PESTLE & MORTAR 03 July 2025

#1

BIS Warns of Renewed Inflation Risk

The Bank for International Settlements (BIS), often described as the “central bank of central banks,” has cautioned that global inflation may soon resurge. In its latest report, the Switzerland-based institution highlighted that consumers worldwide anticipate significant price increases over the coming year. Crucially, these expectations have been shaped by persistent inflation stemming from the COVID-era disruptions, increasing the risk that inflationary predictions become self-fulfilling. Households across major economies are forecasting inflation rates significantly above current levels, according to the BIS. This psychological shift—described as “once bitten, twice shy” by a senior BIS official—creates potential difficulties for central banks as they begin cautiously reducing interest rates in response to recent declines in headline inflation.

The BIS emphasized that if inflation expectations become unanchored, central banks may need to rapidly reverse course, tightening monetary policy again and potentially triggering financial volatility. Agustín Carstens, General Manager of the BIS, urged policymakers to remain vigilant and ready to act decisively to maintain credibility and price stability (Reuters). Compounding the economic uncertainty are escalating global trade tensions, particularly driven by protectionist measures such as U.S.-imposed tariffs. According to the BIS, this protectionism exacerbates volatility, disrupts supply chains, and undermines the global economic order, marking what it termed a “new era of heightened uncertainty and unpredictability.”

For businesses, a return to higher inflation would mean renewed pressure on input costs, wages, and overall financial planning. The prospect of central banks being forced into abrupt monetary policy reversals increases risks related to borrowing costs, investment decisions, and market stability. Companies should anticipate greater financial market sensitivity to inflation signals, plan cautiously around interest rate volatility, and reinforce their strategic resilience to sudden policy shifts.

#2

Germany Targets DeepSeek as Chinese AI Gains Ground

Germany’s data protection authority has accused Chinese AI firm DeepSeek of unlawfully transferring user data to China without adequate safeguards, warning that the practice violates EU standards and could lead to an effective Europe-wide ban if Apple and Google remove the app from their stores. The scrutiny reflects rising concern as Chinese AI models rapidly close the gap with American rivals; four of the ten best-performing large language models on a leading benchmark were developed in China, compared to five from the US and one from Europe. Multinational banks, oil companies, and universities are increasingly adopting Chinese models because they deliver near-equivalent performance at much lower cost, despite US sanctions and export controls. This surge in adoption underscores how AI tools are becoming not just commercial platforms but instruments for shaping information ecosystems and political narratives, raising the stakes for governments and corporations alike. As our report The Geopolitics of AI Use highlighted, control over advanced language models is emerging as a strategic lever in global competition, with regulatory crackdowns, security concerns, and market fragmentation likely to intensify. For businesses, the DeepSeek case demonstrates that partnerships with international AI providers now carry geopolitical risk exposure that can quickly translate into operational disruption, legal scrutiny, and reputational damage.

#3

Tesla and Paramount Draw Political Retaliation

Elon Musk has threatened to create a third political party and spend millions to defeat lawmakers who back President Trump’s “Big Beautiful Bill,” escalating a conflict that has quickly shifted from rhetoric to targeted pressure on Musk’s business interests. In response, Trump accused Musk of profiting excessively from federal subsidies and suggested regulators should reassess Tesla’s reliance on government incentives, creating immediate uncertainty for the company’s finances and operations. The feud highlights how political leaders increasingly use regulatory threats and public attacks against firms they perceive as adversaries. This dynamic was underscored when Paramount agreed to pay $16 million to settle a lawsuit brought by Trump’s campaign over CBS’s broadcast edits of Vice President Kamala Harris, a settlement widely seen as a strategic move to avoid jeopardizing Paramount’s planned merger with Skydance Media. The episode drew criticism from journalists and free-speech advocates who warned it sets a precedent where media companies can be pressured to capitulate to political demands. For businesses, these cases show how partisan affiliations can become operational vulnerabilities, exposing firms to unpredictable retaliation that can reshape reputations (self-identified Republicans are 11 percentage points less likely to buy a Tesla than they were in April), regulatory exposure, and market access.

#4

Thai PM Suspended Amid Protests Over Cambodia Call

Thailand’s Constitutional Court has suspended Prime Minister Paetongtarn Shinawatra after accepting a petition accusing her of ethical violations during a leaked phone call with Cambodia’s Senate President Hun Sen, in which she flattered him and criticized Thailand’s military as tensions escalated along the border. The suspension has triggered large protests in Bangkok, with thousands of nationalist demonstrators gathering at Victory Monument to demand her resignation over what they view as an act of disloyalty. The Bhumjaithai Party has withdrawn from the ruling coalition, leaving her government in crisis and raising the risk of early elections or military intervention if the situation deteriorates. Paetongtarn’s approval ratings have collapsed, and Deputy Prime Minister Suriya Juangroongruangkit is now acting as caretaker leader while she has 15 days to prepare her defense. For businesses, the episode underscores the volatility of Thailand’s political landscape, where personal missteps can quickly trigger mass protests, fracture coalitions, and threaten policy continuity, particularly for companies dependent on cross-border trade, infrastructure projects, or regulatory stability.

#5

Iran-Israel Ceasefire Holds, Nuclear Concerns Persist

A fragile ceasefire brokered by the United States between Israel and Iran has come into effect following recent military strikes on Iranian uranium enrichment sites. Despite the cessation of direct conflict, significant uncertainties remain regarding both the extent of damage inflicted by the strikes and the likelihood of renewed nuclear negotiations. Iranian Deputy Foreign Minister Majid Takht-Ravanchi indicated that Tehran is open to discussions regarding its nuclear program, but only under the condition that the United States guarantees there will be no further attacks. Prior to the recent escalation, nuclear talks had already stalled raising ongoing concerns about nuclear proliferation. The aftermath of the conflict has seen heightened domestic tensions within Iran. The regime has reportedly arrested over a thousand alleged spies and dissidents and executed at least six individuals accused of collaborating with Israel, according to The Wall Street Journal. Observers suggest these actions reflect efforts by Iranian authorities to suppress dissent and reinforce regime control. For businesses, the current scenario maintains significant geopolitical risk. Potential further escalation, ongoing Iranian nuclear activities, and the associated diplomatic stalemate could lead to renewed sanctions, regional instability, and disruptions to global energy markets. Organizations operating in or reliant on Middle Eastern markets should closely monitor developments, reinforce contingency plans, and prepare for ongoing uncertainty in the region.

#6

U.S. Weapons Pause Weakens Ukraine’s Air Defenses

The United States has halted shipments of Patriot interceptors, artillery munitions, and other critical air defense weapons to Ukraine after a Pentagon review found American stockpiles were dangerously low. The decision comes as Russia intensifies large-scale missile and drone attacks on Ukrainian cities and infrastructure, with over 5,000 drone strikes reported in June alone. While President Trump has signaled openness to providing more systems, the Pentagon’s move underscores growing divisions over sustaining long-term support and reflects shifting priorities toward China and the Middle East. The pause will quickly degrade Ukraine’s ability to defend key population centers, critical infrastructure, and front-line positions, increasing the likelihood of deeper territorial losses and civilian casualties. For Kyiv, the suspension creates immediate operational vulnerabilities and signals that U.S. military backing is no longer assured, raising questions about the credibility of Western commitments and emboldening Russian strategy.

#7

QUAD Ministers Advance Indo-Pacific Coordination

Foreign ministers from the United States, Australia, India, and Japan met in Washington to deepen cooperation across critical minerals, maritime security, and regional infrastructure, reflecting the group’s focus on countering Chinese influence and strengthening supply chain resilience. The meeting produced a new Critical Minerals Initiative to diversify sourcing of rare earths and battery materials essential for clean energy and advanced manufacturing. The ministers also pledged expanded maritime domain awareness and coordinated enforcement against illegal fishing and coercive activities in the South China Sea. While no binding defense or trade pacts were concluded, the joint statement condemned North Korea’s weapons tests and militant attacks in Kashmir. The gathering highlights how the QUAD is evolving from a consultative platform into an operational mechanism to protect strategic resources and infrastructure, with future cooperation likely to expand into AI supply chains and undersea cables. For businesses, the initiative signals increasing alignment among its partners to harden critical supply routes and limit reliance on Chinese materials, though lingering political constraints could slow implementation and affect investment planning across energy, technology, and logistics sectors.

#8

Russia’s Global Pivot Masks Economic Strains

The St. Petersburg International Economic Forum this year showcased Russia’s efforts to recast itself as the hub of a multipolar order, drawing delegates from over 170 countries and announcing a slate of agreements with Asian, African, and Middle Eastern partners. The forum’s theme of "Shared Values: The Foundation of Growth in a Multipolar World" underscored Moscow’s strategic priority to cultivate ties beyond the West and present sanctions as an opportunity to realign global trade and investment. Yet beneath the show of confidence, Russia’s economic foundations are weakening. Official forecasts now project growth of just 1 to 2 percent in 2025, far below last year’s oil-fueled surge. The slowdown reflects a convergence of sanctions pressure, tight monetary policy to contain inflation, and declining budget capacity as military expenditure eases. SPIEF announcements often bundle previously negotiated agreements, nonbinding memorandums, and domestic projects repackaged as foreign investment. In 2024, the forum claimed $70 billion in deals, but actual inward foreign direct investment fell by approximately 63 percent as sanctions made meaningful Western capital nearly impossible. Much of the funding comes from state-owned enterprises, BRICS development banks, or barter-style energy agreements rather than new private commitments. For businesses, this divergence is a cautionary signal: Russia’s geopolitical ambitions will sustain short-term alignment with emerging markets, but the underlying constraints, including limited consumer demand, high borrowing costs, and chronic capital flight, are likely to keep growth subdued and economic policy unpredictable.

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