While attention over the past few weeks have mostly been towards navigating the Middel East war, it is no doubt that the current time period will go down as yet another defining point of the global economy similar to many events in the past such as the Global Financial Crisis in 2008 or the oil crisis in 1973. While too much uncertainty lingers around for anyone to make a call on the actual damage and economic consequences of the current conflict, what can be said with certainty is that irrespective of how long the war may or may not last, the signals sent as a result of it point towards a very different global economic landscape here onwards.
While conversations around this were already in the picture even before the war, it is fair to assume that the war might speed up this process as growth outlooks are revisited and revisions are made across the world. Analysts have already accounted for a global slowdown and revised their growth forecasts down with some even projecting a possible recession depending on how long the war progresses. However, one thing that runs deeper than the topline numbers is how the world may perceive growth in itself following the consequences of the current war as well as the structural changes that it may amplify. Traditional models that drove the global economy over the past 30+ years or so may change to fit a world with severe debt and high geopolitical fragmentation. Keeping track of such adjustments that could possibly re-define global capital and trade flows, and adapting accordingly could be the x-factor that separate the winners and losers in this newly emerging global order.
What are some prominent structural changes that define the new world?
The Artificial Intelligence (AI) boom is the most obvious one here. In the latter half of the 20th century, some of the brightest minds in the United States and the Soviet Union were focused on the race to develop nuclear weapons. Today, it’s a different kind of competition - this time with China - centered on achieving technological dominance, particularly in AI. Similar to these two giants, other developed nations and emerging economies are also aligning themselves to this age of AI with massive investments in technological infrastructure. Data centres emerged as a major force shaping global investment in 2025 driven by surging demand for AI infrastructure and digital networks. Similar to countries that attract such investments, more emerging economies may also look forward to ride this wave and place themselves within these supply chains that may re-define domestic policies within countries.
Defence spending is another prominent feature in this newly emerging order. As competition intensifies and more inter-state conflicts are expected in future, countries are heavily increasing their share of expenditure allocated for defence. 2025 turned out to be the 11th consecutive year of rising global military expenses with defence spending as a % of GDP reaching 2.9% - the highest since 2009. This trend may present a series of opportunities particularly to the players within those supply chains that provide and assist the production or exchange of advanced military technologies and materials. This could also present a significant challenge to policymakers by restricting other fundamental investments geared towards areas such as education and healthcare that drives more longer-term growth and productivity.
Conflicts in the Gulf have consistently proven that being entirely dependent on Middle-eastern fuel and energy pose a significant threat to countries. Hence, achieving energy independence have made its way to the priority list of world leaders that could define domestic strategies in the years to come. The EU for instance is currently accelerating its efforts in this direction and setting the trend for the rest of the world. Following the heavy disruption faced due to the current crisis, the commission launched its latest initiative - AccelerateEU - the toolbox to bring immediate relief to European households and industries, especially the most vulnerable ones, while putting Europe on a steady pathway to energy independence. Climate risks and the transition towards green technologies compliments this further as growth and development of countries in this new age will be more closely linked to developing more sustainable energy sources.
What are some downside risks prevailing in this new context?
While the above-mentioned trends may provide policymakers, investors and businesses plenty of room for growth, it’s also important to note that it’s happening on the backdrop a global environment that is drowning in unprecedented levels of debt. The IMF says global public debt could exceed 100% of GDP by the end of the decade. Governments around the world now owe nearly $100 trillion in public debt. That’s almost double what they owed just a decade ago. While mature markets – particularly due to massive investments in AI account for most of this growing levels of debt, emerging markets have also reached a new high of more than $115 trillion, with Brazil, Russia, South Korea, Poland, and Mexico following China in debt accumulation. While increasing government borrowing serves as the main reason behind debt accumulation, the ability for authorities to operate in such tight fiscal conditions in the long run while maintaining low interest rates is the common question monetary authorities face across the world. Even though an immediate fallout is not within the cards as of yet, this approach of running large deficits and financing them using debt raises concerns around the long-term sustainability of public budgets across the world.
Another not-so immediate but certainly an area that may pose a new kind of challenge is the demographic shift that happening across labour and consumer markets across the world. This is also an area that indicates divergent implications across regions that could be increasingly visible with time. For instance, according to the United Nations, while Central Asia continues to experience youth-driven population growth, with a rising share of working-age people offering significant economic potential, many European countries are grappling with shrinking and ageing workforces, as fertility rates are low and populations become older. A number of countries – particularly in the EU and East Asia - are already having to deal with increasingly ageing and shrinking population growth which have caused disruptions in domestic markets and require the need for carefully devised policies to face a new demographic reality. Labour markets in particular pose a risk of skill mismatch especially within traditional sectors as technological innovations and AI boost amplifies. Navigating such changes remains key for both governments and businesses in order to maintain the rapidly evolving consumer and labour markets of economies.
What could this mean for Sri Lanka?
Outside of dealing with the short-term implications of the current war, the changing economic landscape provides Sri Lanka with a mix of growth opportunities and challenges. The transition of the country from a deficit to a surplus economy itself places the country on a strong footing. As Sri Lanka continues on its recovery pathway while easing off its debt burden, in a context of rising global debt, it is highly likely that a possible credit rating upgrade will allow the country to regain access to global capital markets. Maintaining fiscal discipline on the other hand will allow the country to efficiently allocate resources towards social development and reform efforts. As reforms come into play and the private sector further expands its involvement in domestic economic expansion, the ability for the country to plug in to these newly emerging AI supply chains wouldn’t be a long shot. It also presents the country the opportunity to attract investments for the development of infrastructure and labour particularly for those outside of the traditional sectors. The key remains in how proactive policymakers are when it comes to accelerating reform efforts while maintaining broader economic recovery and how invested the private sector is to expand their game within a structurally different Sri Lankan economy in the midst of a rapidly evolving global landscape.