IMF: Energy Squeeze Hits Global Economy’s Strength
The International Monetary Fund indicated that global growth is expected to accelerate next year, driven by investments in AI. However, it cautioned that the world economy is approaching the boundaries of its resilience, as the ongoing energy squeeze and escalating financial risks continue to pose challenges. Growth is projected to accelerate to 3.4% in 2027, according to the fund’s World Economic Outlook released on Tuesday. That remains consistent with the previous update in July, whereas the projection for this year has been adjusted upward marginally to 3.1%. Businesses “have continued to adjust to repeated shocks” while markets – buoyed by an exuberant tech industry – have taken a “broadly benign view of the challenges,” the IMF said. However, it also delineated multiple factors that could potentially undermine its sustainability.
The global energy inventories have been depleted to mitigate supply shortages following the US’s military action against Iran, and these reserves may become increasingly strained as the conflict continues. The artificial intelligence boom has fuelled demand for hardware and has the potential to yield widespread productivity gains; however, it is accompanied by inherent financial risks. The recent surge in bond yields underscores the pressing need to reduce budget deficits and public debts. “The global economy has been resilient but that resilience its reaching its limits” and risks to growth are tilted to the downside, IMF Chief Economist Silvana Tenreyro said. Even with next year’s expected rebound, global growth would be trailing the 3.5% average observed over the previous two years, and the fund characterised medium-term prospects as “lackluster.” One reason is that the boost from AI is highly uneven, and the report underscores the widening gaps that are emerging as the technology progresses. Nearly two-thirds of the additional trade in computing hardware originates from only two nations, Taiwan and South Korea, as reported by the IMF.
Meanwhile, the United States and China comprised over 75% of net AI-related imports in the previous year. The outcome indicates that global economic growth is supported by a more limited foundation. According to the IMF, a mere 32 economies now represent 95% of the total expansion, a significant decrease from 54 countries just six months prior. Whether the surge in AI-related demand “will transform into a positive supply shock in the long term by delivering faster productivity growth remains to be seen,” the IMF said. Meanwhile it’s “contributing to inflationary pressures and financial fragility.” Nonetheless, the fund anticipates a deceleration in inflation in the upcoming year. It predicts that the global headline rate will revert to 4.1% – the level observed in 2025 – following a peak of 4.7% this year. Regarding the budget challenges underscored by the bond-market decline, the IMF emphasised the pressing necessity for “credible adjustment plans” to reinstate fiscal buffers.
“The task ahead is to move from coping to rebuilding,” Tenreyro said. The anticipated increase in growth for the upcoming year is contingent upon a swift expansion in both emerging and developed economies. In the advanced economies, the IMF projects a slowdown in expansion to 1.8%, down from 2.1% this year. It forecasts a growth rate of 2.3% for the US, the largest economy globally – a modest increase from the 2.2% projection made in July. For China, the forecast for 2027 remains steady at 4%. Among major economies, the impact on France is particularly notable. The economy is projected to grow by a mere 0.4% this year, with a slight increase to 0.7% anticipated in 2027. Both figures are 0.2 percentage points lower than in the fund’s July forecasts. Germany is projected to experience a growth rate of 1.1% in 2027, whereas the UK is anticipated to see a slight decline to 1.2% in growth, influenced by elevated energy prices and high interest rates that are expected to dampen consumer spending.
