IMF chief warns AI boom, $100 oil and record debt form a dangerous mix for global growth

The same technology wave that investors and governments are counting on to rescue sluggish global growth is also stoking the inflation, debt stress and financial instability that threaten it — and policymakers are running out of room to delay hard choices. That was the blunt message from International Monetary Fund Managing Director Kristalina Georgieva on Wednesday in Singapore, delivered as a curtain-raiser for next week's IMF-World Bank Annual Meetings in Bangkok.

Love it, hate it, or fear it, AI is here.— Kristalina Georgieva, IMF Managing Director

Georgieva described the world economy as being pulled in two opposing directions: a 'negative energy supply shock' from the war in the Gulf, now in its eighth month, and a 'positive demand shock' from the AI investment boom. She added that the net result is 'highly uneven across the world.'

With the Middle East conflict showing little sign of a diplomatic resolution, oil prices have remained above $100 per barrel. Constrained refining capacity has pushed retail diesel prices to record highs. Georgieva described the energy shock as 'large but contained' so far, while cautioning that price pressures could intensify as Northern hemisphere cold-season demand picks up and nations rebuild their reserves. The pinch on key commodity supplies caused by the conflicts in the Middle East and Ukraine is expected to persist through 2027.

On the AI side, the picture is more complicated than the stock market rally suggests. Georgieva said that, measured as a share of GDP, global AI investment will match and likely surpass what was spent constructing the railroads, the electricity grid, or telecommunications networks. AI hardware and related technology products already make up more than a tenth of world goods trade. The IMF estimates AI could add up to half a percentage point to annual world growth if managed well.

Going from 3% to 3.5% over a decade — that is like adding an economy the size of ASEAN to the world economy.— Kristalina Georgieva, IMF Managing Director

But those gains are likely to be narrow. Georgieva said the AI boom tends to pass over economies that are less integrated into global supply chains, raising the danger of deepening economic inequality. The rise in AI-related trade is concentrated among economies woven into its value chain, leaving most others on the outside.

The boom is also adding to inflationary pressure across the board. 'The AI building boom is inflationary,' Georgieva said, placing it alongside energy and food shocks, tariffs, defense spending and high public debt as forces pushing prices higher. That inflation pressure has flowed straight into bond markets: yields on U.S., German and Japanese bonds have surged to their highest levels in decades. Total global debt has now crossed $365 trillion.

Georgieva said global public debt is approaching its highest level since World War II and is on course to surpass 100% of GDP before long, with advanced economies the 'worst offenders.' She noted that for 17 years governments enjoyed what she called 'a relatively easy ride' because interest rates remained below growth rates.

Higher interest rates now put an end to that.— Kristalina Georgieva, IMF Managing Director

She said the interest-to-growth differential is now 'much less favourable' and 'set to climb higher,' making the growth required to bring down debt ratios without fiscal effort 'out of reach in the near term.' Signs of the strain are already apparent across Europe, where spreads over German bunds are widening not only for France and Italy but also for Ireland, Portugal and other countries that had trimmed debt and deficits following the euro-area crisis. She said nations accustomed to running large budget deficits face 'some very tough political choices.'

Georgieva also flagged a specific financial stability risk embedded in the AI boom itself. Strong corporate earnings are driving share prices and wealth effects — but should earnings fall short, she warned, hyperscaler leverage and large and growing global holdings of U.S. equities 'could turn a disappointment into a far-reaching shock.' She invoked Amara's Law — which holds that people overestimate a new technology in the short run and underestimate it in the long run — to argue that the window of greatest risk falls somewhere between the current AI building boom and the point at which AI's real economic benefits actually arrive.

Her prescriptions were pointed: regulation and supervision as the first line of defense, and a 'prudently hawkish bias' in monetary policy for many countries. She said that after a succession of shocks that have swelled public debt, 'fiscal space is crying out for replenishment.'

The Bangkok meetings next week will bring together top finance ministers and central bank governors against a backdrop of turbulence in sovereign debt markets. The bond selloff began after the U.S. and Israel struck Iran in February, disrupting fuel supplies and driving up costs worldwide.

Why it matters — With finance ministers and central bank governors gathering in Bangkok next week, Georgieva's warning sets the agenda: governments that delay fiscal consolidation while inflation stays elevated and debt markets grow restless are narrowing their options at exactly the wrong moment.

Reported by reuters.com, cnbc.com, firstpost.com, bloomberg.com, finance.yahoo.com, wsj.com