in the months to come. Such expectations can increase demand for dollars, all other things being equal.
Going forward, the value of the world’s most important currency will likely reflect a range of factors that are hard to predict. These include relative rates of inflation, relative changes in monetary policy, the evolution of the Middle East situation, the evolution of the AI boom, and the degree of political and social stability in numerous countries. Given so many moving parts, I decline to answer when asked about the future value of the US dollar.
The Fed keeps policy unchanged
- Speaking of monetary policy, the Federal Open Market Committee met a few days ago, and chose to leave the benchmark interest rate unchanged. The vote was 7 to 2. The two dissenters were Fed Governor Lisa Cook, and Beth Hammack, president of the Federal Reserve Bank of Cleveland.
In his press conference that followed the announcement, Fed Chair Kevin Warsh noted that inflation has been running above the Fed’s target for more than six years. Warsh added that “it’s our responsibility to get inflation down. That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price-stability side of our remit.” In justifying the decision to hold the benchmark interest rate this month, Warsh said that “the committee believes that the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2% goal. The committee will deliver price stability.”
The Fed has a dual mandate to minimize inflation and maximize employment. Thus, there could be times when the Fed might tolerate above-target inflation because it is more focused on employment. This would happen if unemployment is very high. Yet, at the current time, the unemployment rate is historically low. Moreover, Fed Chair Warsh noted that “economic activity is expanding at a strong pace. While uncertainty remains—owing, in part, to geopolitical developments—domestic spending has been resilient. Productivity growth is strong, and capital investment robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
Thus, one might ask why the Fed is not raising the benchmark interest rate further. One reason, however, was offered by Warsh. He said that market-based measures of expected future inflation have fallen, despite a rise in oil prices. This might suggest that investors are responding to the Fed’s actions and, consequently, that monetary policy is working.
Meanwhile, in her dissent, Governor Cook said that the massive investment in AI is “already causing inflationary pressure.” She said that those pressures “may not resolve quickly.”
Finally, the FOMC will meet one more time before the end of this year, in December. As of the time of writing, the futures markets indicate an 85.3% probability that the Fed will hike the benchmark rate at its December meeting. This is up from 78.3% yesterday. Plus, the market sees a 56% probability that the Fed will hike the rate at least three more times before the end of 2027. Thus, investors see a strong likelihood of further tightening, likely driven by persistent, or even, accelerating inflation.
Investment in AI strengthens US economy while investors remain concerned
- On March 10, 2000, the NASDAQ index of US technology stocks peaked at a value of 5,047. By May 26, 2000, it had fallen to 3,205—a decline of 36% in two and a half months. It was the start of the collapse of the dot-com bubble. And yet, in the second quarter of 2000, US real GDP grew at a stunning annualized rate of 7.5%. It would be the last quarter of strong growth for a while. The collapse of the tech-equity boom ultimately led to a modest recession.
Why am I discussing ancient history? The reason is that the current economic and financial situation in the United States bears some resemblance to the situation a quarter of a century ago. Last week, shares of one of the biggest hyperscalers fell sharply, wiping out half a trillion dollars in valuation. The technology-heavy NASDAQ fell 1.4% in response.
Yields on tech-company bonds have risen and the cost of insuring those bonds against default has soared. And yet, the US government, last week, released data showing that real GDP grew at an annualized rate of 3.4% in the third quarter. The point is that strong GDP growth, fueled by strong investment about a new technology, can take place at the same time as a major market correction that could ultimately contribute to an economic slowdown. The US economy is thriving in large part because of AI investments. Yet, many investors are increasingly concerned about the sustainability of this level of investment. Let’s look at the details:
In the third quarter of 2026, US real GDP grew at an annualized rate of 3.4%—the best performance since the third quarter of 2025. Growth was fueled by a combination of massive investment in technology and strong growth in consumer spending. Real (inflation-adjusted) consumer spending grew at a rate of 3.8%, including a 4.1% increase in spending on services. Within the latter, the biggest contributor to the increase was spending on healthcare. Of the 3.4 percentage points of GDP growth, 2.5 percentage points were attributable to increased consumer spending. The strength of the consumer came despite a decline in real wages as income gains failed to keep pace with higher inflation.
Meanwhile, the star performer was nonresidential fixed investment, which grew at a rate of 12.7% in the third quarter. This included a 20.9% increase in spending on business equipment. In fact, spending on equipment accounted for 1.16 percentage points of GDP growth. Within that category, spending on information technology equipment, which includes computers and related equipment, accounted for 0.86 percentage points of GDP growth. In addition, spending on software accounted for 0.23 percentage points of GDP growth. Thus, combined spending on information technology equipment and software accounted for one-third of the increase in real GDP.
On the other hand, much of that equipment was imported. In fact, real imports of goods grew at an annual rate of 26.4%, subtracting 2.6 percentage points from GDP growth. This demonstrates how the AI buildout is having a strong, positive impact on many US trading partners. Separately, we have seen strong export growth in such countries as Japan, China, Taiwan, and South Korea, partly reflecting global or US demand for AI-related products.
Also, not all categories of GDP were strong in the third quarter. Residential investment fell at a rate of 3.3%, spending by state and local governments fell 0.1%, while exports of goods fell at a rate of 7.4%. And investment in transportation equipment fell as well. Interestingly, real nondefense federal government spending grew at an astonishing rate of 22.2%. Yet, this was mostly due to a winding down of government sales of crude oil from the Strategic Petroleum Reserve.
Finally, there was a sizable increase in private inventories, accounting for 1.6 percentage points of GDP growth. Thus, absent inventory accumulation, real GDP grew at a rate of 1.8%, a majority of which was due to investment in AI.
The US government also released data on consumer income and spending in September, including data on the Federal Reserve’s favorite measure of inflation. The data indicates that, in September, inflation-adjusted disposable personal income (after taxes) fell 0.3% from the previous month. Meanwhile, real consumer spending was unchanged from the previous month. This was a big change from August when spending increased sharply while income was flat. Thus, it appears that consumer spending was starting to slow down by the end of the third quarter.
In addition, the government reported that, in September, the personal consumption expenditure deflator (PCE-deflator), which is the Fed’s preferred measure of inflation, was up 3.6% from a year earlier, the highest since May. When volatile food and energy prices are excluded, the core PCE-deflator was up 3.1% from a year earlier—not very different from core inflation in recent months. As such, underlying inflation remains elevated but is not accelerating. Energy prices were up 21.3% from a year earlier, contributing to a weakening of consumer purchasing power.
Getting back to the financial markets: the sharp decline in equity prices came as questions were being raised about the ability of AI companies to generate sufficient revenue to service their debt obligations. The Bank for International Settlements (BIS), which serves the world’s central banks, wrote that there is a “risk of firms over-committing resources to investment projects with still uncertain returns, leaving all firms vulnerable to disappointments in AI payoffs.” It added that “disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust.”
Finally, Stijn Van Nieuwerburgh, a professor at Columbia Business School, has estimated that average annual capital expenditures on AI in the period from 2025 to 2032 will be 3.6% of GDP, based on current plans. This far exceeds investment booms in past episodes in which new technologies were rolled out. He also estimated that, during the dot-com boom of 1996 to 2003, capital expenditures on telecom and fiber averaged 1.1% of annual GDP. Going back further, the railway boom of 1870 to 1890 involved annual capital expenditures equivalent to 2.24% of GDP. Thus, the AI boom is historically large. Moreover, it is worth noting that the dot-com and railway boom were both interrupted by the collapse of a financial bubble due to excess investment, the failure of revenue to keep pace with capital expenditures, and a sudden reversal of investor sentiment. The temporary collapse of the railway boom in 1873 led to a very deep recession.
The Chinese economy picks up speed amid persistent headwinds
- China’s economy modestly picked up speed in the third quarter, supported by a combination of several positive factors: First, there was more government stimulus meant to boost domestic demand and ease credit-market conditions. Second, the run up to the Golden Week holiday seemed to have had a positive impact on overall spending. Third, and most importantly, strong exports related to artificial intelligence played a dominant role in driving economic growth.
The government reported that, in the third quarter, real gross domestic product was up 4.5% from a year earlier—a significant acceleration from the previous quarter. However, it was the second-slowest rate of annual growth since the second quarter of 2022. Real GDP was up 1.2% from the second to the third quarter, which was a relatively strong figure given the factors above.
Despite the improvement, China continues to face economic headwinds and risks. One of the main headwinds is weak domestic demand, especially fixed-asset investment, largely driven by continued property-market troubles. One of the main risks is that China’s strong exports could be undermined by protectionism abroad as well as by a potential faltering in the global AI economy.
Regarding domestic demand, retail sales were up 1.1% in September versus a year earlier—the strongest growth recorded since February 2026. There was a 31.1% increase in sales of communications equipment, while automobile sales were down 21.2% from a year earlier.
Fixed-asset investment was down 7.2% in the first nine months of the year versus a year earlier—the same as the first eight months—and this was one of the weakest performances recorded since April 2020, when the economy was impacted by the COVID-19 pandemic. The drop in investment was largely driven by the property sector, in which investments were down 20.6% from a year earlier, mainly due to troubles in the residential property market.
Indeed, prices of new residential homes in the top 20 cities continued to decline in September, after falling for most of the past four years. However, it was also reported that the office-vacancy rate in Shanghai was one of the highest in the world—at least among major cities. Thus, excess capacity in offices has likely suppressed office investment, as well.
Excluding property, fixed-asset investment was down 4.2% from a year earlier. This included a 2.1% decline in investment in manufacturing and a 4.2% decline in investment in infrastructure. Despite this decline, it is likely that investment in AI infrastructure continued to be strong.
Chinese industrial production held up fairly well in September, rising 5.5% from a year earlier—the best performance since March 2026. The manufacturing component was up 6% from a year earlier. Among categories with very strong growth were computers and communications equipment (up 16.4%), railway and shipbuilding (up 11.7%), and automotives (up 6.7%). These increases supported China’s strong export prowess. They did not, however, support domestic demand. Consider autos: Retail auto sales were down sharply while production was up strongly. The difference was partly made up for by strong Chinese exports.
European voters express frustration with economic conditions
- Recently, there were major demonstrations in France, Italy, Belgium, and Albania, some of which became violent. France was the main focus, with unrest and violence being reported in multiple important cities including Paris, Lille, Lyon, Marseille, and Limoges. News reports indicated that they began as peaceful demonstrations by students, teachers, and parents complaining about a lack of sufficient funding for education. But as the protests broadened, concerns about the cost of living and other economic issues also became part of the demonstrations. Some political pundits have suggested that the protests could influence the political environment ahead of next year’s presidential election.
What are the economic factors that could have contributed to this unrest? First, European consumers have been affected by the inflationary impact of the conflict in the Middle East. In the eurozone, consumer prices were up 3.8% in September versus a year earlier—the highest level of headline inflation since September 2023.
Moreover, it mostly had to do with energy prices, which were up 18.8% in September versus a year earlier—the biggest increase since January 2023. Most notably, the price of European natural gas is now up 184% from prior to the start of the Middle East conflict. The supply of liquefied natural gas from the Persian Gulf has been disrupted, contributing to much higher heating costs across Europe, especially in the coming winter months.
But what about France? In recent months, French bond yields have soared, with the yield on the government’s 10-year bond hitting 4.93% at the time of writing—the highest in nearly 20 years. This likely reflected rising inflation, expectations of inflation, expectations of monetary policy tightening, and increased supply of bonds by technology companies.
Those factors, combined, caused a surge in government bond yields in multiple countries. But the situation in France was further dampened by other factors, especially investor concerns that the government may not have the political will to address underlying fiscal imbalances. Plus, there is concern about the upcoming elections. As such, political leaders are caught between the concerns of bond investors and voters, with the two groups having very different concerns.
Voters are evidently concerned that, despite a very high level of government spending, older voters are winning at the expense of younger ones. That is, it is demographics that is driving the trajectory of government spending. As the population has aged, the share of government spending devoted to pensions and healthcare has increased by 5.6 percentage points in the past three decades. At the same time, the share devoted to education, defense, and public safety has fallen by 2 percentage points, while the share devoted to transportation has fallen by 1.5 percentage points.
This demographic challenge is not unique to France, or even to Europe. It reflects the effects of population aging, low birth rates, and a declining ratio of workers to retirees. In many democratic nations, older people historically tend to vote in larger numbers than young people, which can make it politically difficult to rebalance spending amid age groups and competing priorities. Such tensions can contribute to frustration by younger voters, which appears to be happening.
Oil prices surge despite a renewal of traffic in the Strait of Hormuz
- The price of Brent crude hit US$117 at the time of writing, even though oil is reported to be moving through the Strait of Hormuz. In fact, overall oil exports from the Middle East have risen to levels last seen prior to the start of the conflict. While oil exports through the Strait of Hormuz remain about a third lower than levels prior to the conflict, much of that volume going out of the region is doing so through alternative routes. For example, Saudi Arabia is moving oil through the Red Sea. Some oil is going by pipeline to the Arabian Sea, as well.
Despite this partial recovery in exports, the price of oil is very high. This reflects several factors: First, Iran continues to attack oil tankers as well as oil-production and -distribution facilities. Second, Houthi rebels in Yemen, who are aligned with Iran, continue to attack Saudi energy and nonenergy infrastructure. Third, the United States and Israel have signaled a possibility that they will resume military strikes on Iran after the US midterm elections on Nov. 3, 2026. As such, there appears to be limited scope for a quick resolution of the conflict.
Meanwhile, it is reported that Chinese imports of crude oil have begun to recover to their pre-conflict levels. This suggests the possibility that China has reduced its sale of crude reserves. The ability of China to release reserves onto the market was seen as a key factor in stabilizing the price of oil. If China has stopped or reduced such activity, then a rise in the price of crude oil makes sense. China does not publish data on its reserves, so it is hard to know precisely what is happening.
Going forward, if the conflict continues to poses a threat to oil production and distribution, and if China significantly reduces the release of reserves, it is possible that the price of crude oil could go much higher than it is now. And that, in turn, could add to expectations of inflation around the world as well as expectations for monetary policy tightening by major central banks. Consequently, there appears to be a greater likelihood that inflation will accelerate than the possibility of deceleration.
Meanwhile, prices of refined products have risen even more than the price of crude oil in the past year. In part, that reflects limited refining capacity. Iran has attacked Middle Eastern refineries while Ukraine has attacked Russian ones. In fact, about one-third of Russian refining capacity is now offline because of Ukrainian attacks. These factors have driven up the prices of jet fuel, diesel fuel, and heating oil, which, in turn, has added to inflationary pressures around the world.
In the United States, the price of heating oil has reached a record high. This can pose a threat to the financial stability of low- to middle-income households in the Northeastern part of the country. This coming winter could see a 50% increase in home-heating costs in the Northeast part of the country. In the rest of the Northern parts of the United States, it is more common to use natural gas or electricity to heat homes.
Investor purchases of credit default swaps for tech bonds surge
- Investors appear to be getting increasingly concerned about their AI investments. This is evidenced by a surge in activity in the credit default swap market, whereby investors purchase insurance against bond default. The average volume of trading of credit default swaps for tech company bonds increased from $2 billion per week in July to $9 billion per week in September. Moreover, not only has the volume of trading increased but also the cost of insuring against default.
One reason for the jump in CDS activity could be the sharp increase in the volume of debt issuance. For tech companies, AI-related debt of $101 billion was issued in the first nine months of 2025. This increased to $466 billion in the first nine months of 2026, and is expected to rise even further in 2027. The ability to service that debt will depend on whether there is a dramatic increase in AI-related revenues. Uncertainty about this is driving investor concern.
The surge in this activity took place in the context of rising bond yields in the United States and Europe. The yield on the US Treasury’s 10-year bond rose sharply in recent months—hitting a high of 5.3% in early October. However, the yield has fallen sharply since then, hitting 5% a day before the time of writing. The drop in yields likely reflects investor concerns on a range of economic and market factors including tech-company debt. As such, the drop in Treasury yields is a kind of flight to safety.
BY
Dr. Ira Kalish
Editorial and production: Arpan Saha and Aparna Prusty
Audience development: Kelly Cherry
Cover image by: Sofia Sergi
Knowledge services: Rohan Singh
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