AI investment props up global growth, but war and debt threaten outlook, IMF says
The IMF is forecasting 2026 global growth at 3.1 per cent, a slight uptick from the 3.0 per cent it predicted in July.
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BANGKOK: The global economy will still manage to top 3 per cent 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 US$100 a barrel, the IMF is forecasting 2026 global growth at 3.1 per cent, a slight uptick from the 3.0 per cent 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 per cent.
For 2027, the IMF predicts 3.4 per cent global growth, flat with the July forecast and up 0.2 percentage points from April.
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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 reaching its limits, so we need to move from just coping to rebuilding," the IMF's chief economist, Silvana Tenreyro, told a news conference. "We need to restore fiscal space. We need to rebuild supply-side resilience."
She said major downside risks to growth include a prolonged, intensified war in the Middle East that spikes inflation pressures, rising bond yields that raise government borrowing costs, El Nino-driven extreme weather events and a reassessment of AI profitability that craters investment and asset prices.
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 a separate interview. She said global growth would have fallen to 2.5 per cent this year without these measures, but their effect is fading as the war drags on.
The IMF noted a growing divergence between countries benefiting from AI and those bypassed by it. Just 32 countries now account for 95 per cent of global growth, compared to 54 countries in April.
Downward growth revisions have become more widespread, with the IMF downgrading 47 per cent of economies since the April forecasts were issued, including several energy importers outside AI value chains.
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 per cent this year compared with the 1.7 per cent 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 per cent, 16 per cent, 16.7 per cent, 15.6 per cent and 3.9 per cent, respectively.
UNITED STATES FLAT, IMPROVEMENT IN EUROPE
Among major economies, the IMF forecast US growth of 2.3 per cent 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.
Eurozone growth for 2026 was upgraded to 1.1 per cent from 0.9 per cent in July due to stronger investment in AI, participation in AI value chains such as chemical production in Germany, and higher defence spending in EU countries. Britain's 2026 growth forecast also was upgraded by 0.3 percentage points from July to 1.3 per cent due to larger AI investment.
The IMF forecast China's growth at 4.5 per cent for 2026 and 4.0 per cent 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 per cent 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.
The AI investment surge is projected to keep upward pressure on prices, with global headline consumer price inflation forecast at 4.7 per cent in 2026 and 4.1 per cent for 2027.
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 US$96 per barrel for 2026 and US$87 in 2027.
But under an adverse scenario highlighted in the report, in which a worsening war pushes oil prices to US$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 per cent.
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 per cent by 2029, with the bulk of the benefits going to the US and China.
But if productivity gains from AI fail to materialise, prompting a sharp decline in investment, US GDP could fall by 0.8 per cent directly, causing spillovers to Asian technology exporters with a total direct GDP impact of as much as 0.4 per cent 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 per cent by 2028, including a 1.8 per cent drop in US output.
The IMF also warned that elevated public debt levels, particularly in advanced economies, increase the risk of sharply higher borrowing costs that can weigh on growth prospects. It urged governments to stop delaying action to rebuild fiscal buffers and articulate credible medium-term plans to bring debt back to sustainable levels - advice that IMF officials plan to push at the Bangkok meetings.
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