Why hasn’t the economy collapsed?

The intuition of conventional economics is that an unprecedented supply shock as we have seen in the last three months would cause a hike in oil prices, significantly slowing down growth and pushing up inflation.

We did see a hike in oil prices during the initial shock phase of the military action at the end of February but the International Monetary Fund (IMF) revised global growth projections only modestly.

Their overall global growth forecast was cut by only 0.2% in their April update compared to January.

The Middle East was, of course, projected to be hit hardest with growth cut by 2.0% and European countries were also downgraded.

In other advanced economies, growth is projected to rise by 0.6% and in the US growth is expected to be 0.2% higher than the January forecast.

The IMF forecasts Malaysia’s 2026 GDP growth at 4.7%, up from its 4.3% forecast in January. The World Bank raised its 2026 growth forecast to 4.4% in April, up from 4.1%. Both institutions cited resilient domestic demand and robust exports as key drivers for the upward revisions.

This is based on strong growth of 5.2% in 2025 which continued its momentum into the first quarter of this year with growth of 5.4%.

The official forecasts of Bank Negara Malaysia (BNM) of 4% to 5% growth have been maintained and most economic forecasters have kept the view that growth will continue to be strong in the upper part of this range.

So, far from a global collapse in economic growth we are seeing remarkable resilience. Why did this not happen?

First, the supply shock was not as bad as it first appeared. Around 20% of daily oil demand of 100 million barrels passes through the Strait of Hormuz.

Some continued to get through, supply increased from the US, demand in China fell, stocks were released. So, the actual loss of daily supply was probably less than 10%.

Second, as the markets adjusted to these realities, they saw that the fighting mostly stopped at the beginning of April, oil infrastructure was mainly intact albeit closed and peace negotiations leaned toward a likely settlement in rational terms. So, oil prices moderated after peaking.

Third, economic actors including policymakers, businesses, supply and logistics operators, oil and gas companies and financial markets acted rationally after the initial shock.

They adjusted policy and learned lessons from previous shocks on how to manage a Trump-induced crisis, especially understanding that they are disruptive but short-lived.

Fourth, we are not in a supply-constrained economy to the extent we were in the past. In terms of goods and services, inventories provided a buffer on most essential products.

Renewable energy and EVs have moderated dependence on hydrocarbons slightly and consumers and businesses adjusted to the well-signalled likelihood of possible supply shortages.

Fifth, the economic system has changed post-Covid, with the advent of new technologies, more diverse and interconnected trade partnerships and new modes of work and income generation as well as more flexible and agile business and employment models have changed the way the economy responds to shocks.

The economic armageddon scenarios of some conventional commentators are biased by a visceral hatred of Donald Trump and an insistence that everything he does will destroy the world.

This is emotional and irrational.

Still after four years of his first term and halfway through his second term, conventional thinkers are confused and shocked by what he does and seem unable to understand that the disruption is purposeful.

The US has benefitted from high oil prices just as it benefitted from the Trump-tariffs on “Liberation Day”. There is method in the madness.

The views expressed are those of the writer and do not necessarily reflect those of FMT.