IMF's Georgieva warns AI boom, energy shocks strain global growth

Policymakers can no longer rely on interest rates below growth to manage debt, ending a 17-year period of fiscal ease. Higher interest rates now end that period of easy debt financing, according to International Monetary Fund Managing Director Kristalina Georgieva.

AI boom is inflationary and concentrated in few economies

The AI building boom is inflationary. It is rapidly becoming a key driver of countries' relative fortunes in the world economy. Global AI investment as a share of GDP will reach and likely exceed the amounts historically invested in building railroads, electricity grids, or telecommunications networks.

This surge is delivering a growth spurt confined to a handful of countries. AI hardware and related technology products account for more than a tenth of world goods trade, driving record exports for Asia’s powerhouse producers of chips and other equipment. The wave of AI investment and expectations for economic gains are also propelling stocks to new highs.

Yet the benefits are likely highly concentrated. Growth in AI-related trade reflects investment in economies embedded in the AI value chain, largely bypassing most economies less involved in the global AI supply chain. This increases the risk of widening economic inequality across the globe.

Energy shocks and debt pressures compound growth challenges

The triple forces of AI advancement, soaring energy costs, and record public debt are challenging underwhelming growth this decade. Oil prices have stayed above $100 per barrel due to the Middle East conflict, while retail diesel prices rose to record highs due to squeezed refining capacity. The AI buildout is adding to this energy demand.

Price pressures may build further as demand rises with the approach of the Northern hemisphere cold season. Georgieva described the energy shock as 'large but contained' so far. The squeeze on key commodity supplies due to conflicts in the Middle East and Ukraine is set to continue into 2027.

Simultaneously, global public debt is near its highest level since World War II and on track to exceed 100% of GDP. Total global debt has surpassed $365 trillion. Advanced economies are the 'worst offenders' in accumulating high public debt. Soaring bond yields have left governments with excessive debt under mounting budget pressure.

The interest-to-growth differential is now much less favourable and set to climb higher. The growth needed to reduce debt ratios without fiscal effort is now out of reach in the near term. After a string of shocks, most countries' fiscal deficits remain above pre-pandemic averages. Fiscal space is crying out for replenishment.

Georgieva urges prudently hawkish policy and regulation to manage AI transition

Kristalina Georgieva spoke at a Wednesday event in Singapore ahead of IMF and World Bank annual meetings. She said we are in the transition between today's AI building boom and tomorrow's arrival of AI's benefits, calling this the period of maximum risk. "Love it, hate it, or fear it, AI is here," Georgieva said.

The first line of defense against AI risks is regulation and supervision. Georgieva called for a 'prudently hawkish bias' on the part of central banks, suggesting such a monetary policy stance may be appropriate in many countries. Countries used to running large budget deficits face some very tough political choices.

The IMF estimates AI could add up to half a percentage point to annual world growth if done right. "Going from 3% to 3.5% over a decade, that is like adding an economy the size of ASEAN to the world economy," Georgieva stated. However, ballooning long-term private bond issuance by AI-related borrowers competes with governments for capital. If corporate earnings fall short, hyperscaler leverage and large global holdings of U.S. equities could turn disappointment into a far-reaching shock.

The weeklong Bangkok gathering of top finance ministers and central bank governors is taking place against a backdrop of turbulence in sovereign debt markets.