AI investment boosts global development, but war, debt threaten

The global economy is projected to achieve over 3% real GDP growth this year, driven by robust AI investment that mitigates the energy shock stemming from the conflict in the Middle East. However, the International Monetary Fund cautions that downside risks are increasing, with a growing number of countries becoming marginalised and susceptible to escalating debt burdens, as stated 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 convene in Bangkok for the IMF and World Bank annual meetings, aligns closely with the most optimistic scenario presented in April, yet it remains below the anticipated global growth of 3.5% for 2025.

For 2027, the IMF forecasts a global growth rate of 3.4%, consistent with the July projection and an increase of 0.2 percentage points from the April estimate. The slight improvement is largely attributed to sustained robust investment in artificial intelligence infrastructure, leading to growth upgrades for key advanced economies developing AI platforms. This is particularly true for countries supplying AI hardware, such as 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. “We need to restore fiscal space. We need to rebuild supply-side resilience.” She indicated that significant downside risks to growth encompass a prolonged and intensified conflict in the Middle East, which could exacerbate inflationary pressures, increasing bond yields that elevate government borrowing costs, extreme weather events driven by El Nino, and a reevaluation of AI profitability that could lead to a sharp decline in investment and asset prices.

Countries and companies acted swiftly to address the oil price shock by depleting reserves, seeking alternative suppliers and energy sources, and reducing oil demand, according to Petya Koeva Brooks, the IMF’s deputy research director, in a separate interview with Reuters. She stated that global growth would have declined to 2.5% this year in the absence of these measures; however, their impact is diminishing as the conflict continues. The IMF observed an increasing disparity between nations that are reaping the benefits of AI and those that are being left behind by it. Currently, only 32 countries contribute to 95% of global growth, a decrease from 54 countries in April. Downward growth revisions have become increasingly prevalent, as evidenced by the IMF’s downgrade of 47% of economies since the April forecasts were released, encompassing numerous energy importers that lie 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% this year compared with the 1.7% growth predicted in July.

Iran, Iraq, Kuwait, Qatar, and the United Arab Emirates are projected to experience significant economic downturns, with contractions in 2026 estimated at 7.6%, 16%, 16.7%, 15.6%, and 3.9%, respectively. Among major economies, the IMF has projected US growth at 2.3% for both 2026 and 2027, remaining unchanged for this year and reflecting an increase of 0.1 percentage point for the following year. The US economy is anticipated to benefit from strong private consumption, tax reductions, and investments in AI. However, the positive impact of AI is likely to be counterbalanced by its significant import component. Euro zone growth for 2026 has been revised upward to 1.1% from the previous estimate of 0.9% in July, attributed to increased investment in AI, engagement in AI value chains like chemical production in Germany, and elevated defence expenditures across EU nations. Britain’s growth forecast for 2026 has been revised upward by 0.3 percentage points from July, now standing at 1.3%, attributed to increased investment in AI.

The IMF projects China’s growth at 4.5% for 2026 and 4.0% for 2027, reflecting a decrease of 0.1 percentage point from July, as elevated oil prices intensify weak domestic demand, notwithstanding robust export performance. India continues to hold the position of the fastest-growing major economy globally, projected to achieve a growth rate of 7.0% for both 2026 and 2027. This marks an increase of 0.6 percentage points for the current year and 0.3 percentage points for the following year, relative to the forecasts made in July, driven by strong domestic demand, active services sector, and investments in artificial intelligence. The anticipated surge in AI investments is expected to maintain upward pressure on prices, with global headline consumer price inflation projected at 4.7% for 2026 and 4.1% for 2027. Participants at the IMF and World Bank meetings in Bangkok will be evaluating a challenging economic landscape. The IMF forecasts are predicated on the assumption that the Strait of Hormuz will reopen in March 2027, with a comprehensive return to pre-war shipping conditions anticipated by October 2027. The IMF projects an average oil price of $96 per barrel for 2026 and $87 for 2027.

However, in a negative scenario outlined in the report, where escalating conflict drives oil prices to $130 per barrel by the first quarter of 2027, growth would be curtailed by 0.2 percentage points in 2026 and 0.5 percentage points in 2027. Inflation in 2027 is projected to increase by an additional 1.1 percentage points, reaching 5.2%. AI represents a significant source of uncertainty, presenting both considerable downside and upside risks, according to the IMF report. In a scenario characterised by rapid technology adoption and heightened investment, it is projected that global GDP may increase by an additional 0.6% by 2029, predominantly benefiting the United States and China. However, should productivity gains from AI not materialise, leading to a significant drop in investment, US GDP could experience a direct decline of 0.8%, which would in turn create spillover effects for Asian technology exporters, potentially resulting in a total direct GDP impact of up to 0.4% by 2028.

This shift would also trigger a sharp reduction in asset prices and tighter financial conditions, leading to a significant decline in consumption, particularly in the US, according to the IMF. Increased global bond yields are projected to dampen economic activity, leading to an overall reduction in global output of 1.1% by the year 2028, which encompasses a notable decline of 1.8% in output within the United States. The IMF also cautioned that high levels of public debt, especially in advanced economies, heighten the risk of significantly increased borrowing costs that could hinder growth prospects. It urged governments to cease postponing measures to restore fiscal buffers and to present credible medium-term strategies aimed at reducing debt to sustainable levels – guidance that IMF officials intend to advocate at the Bangkok meetings.