IMF chief warns energy shock, growing debt and AI risks threaten global growth

International Monetary Fund Managing Director Kristalina Georgieva warned on Wednesday that the global economy faces threats from high energy prices, soaring public debt, and risks associated with the AI investment boom. In a speech previewing upcoming IMF and World Bank Annual Meetings in Bangkok, Georgieva highlighted how the world is experiencing both a negative energy supply shock from conflicts in the Middle East and a positive demand shock from artificial intelligence, which is fueling inflation.

The combined impact of these forces is unevenly distributed across the globe, with AI growth bypassing many countries. IMF growth forecasts for the meetings will show that economies affected by war, such as Ukraine and Gulf countries, will face significant growth downgrades. Georgieva did not specify whether the IMF's latest World Economic Outlook would alter the global growth forecast from the sluggish 3.0% rate predicted in July.

Oil prices currently stand at $100 a barrel, despite impaired refining capacity adding another $100 in crack-spread margins per barrel for key products like diesel. Even if the war in the Gulf ends soon, high energy prices are expected to persist for some time due to restricted natural gas supplies. Georgieva also pointed out the growing public debt burden, which is at its highest level since World War Two and projected to exceed 100% of GDP before 2030.

Advanced economies, led by the United States, are the worst offenders in terms of debt loads, with debt-to-GDP ratios higher than emerging markets and low-income countries. Georgieva emphasized that policymakers cannot rely on higher growth rates alone to address fiscal issues and called for credible medium-term fiscal consolidation plans, potentially supported by upfront fiscal measures.

She also suggested that inflationary pressures may persist due to AI build-out, energy and food price shocks, tariffs, higher defense spending, and higher debt service costs. Georgieva recommended a cautiously hawkish approach in many countries' monetary policy, citing rate hikes by the US Federal Reserve, the European Central Bank, and the Bank of Japan as appropriate.

Additionally, she highlighted the risks associated with AI, including investment as a share of GDP likely exceeding that of railroads, electricity grids, or telecommunications infrastructure. Georgieva warned that market disappointment could result in a far-reaching shock, but IMF research suggests AI, when implemented correctly, could add half a percentage point of extra world growth annually each year.