AI rout, energy costs add to fears of slowing global growth

Global markets face mounting pressure from persistent inflation, rising government borrowing costs, and weakening economic growth, even as hopes of de-escalation in the Iran war have pushed oil prices lower, Reuters reported.

Oil prices have fallen nearly 20% this week to below $100 a barrel. However, uncertainty over a possible resolution to the conflict continues to cloud the outlook. Crude remains almost 60% higher this year, while natural gas prices are nearly three times their levels at the start of 2026.

Elevated energy costs are keeping inflation expectations high and raising concerns that central banks may be forced to increase interest rates further even as economic growth slows. The University of Michigan's measure of one-year US inflation expectations rose to 4.7% in October from 4.6% in September and 3.4% in February, Reuters reported.


Long-term market-based inflation expectations also remain above 2% in the euro zone and the United States, while Britain's measure is above 3%.

Food prices are adding to inflationary pressures. The United Nations Food and Agriculture Organization's Food Price Index has climbed to its highest level in nearly four years, driven by extreme weather, shipping disruptions and elevated energy costs. Major consumer goods and food companies have also warned of potential price increases to offset higher expenses, Reuters reported.

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Rising food costs could trigger broader inflationary pressures by increasing wage demands and affecting consumer expectations, analysts said.

Rising borrowing costs add to concerns
Higher government borrowing costs are emerging as another threat to the global growth outlook. US borrowing costs surged 85 basis points in the third quarter, while yields in France and Italy rose by more than 100 basis points.

Although bond yields have eased since then, they remain significantly higher this year, potentially tightening financial conditions and increasing financing costs for governments and businesses.

European Central Bank estimates circulated ahead of its latest policy meeting indicated that the recent rise in bond yields could reduce cumulative economic growth by 100 basis points in 2027-28 compared with its September projections.

AI stock selloff threatens investor confidence
Growing doubts about the sustainability of the artificial intelligence boom have also weighed on financial markets, with technology stocks facing significant selling pressure.

More than $2 trillion was wiped off the Nasdaq 100's market value last month alone. Although major stock indexes remain close to record highs, further declines could erode household wealth, increase corporate funding costs and weaken investor appetite for risk.

Citi said financial conditions had tightened following wider credit spreads and falling equity prices, although US Federal Reserve officials might not yet consider conditions sufficiently restrictive.

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European economic data weakens
Fresh economic indicators have added to concerns about slowing growth. Euro zone economic activity slowed sharply in October, with demand approaching stagnation, while rising costs squeezed businesses and confidence fell to a five-month low, data released on Wednesday showed.

Citi's European economic surprise index, which tracks whether economic indicators exceed or fall short of expectations, is also pointing lower.

The US economy, meanwhile, continues to demonstrate resilience, supported partly by substantial investment in AI infrastructure.

However, analysts have cautioned against dismissing the risks posed by persistent inflation and weakening growth. While the US economy continues to expand at a solid pace and unemployment remains relatively low at 4.2%, inflation remains the Federal Reserve's primary concern, according to Federated Hermes global fixed-income chief investment officer RJ Gallo, Reuters reported.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)