The global economy is facing an increasingly complicated combination of risks, with prolonged energy disruptions, record public debt and the rapid expansion of artificial intelligence threatening to weaken growth and keep inflation elevated, International Monetary Fund Managing Director Kristalina Georgieva has warned.
Speaking ahead of next week’s IMF and World Bank Annual Meetings in Bangkok, Georgieva said the global economy was being pulled in opposite directions. Conflicts in the Middle East are creating a negative energy supply shock, while strong investment in artificial intelligence is generating a positive demand shock that is also adding to inflationary pressures.
The effects are unlikely to be evenly distributed. Countries directly affected by war and energy disruptions are facing immediate economic damage, while many developing economies risk being left behind by the AI investment boom.
The IMF’s latest growth forecasts, due to be released during the meetings, are expected to show the largest downgrades in economies affected by war. Ukraine faces extensive damage to its civilian and economic infrastructure, while Gulf economies have been hit by Iranian strikes and disruptions to energy exports.
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The IMF has not yet indicated whether it will change its 2026 global growth forecast of 3%, issued in July. That forecast had assumed that the Strait of Hormuz would begin reopening in mid-July and return to pre-war conditions by March 2027.
Those assumptions are now under greater pressure.
Energy Shock Could Last Beyond the War
Energy prices have emerged as one of the most immediate threats to global growth.
Georgieva said oil prices remain around $100 a barrel, while disruptions to refining capacity have added substantially to the cost of key petroleum products such as diesel. Natural gas markets are also under pressure as threats to liquefied natural gas shipments through the Strait of Hormuz continue to restrict supplies.
The approaching winter heating season could further increase demand.
The concern for policymakers is that even an end to the conflict would not necessarily bring an immediate return to cheaper energy. Georgieva warned that high prices could persist for some time, while oil futures point to elevated prices extending into 2027.
That creates a difficult environment for central banks. Higher energy costs feed directly into inflation, but they can also weaken economic activity by increasing production and transportation costs for businesses and reducing household purchasing power.
The result could be a combination of slower growth and persistent inflation, limiting the ability of central banks to support economies through lower interest rates.
Georgieva pointed to rising government bond yields as another sign of the pressure. Ten-year yields in the United States, Germany and Japan have reached their highest levels in years, increasing borrowing costs for governments and businesses.
Why Record Debt Is Becoming a Bigger Problem
The energy shock is unfolding against another long-term vulnerability: high public debt.
According to the IMF, global public debt is at its highest level since the Second World War and is expected to exceed 100% of global GDP before 2030.
Advanced economies are particularly exposed. Georgieva described the United States and other high-income economies as among the biggest contributors to the rising debt burden, with debt-to-GDP ratios exceeding those of emerging and low-income economies.
For years, governments could partly rely on economic growth to make large debt burdens more manageable. That strategy is becoming less reliable as growth slows and borrowing costs rise.
Georgieva therefore called for credible medium-term plans to reduce fiscal deficits, including some upfront measures in countries where debt pressures are particularly severe.
The political difficulty is significant. Governments are being asked to reduce spending or raise revenues at a time when households are already dealing with higher energy and food prices, while countries are simultaneously facing pressure to increase spending on defence, infrastructure and economic resilience.
This creates a central dilemma for policymakers: fiscal consolidation may be necessary to restore stability, but aggressive austerity could further weaken economic growth.
AI Could Boost Growth, But It Could Also Create a New Financial Shock
Artificial intelligence presents the opposite side of the global economic picture.
Investment in AI infrastructure has accelerated rapidly, with spending as a share of GDP potentially exceeding previous major infrastructure investment cycles involving railways, electricity grids and telecommunications.
The boom could provide a significant boost to productivity. IMF research suggests that, if managed effectively, AI could add around half a percentage point to global growth each year.
But Georgieva warned that the scale of investment is also creating financial risks.
The concentration of capital and economic activity around a relatively small number of AI companies has increased pressure on those firms to deliver large productivity and earnings gains. Their valuations increasingly depend on expectations of continued growth.
If those expectations are disappointed, the consequences could extend beyond the technology sector.
A sharp reversal in investor confidence could reduce investment, weaken financial markets and create a broader economic shock, particularly if financial institutions and businesses have become heavily exposed to the AI boom.
The risk is therefore not that AI will fail to transform the economy. It is that financial markets may price in an economic transformation that arrives more slowly or unevenly than expected.
The Benefits of AI Are Not Reaching Everyone
Another concern is the uneven distribution of the AI boom.
Countries with advanced digital infrastructure, skilled workforces, deep capital markets and established technology industries are better positioned to attract AI investment and capture productivity gains.
Many developing economies lack those advantages.
That creates the possibility of a widening technological and economic divide in which AI accelerates growth in already advanced economies while leaving others further behind.
Georgieva therefore stressed the importance of AI preparedness, including investments in skills and infrastructure and regulatory frameworks capable of managing the technology’s risks.
Those risks extend beyond economic disruption. The IMF chief highlighted potential large-scale labour market losses, cybersecurity threats, financial stability risks and the possibility that increasingly advanced AI systems could become difficult for humans to control.
What Should Governments Do?
Georgieva’s message to policymakers is that governments cannot afford to address these risks separately.
Energy security, fiscal sustainability, monetary policy and technological preparedness are increasingly interconnected.
Governments need to strengthen their fiscal positions, even when doing so carries political costs. They also need to improve workforce skills, make it easier for businesses to enter and exit markets, strengthen energy security and reduce unnecessary regulatory barriers.
Central banks, meanwhile, may need to maintain a cautious approach to monetary easing while inflationary pressures remain elevated.
That could create an uncomfortable period for the global economy. Higher interest rates can help contain inflation, but they also make already large government debt burdens more expensive to service and can discourage investment.
The broader challenge is therefore one of managing competing shocks rather than responding to a single crisis.
The energy shock threatens to push prices higher. High debt limits governments’ ability to respond with fiscal support. AI could provide a new source of productivity and growth, but excessive financial optimism around the technology could create another source of instability.
Whether the global economy can navigate these pressures will depend on how quickly governments strengthen their fiscal positions, secure energy supplies and prepare workers and institutions for the economic transformation brought by AI.
With information from Reuters.
