IMF Warns on Global Economy: AI Market Correction, War & Debt Threats
Key Risks and Economic Outlook from the IMF
By David Lawder and Andrea Shalal
BANGKOK, Oct 13 (Reuters) - The International Monetary Fund on Tuesday flagged significant growth and financial stability risks from a potential ending of the AI investment boom, growing debt levels and a prolonged Middle East conflict.
The IMF forecast global growth at 3.1% for 2026, a slight uptick from a 3.0% forecast in July as still-strong AI infrastructure investment offset higher oil prices caused by the war in the Middle East.
The latest World Economic Outlook report, released in Bangkok during the annual meetings of the IMF and World Bank, also predicts 3.4% growth in 2027, but that is based on assumptions that the Strait of Hormuz reopens by March and shipping conditions return to the pre-war situation by October 2027.
A deeper war that kept oil prices above $130 through the first quarter of 2027 would cut growth next year by half a percentage point, the IMF said.
AI Investment Boom and Market Correction
Potential Downside Scenario
AI CORRECTION
In another downside scenario, the IMF said that a steep drop in AI investment prompted by disappointment in the technology's productivity gains or profitability could lead to a sharp fall in asset prices, ultimately cutting global GDP by 1.1% by 2028, including a 1.8% drop in US output.
The IMF flagged similar risks in its separate Global Financial Stability Report, warning policymakers needed to avoid "complacency" in guarding against a potential pull-back in AI investment and stock valuations.
Risks to Financial Stability
"If there are questions about the monetization of AI, the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments in the future may not materialize," Jason Wu, assistant director of the IMF's Global Markets Analysis Division, told a press conference at the Bangkok meetings.
An ensuing AI market correction would feed back through the real economy, dragging down broader asset prices and overall demand through a wealth effect reduction, said Athanasios Vamvakidis, deputy director of the IMF's Monetary and Capital Markets Department.
Impact on Global Trade
It would also lead to reduced trade, IMF chief economist Silvana Tenreyro said. Trade in AI goods grew 29% between 2023 and 2025, more than triple the 8.3% growth rate of global trade over the same period. Without the AI trade, overall growth in trade would have been only 4.6%, she said.
Recession Risk and Economic Resilience
Likelihood of a Global Recession
RECESSION UNLIKELY
But even the steep drop in output seen under this scenario was not likely to reduce growth to levels consistent with a global recession, IMF deputy research director Petya Koeva Brooks told Reuters in an interview.
Government Policies and Resilience
Assumptions that recession can be avoided are based on the resilience of the economy so far, along with generally strong government policies, IMF Managing Director Kristalina Georgieva said at a separate panel discussion, where she reiterated the warning against complacency.
"Don't take this resilience for granted. We have to work for it," Georgieva said.
AI-Driven Cybersecurity Risks
The concerns highlighted in Bangkok also include AI-driven cybersecurity risks. They come as banking regulators step up efforts to contain AI-related risks, with Reuters reporting that major US regulators are quizzing banks on their use of advanced AI models and European regulators are pressing banks to boost recovery plans.
Fiscal and Debt Challenges
Public Debt and Bond Yield Pressures
FISCAL, BOND WOES
The IMF reports and meeting participants also highlighted risks from elevated public debt levels and bond yields that may be driven higher still by war-driven inflation pressures, eating up budgets to service debts and sapping growth.
Developing Economies and Debt Burdens
The debt vulnerabilities of many developing economies are a "major barrier" to inclusive growth, said Nigerian Finance Minister Taiwo Oyedele, who chairs the Group of 24 developing nations, warning that member governments were increasingly contending with mounting debt burdens.
Oyedele said estimates showed that developing countries were paying $500 billion more for their debt than developed countries, even as they contend with growing deficits.
IMF Policy Recommendations
The IMF this week is urging countries to begin politically painful steps to bring budgets under control. It singled out Britain for praise as the only major advanced economy to have set out clear plans to reduce government borrowing over the coming years, but urged it to stay the course just weeks before the new UK government unveils budget plans.
Few governments are listening to the IMF's calls to shrink borrowing, said Josh Lipsky, vice president of international economics at the Atlantic Council who is attending the Bangkok meetings.
"France, Germany, the US all need to do fiscal consolidation, but they're moving in the opposite direction," Lipsky said. "I'm afraid that it's going to take some kind of crisis to wake up and realize that this is what has to be done."
(Reporting by David Lawder and Andrea Shalal; Additional reporting by David Milliken, Rae Wee and Selena Li; Editing by John Mair)
