IMF: AI Investment Drives Global Growth but War, Debt Cast Shadows
By David Lawder
IMF World Economic Outlook: Growth, Risks, and Divergence
BANGKOK, Oct 13 (Reuters) - The global economy will still manage to top 3% real GDP growth this year as strong AI investment offsets the energy shock from the war in the Middle East, but downside risks are mounting and more countries are being left behind and vulnerable to rising debt loads, the International Monetary Fund said on Tuesday.
Despite a more protracted conflict that has kept oil prices above $100 a barrel, the IMF is forecasting 2026 global growth at 3.1%, a slight uptick from the 3.0% it predicted in July.
The World Economic Outlook forecast, released as global economic and finance leaders gather in Bangkok for the IMF and World Bank annual meetings, is about even with the most optimistic scenario issued in April but below 2025 global growth of 3.5%.
For 2027, the IMF predicts 3.4% global growth, flat with the July forecast and up 0.2 percentage point from April.
AI Investment as a Growth Driver
The slight improvement is largely due to continued strong investment in artificial intelligence infrastructure, prompting growth upgrades for key advanced economies building AI platforms and especially for countries supplying AI hardware, including South Korea, Malaysia, Mexico and Thailand, which is hosting the meetings this week.
"The global economy has been resilient, but that resilience is under strain, with risks to growth tilted to the downside," the IMF's new chief economist, Silvana Tenreyro, told reporters.
"A prolonged conflict in the Middle East could put additional pressures on inflation and slow down growth. A worsening of fiscal prospects, a reassessment of AI profitability, and extreme weather events could further weaken the outlook," she added.
Mitigating the Oil Price Shock
Countries and companies moved quickly to mitigate the oil price shock, drawing down reserves, substituting other suppliers and energy sources and cutting oil demand, Petya Koeva Brooks, the IMF's deputy research director, told Reuters in an interview. She said global growth would have fallen to 2.5% this year without these measures, but their effect is fading as the war drags on.
Divergence in Global Growth
The IMF noted a growing divergence between countries benefiting from AI and those bypassed by it. Just 32 countries now account for 95% of global growth, compared to 54 countries in April.
Downward growth revisions have become more widespread, with the IMF downgrading 47% of economies since the April forecasts were issued, including several energy importers outside AI value chains.
Regional Impacts and Downgrades
Hardest hit by downgrades were the Gulf countries directly impacted by the US-Israeli war against Iran, with Saudi Arabia's GDP now forecast to contract 3.3% this year compared with the 1.7% growth predicted in July.
Iran, Iraq, Kuwait, Qatar and the United Arab Emirates are also expected to fall into deep recessions, with 2026 contractions of 7.6%, 16%, 16.7%, 15.6% and 3.9%, respectively.
Major Economies: Forecasts and Trends
United States and Europe
UNITED STATES FLAT, IMPROVEMENT IN EUROPE
Among major economies, the IMF forecast US growth of 2.3% for both 2026 and 2027, unchanged for this year and 0.1 percentage point higher for next year. The US economy is expected to be supported by robust private consumption, tax cuts and AI investment, though the boost from AI will be offset by its large import content.
Euro zone growth for 2026 was upgraded to 1.1% from 0.9% in July due to stronger investment in AI, participation in AI value chains such as chemical production in Germany, and higher defense spending in EU countries. Britain's 2026 growth forecast also was upgraded by 0.3 percentage point from July to 1.3% due to larger AI investment.
Asia: China and India
The IMF forecast China's growth at 4.5% for 2026 and 4.0% for 2027, both down 0.1 percentage point from July, as higher oil prices exacerbate weak domestic demand despite strong exports.
India remains the world's fastest-growing major economy at 7.0% for both 2026 and 2027, up 0.6 percentage point this year and 0.3 percentage point next year compared with the July forecasts amid robust domestic demand, services activity and AI investment.
Inflation Outlook
The AI investment surge is projected to keep upward pressure on prices, with global headline consumer price inflation forecast at 4.7% in 2026 and 4.1% for 2027.
Risks: Energy Prices and AI Uncertainty
Energy Price Scenarios
ENERGY PRICE, AI RISKS
Participants at the IMF and World Bank meetings in Bangkok will be assessing a precarious outlook. The IMF forecasts are based on assumptions that the Strait of Hormuz will reopen in March 2027 with a broad return to pre-war shipping conditions occurring by October 2027. The IMF assumes an average oil price of $96 per barrel for 2026 and $87 in 2027.
But under an adverse scenario highlighted in the report, in which a worsening war pushes oil prices to $130 per barrel through the first quarter of 2027, growth would be reduced by 0.2 percentage point in 2026 and 0.5 percentage point in 2027. Inflation in 2027 would surge by another 1.1 percentage point to 5.2%.
AI: Upside and Downside Risks
AI is also a huge source of uncertainty, with major downside and upside risks, the IMF report said. Under a scenario of faster adoption of the technology and accelerated investment, global GDP could rise a further 0.6% by 2029, with the bulk of the benefits going to the US and China.
But if productivity gains from AI fail to materialize, prompting a sharp decline in investment, US GDP could fall by 0.8% directly, causing spillovers to Asian technology exporters with a total direct GDP impact of as much as 0.4% by 2028.
This shift would also trigger a sharp reduction in asset prices and tighter financial conditions that cause a major drop in consumption, particularly in the US, the IMF said. Higher global bond yields would further reduce activity, with a combined global output reduction of 1.1% by 2028, including a 1.8% drop in US output.
Debt Concerns
The IMF also warned that elevated public debt levels, particularly in advanced economie