THE global economy is set to grow by 3.3 per cent this year, but the International Monetary Fund (IMF) is sounding the alarm that the AI boom driving growth could also become a source of instability. While the growth outlook is being supported by the private sector’s ability to adapt quickly and keep supply chains functioning, alongside supportive financial conditions, the IMF cautioned that risks remain tilted to the downside, noting that much of the current growth is concentrated in information technology and artificial intelligence, particularly in the United States.

“IT investment, as a share of output, has surged to an all-time high,” said Pierre-Olivier Gourinchas, chief economist and director of the research department at the IMF.

While tech investment is generating positive growth globally through strong demand for technology goods, particularly from Asia, the IMF explained that the boom has been supported by favourable financial conditions that are increasingly giving way to debt financing. That shift could amplify shocks if expected returns fail to materialise. Comparing the current surge with the 1995-2000 dot-com boom, potential overvaluation in US equity markets remains modest so far. However, a moderate correction in AI-related stock valuations, combined with tighter financial conditions, could reduce global output by 0.4 per cent in 2026. The impact of such a correction could be wide-reaching. In breaking down the concerns, Gourinchas stated that many critical AI firms are not publicly listed and rely heavily on debt, making them more vulnerable to shocks. US equity market capitalisation is now much higher relative to economic output, meaning a correction could have a larger effect on consumer spending. In addition, foreign ownership of US equities has increased significantly in recent years, raising the risk of global spillovers. Even so, the technology boom carries upside potential. If productivity gains materialise as expected, global output could increase by 0.3 per cent in 2026. The World Economic Outlook also projects that global inflation will continue to ease, slowing from 4.1 per cent in 2025 to 3.8 per cent this year, and further to 3.4 per cent in 2027. However, fiscal discipline has weakened in recent years, leaving governments less able to correct course as public debt rises. Since the pandemic, looser fiscal policies have increased public debt by an additional 2 to 8 per cent of gross domestic product (GDP) in advanced economies, more so than in emerging markets. This erosion of fiscal buffers poses risks to countries’ ability to respond to future shocks and major economic challenges.

“In terms of population ageing, climate transition, national security, or ability to support the economy should a large shock occur,” Gourinchas said as an example.

Since central banks need the ability to adjust course quickly, central bank independence remains critical. Weakened credibility could lead to higher inflation expectations and reduced global demand for US assets, potentially lowering global output by 0.3 per cent in 2026.

“Unfortunately, threats to central bank independence are increasing and must be firmly resisted,” he added.

The International Monetary Fund’s outlook did not sidestep the elephant in the room. After trade tensions weighed on global activity last year, fresh geopolitical risks are again clouding the 2026 outlook. During the World Economic Outlook presentations, journalists pressed officials on US intervention in Venezuela, rising tensions involving Greenland, and renewed threats of tariffs and retaliation. The IMF acknowledged that escalating geopolitical risk and further trade tensions remain among the most pressing challenges facing the global economy, reinforcing concerns that uncertainty around trade policy could once again weigh on growth.

“We’re establishing a projection under the assumption that the level of tariffs remains unchanged. We have current projections and an effective tariff rate estimated at 18.5 per cent for the US against the rest of the world, and it is assumed to stay at that level,” he said.

Recent US threats to impose tariffs on several European countries over their opposition to US ambitions in Greenland have sparked market volatility and concern among global policymakers, with the IMF warning such conflicts could unsettle financial markets and slow growth.

Pierre-Olivier Gourinchas, economic counsellor and director of the research department at the International Monetary Fund (IMF), speaks during a World Economic Outlook news conference.(Photo: Ting Shen)