5 Trends in a Volatile Global Economy

Current advancements in AI have boosted the valuations of large tech companies, driving up the overall stock market. However, there is considerable uncertainty about which companies will successfully develop leading products and maintain a competitive edge to secure persistently strong profit margins. This uncertainty naturally creates disagreement about valuations, resulting in high trading volumes and increased market volatility, according to Kellogg finance professor Sergio Rebelo.

During a recent webinar hosted by the Kellogg School of Management, Rebelo discussed five key trends that have emerged amid this volatility and their impact on the global economy.

1. An easing of inflation

Inflation has been under close scrutiny since it started surging in 2021. The good news is that it’s on its way back down, with the U.S. Federal Reserve’s preferred inflation metric (core PCE) approaching the Fed’s target of 2 percent.

“High inflation is increasingly in the rearview mirror,” Rebelo says.

So far, inflation has declined without driving the economy into a full-blown recession despite large increases in interest rates. Rebelo notes that the economy has been resilient in part because most households hold fixed-rate mortgages, which shielded them from interest-rate hikes. The cost of servicing household debt as a percent of disposable personal income remains around 10 percent in 2024, similar to pre-pandemic levels.

With inflation on the decline, the European Central Bank, China’s central bank, and the Bank of England, among others, have begun to cut interest rates. There’s growing anticipation that the Fed will follow suit and lower interest rates in September. This sentiment is being reflected in the bond market; the yield on the ten-year treasury bond has significantly declined.

Still, despite slowing inflation, prices are much higher now, and they are not likely to drop. “People are feeling that goods and services have become permanently more expensive, which is why inflation is so unpopular,” Rebelo says.

2. A labor revolution

There’s been a clear shift in the working environment since the Covid-19 pandemic.

For one, remote work has become common in some industries. With so many people working from home, there’s been a significant drop in vehicle use in the U.S.—about 20 billion fewer miles traveled on highways in 2024 than initially projected—and about a 30 percent dip in subway commuting in New York City.

Demand for commercial buildings has sharply declined as well. The total square footage of leased offices has dropped below 100 million, down from about 300 million in 2020. “This is an enormous decline in the demand for commercial real estate,” Rebelo says.

Meanwhile, some cities are experiencing a different phenomenon: population growth driven by remote workers. Taking advantage of the strength of the U.S. dollar, remote workers from the U.S. are moving in droves to cities like Barcelona, Venice, and Lisbon to live and work. And this influx of people is driving up housing costs for locals in those cities.

“While some cities are seeing vacant offices, others are dealing with a housing shortage,” Rebelo says.

Adding to the changing work environment is the rapid advancement of AI, which is already beginning to supplement various jobs. But it remains to be seen whether—or when—it will start to replace them.

The large-language model ChatGPT has passed the bar exam, and algorithms have analyzed quadrillions of combinations between chemical compounds and proteins—a task that would take humans 100,000 years to complete—in only a week.

“It’s these kinds of achievements that lead many to believe that we are at the dawn of a revolution that’s going to be bigger than the industrial revolution,” Sergio says, “and that it will happen faster.”

3. A mostly tight job market

Unemployment in the U.S. has remained relatively low overall, Rebelo says. Whereas interest rates shot up and stayed high in the early throes of the pandemic, unemployment surprisingly did not.

One reason, Rebelo notes, is that the active labor force (people between 25 and 54 years of age) has not grown in the U.S. since 2007, making labor more scarce as the economy expands. With lower fertility rates, migration has played a vital role in stabilizing the active population in the U.S.

This situation contrasts with the significant drop in the active population experienced by Japan and the European Union. In Europe, in particular, identity politics have led many countries to close their doors to immigration, limiting the workforce and depriving businesses of both high-skilled and low-cost labor.

“I expect labor markets to remain tight as the active labor force continues to fall in the developed world,” Rebelo says.

4. A move toward de-globalization

Historically, world trade has driven down prices, improving efficiency by offering companies larger markets but also more competition. The recent escalation of trade wars between countries like the U.S. and China, however, is poised to harm global productivity, according to Rebelo.

The conflicts in Ukraine and Gaza have further disrupted global trade, affecting transportation and driving up the costs of fertilizers and other raw materials.

“There’s been a significant shift toward de-globalization,” Rebelo says. “A lot of companies feel less comfortable investing overseas.” For example, direct foreign investment into China has decreased this year for the first time.

The recent trend toward import substitution and industrial policies that subsidize local companies could result in higher prices due to decreased scale and lessened competition.

“Economists are worried that the gains from trade are being eroded,” Rebelo says.

5. An approaching climate-change tipping point

The clearest evidence of climate change—for wine lovers, at least—is the shift in harvest time. Traditionally, grapes were harvested in mid-October, but rising temperatures have pushed the harvest up to mid-August in some regions.

“We are approaching a tipping point where the consequences of climate change are becoming increasingly visible, not just to winemakers but to the world at large,” Rebelo says.

Insurance and reinsurance companies, for example, have significantly raised rates for catastrophe risk insurance or have stopped offering some of these policies altogether. The reason is that, with changing weather patterns, they can no longer rely on historical data to predict the probability of future catastrophes and set insurance rates accordingly.

“We are beginning to see climate change affect the way companies operate,” Rebelo says. “Hopefully, this will encourage more businesses to help decarbonize the economy and steer us toward a more sustainable future.”

“We live in an interesting world, one with much upside as well as significant downside,” he continues. “I am optimistic about the future because, as a Spanish proverb says, ‘With wine and hope, anything is possible.’”