The Great Bifurcation — Resilient Performance vs. Still-Menacing Risks

In a new report from Citi Research, Chief Economist Nathan Sheets and a team of analysts and economists explore what they see as a “gaping bifurcation” between the global economy’s continued resilience and downside risks that remain menacing. What is clear to the team is that global growth has kept motoring forward; we now expect global growth of 2.7% in 2025, nearly equal to last year’s 2.8% pace. This resilience poses intriguing questions, but the global outlook also faces risks that appear outsized. In the near-term, the possibility of a further bite from tariffs stands front and center; looking longer-term, we’re concerned about high levels of public debt, rapidly aging demographics, and the increased likelihood of economic and geopolitical fragmentation.

Growth in developed markets remains much weaker than in emerging markets, but has dipped only modestly in both sets of economies. We expect global growth to ease in 2026, but only to 2.5%. Across individual economies, growth in the euro area looks to have accelerated this year, and we also judge the pace of expansion as having picked up in Japan, Australia, India and Poland. Growth has also looked solid in China and Indonesia, with ongoing 5% gains. U.S. growth appears to be moderating to a near-trend 2% rate, a slight cooling from 2024’s unsustainably rapid pace. 

Meanwhile, global purchasing managers’ indices (PMIs) continue to highlight relative strength in services, which are running in strongly expansionary territory. But these measures haven’t shown any meaningful deterioration this year, and highlight the economy’s generally solid performance.

The largest near-term risks we see are the possibility that tariffs will deliver a further, more painful bite. We’re also concerned about political and geopolitical tensions, with the U.S. government shutdown, French political dysfunction, and policy uncertainties about Japan’s new prime minister all in play even as the Russia-Ukraine conflict drags on. And the longer-term risks noted above all threaten to slow or disrupt the global economy in the years ahead.

But those cautions must be balanced against the resilience shown by the global economy despite a run of sizable shocks, all of which were expected to derail growth: the onset of the Russia-Ukraine conflict (2022), headwinds from aggressive central-bank rate hikes (2023 and 2024), and challenges from the Trump administration’s tariff campaign (2025). In each instance, global growth has shrugged off the pressures and continued expanding at a near-trend pace.

Part of this resilience has flowed from the willingness shown by central banks and governments to provide aggressive monetary and fiscal support. But this doesn’t explain the entirety of what we’ve seen. Rather, it seems that the global economy is showing increased flexibility and more capacity to respond to shocks than we’ve seen in the past. Adjustments to supply chains and production techniques now seem to happen more smoothly, fueling solid ongoing global growth and labor-market performance. Indeed, we note that labor markets have stayed tight, which in turn has supported consumer spending; we judge that the global unemployment rate has been about flat at just over 5% in recent years.

And looking medium-term, we see other reasons for optimism. As explored in our September Must C report, the potential economic effects of artificial intelligence (AI) develop the case for a forthcoming rise in productivity. Those gains are yet to be seen, with the global economy currently supported by a surge in AI-related investment, but our expectation is that these gains will come, and we note that the adoption of AI looks to be proceeding at a historically rapid pace.

Bullishness about AI has been a key driver of strength in U.S. equity markets. Looking ahead, we expect efficiency gains and profits from AI will be increasingly felt among “AI adopters,” rather than concentrated among “AI producers.” Such a dissemination across sectors will allow countries that aren’t AI producers to also notch meaningful productivity gains.

These disparate and offsetting factors leave us to wrestle with what they mean for the global outlook: The challenges and risks we note mandate caution, but the experience of the last four years highlights the economy’s sustained and ongoing momentum. Hunkering down hasn’t been a winning strategy; the prescription instead seems to be tactical flexibility and paying attention to both the range of challenges and the continuing opportunities.