In the new episode of Talking Economics, CERGE-EI alum Kamil Kovář, Director at Moody’s Analytics, joins us to discuss how geopolitical and economic shocks are reshaping the real economy. The conversation looks at what has changed most fundamentally in macroeconomic forecasting, why scenarios are becoming more important than single-point predictions, and what current risks mean for the global economy, Europe, and the Czech Republic.
The global economy has been hit by a series of overlapping shocks: the pandemic, energy disruptions, war, trade fragmentation, rearmament, political unpredictability, and renewed tensions in the Middle East. For economists and forecasters, this has changed not only the outlook but also the way they think about uncertainty itself.
Why the baseline forecast is no longer enough
Kamil describes the past few years as a period in which forecasters have had to repeatedly become experts in new areas. One of the biggest lessons, he argues, is that the traditional “baseline forecast” is no longer enough. A baseline remains necessary: it is the starting point, the most likely path. But in today’s world, the range of possible outcomes has widened dramatically. The alternatives are no longer remote possibilities; they are plausible enough that policymakers, firms, and households need to take them seriously.
What recent shocks have taught economists
The inflationary surge of 2022–2023 is a powerful example of how economic models and assumptions were challenged by reality. Before the shock, euro area inflation of around 10 percent would have seemed almost unimaginable. Yet it happened. For macroeconomists, this was not only a difficult forecasting episode but also a learning moment. It showed that economies can behave in ways that existing models do not fully capture, particularly when shocks are large, sudden, and politically driven.
Rather than relying on one universal model, Kamil suggests that forecasters need a broader “mental library” of models. Different episodes provide different lessons. The 2022 energy crisis may offer one chapter, but it cannot simply be copied and applied to every new shock. The challenge is to understand which features of the past are relevant to the present and which differ.
Building useful scenarios in a geopolitical world
A major part of the episode focuses on the current geopolitical situation and its implications for oil prices, inflation, and growth. Kamil explains how Moody’s Analytics approaches such uncertainty through scenarios. In geopolitical forecasting, this means thinking carefully about the actors involved, their incentives, and their possible responses.
In the case discussed in the episode, he outlines a baseline in which tensions gradually ease, oil prices remain elevated for some time but do not spiral, and the broader economic effects remain manageable. Under this scenario, the shock would create some inflationary pressure but would not fundamentally change the behaviour of firms and consumers. Growth would slow only moderately, and inflation would eventually return closer to target.
The darker scenario: oil shocks and recession risk
The darker alternative is more serious. If tensions escalate again, oil prices could rise sharply and remain high for longer. In that case, businesses could begin to delay hiring and investment, consumers could cut spending, and the pass-through from energy prices to consumer prices could be faster and stronger. Such a scenario could push the global economy toward a mild recession.
The impact would not be evenly distributed. Countries that depend heavily on energy imports would be more exposed, with some Asian economies facing particularly difficult conditions. Japan and South Korea are vulnerable because they rely on imported energy, while emerging economies such as Pakistan and the Philippines could struggle to compete for expensive replacement supplies. China, by contrast, may be somewhat less exposed because of alternative energy sources and large strategic reserves.
Europe would also remain vulnerable. Although European countries may not import most of their oil directly from the Middle East, they still face world market prices. A global oil shock affects Czech fuel prices even if the Czech Republic does not import oil directly from the region. In energy markets, the source of supply matters, but the global price matters too.
Europe between security risks and political constraints
The discussion then turns to the medium-term outlook for Europe. Kamil argues that relations between the United States and Europe have already deteriorated and are unlikely to return to the more stable post-Cold War relationship of the 1990s and 2000s. Even if political leadership in Washington changes, Europe cannot assume that the old security and economic order will simply be restored.
Defence spending is one area where change is already visible. For years, many European countries struggled to meet the NATO target of spending 2 percent of GDP on defence. Now, some are discussing levels closer to 5 percent. This represents a major structural shift. But it also raises difficult fiscal questions. Public debt and deficits are already high in many countries, and governments must decide how to finance new commitments.
Kamil suggests that, at least in the short run, many governments may try to postpone the trade-offs. They will increase defence spending and deal with the fiscal consequences later. In some countries, such as Germany, higher spending may also support domestic industry and help offset weaker external demand. Defence investment could therefore have positive multiplier effects, especially where industrial capacity is underused.
Still, the long-term questions remain unresolved. Higher defence spending, ageing populations, public debt, and demands for social investment will eventually collide. Economists can describe the trade-offs, but politics will decide how they are managed.
What this means for Europe and the Czech Republic
The episode ultimately shows how closely geopolitics and macroeconomics are now intertwined. Wars, energy flows, military spending, trade policy, and political decisions are no longer external background conditions for economic forecasting. They are central drivers of inflation, growth, investment, and public finances.
For Kamil, the key lesson is humility. In a world where shocks are frequent and the distribution of outcomes is wide, economists need to think in scenarios, compare risks, and remain alert to the possibility that the next shock may again come from an unexpected direction.
For Europe and the Czech Republic, this means preparing for a less predictable world: one in which economic resilience depends not only on monetary and fiscal policy, but also on energy security, defence capacity, institutional coordination, and the ability to respond quickly when geopolitics reshapes the economy.
Listen to a guide to understanding the macroeconomic landscape in a period marked by constant disruption on Spotify, Apple Podcasts, or YouTube.
Kamil Kovář is a CERGE-EI PhD alumnus and Director at Moody’s Analytics in Prague, where he leads euro area forecasting and coordinates analysts responsible for individual country outlooks. He also manages a team focused on forecasting tools, onboarding for global new hires, and scenario construction, while communicating macroeconomic insights to clients through presentations, webinars, podcasts, and written analysis.
