Deflation to shape global outlook despite inflation risks, QNB says

11/08/2025 04:11 AST

Long-term deflationary forces are set to dominate global trends, interrupted by brief inflation surges triggered by geopolitical and structural shocks, Qatar National Bank has warned.

In its weekly report, carried by the Qatar News Agency, the bank said the new macroeconomic phase will be defined by structural fluctuations, not a purely inflationary or deflationary environment, with prices periodically jolted by supply disruptions and policy shifts.

The assessment comes as the International Monetary Fund forecasts global inflation to ease to 4.2 percent this year and 3.6 percent in 2026, even as major economies send mixed signals, with US consumer prices rising 2.7 percent year on year in June and China's consumer price index edging up to 0.1 percent after months of decline.

"The bank pointed out that the global economy is no longer stable in a purely inflationary or contractionary environment, but has entered a new phase characterized by structural fluctuations," QNA reported.

It said shifts in the prices of key goods and services remain among the most closely monitored macroeconomic indicators, alongside economic growth rates, as they directly impact purchasing power, consumer confidence, investment decisions, and monetary policy.

Inflation vs. deflation
While moderate inflation is considered normal and even necessary for economic growth, QNB said excessive inflation or sharp deflation can lead to structural imbalances and long-term economic disruptions.

The report cited the "Great Moderation" in advanced economies as an example of stable growth under controlled inflation. However, it cautioned that central banks' aggressive monetary tightening in response to inflation can also trigger recessions or financial stress.

On the other hand, deflation - a sustained drop in price levels - often signals deeper structural weaknesses, such as weak demand, financial deleveraging, or demographic decline. While falling prices may seem beneficial at first glance, QNB said they can reduce consumption, delay investment, increase real debt burdens, and trap economies in a low-growth cycle.

Japan's "Lost Decade" was cited as a prime example of deflation's damaging long-term effects, with other major economies facing similar challenges after the 2007-08 financial crisis.

Post-pandemic uncertainty
The report said the post-COVID-19 era, combined with supply shocks, led to unusually high inflation, but economists remain divided on whether inflation or deflation will dominate in the medium to long term.

QNA said "some analysts highlight that one of the main reasons why inflation is returning to the fore as a source of economic concern lies in the disintegration of many structural factors that supported the Great Moderation."

Rising geopolitical fragmentation has disrupted global trade, while supply chain reconfigurations, green transition costs, and demographic pressures could keep inflation structurally higher.

Others believe technology-driven deflationary forces will prevail. Innovations in automation, artificial intelligence, and digital services continue to reduce costs, offsetting inflationary pressures.

A July report by Morgan Stanley said the ongoing AI wave continues to dominate global markets, with significant investments projected in data centers.

The report forecasted that global data center spending would reach $2.9 trillion by 2028, covering hardware such as chips and servers, and infrastructure, including construction and maintenance.

QNB's report also said some geopolitical developments, including trade fragmentation, could have deflationary consequences by reducing efficiency and demand, under certain conditions.

Arab News