IMF chief warns of energy shock, growing debt and AI risks

IMF chief Kristalina Georgieva has issued a foreboding warning about the global economy's vulnerabilities, pointing to persistently high energy prices, soaring public debt, and risks stemming from the burgeoning artificial intelligence (AI) sector. Speaking ahead of the upcoming IMF and World Bank Annual Meetings in Bangkok, Georgieva urged governments to adopt protective fiscal and monetary policies to mitigate these threats.

Georgieva explained that the world is grappling with two opposing forces: a negative energy supply shock caused by Middle East conflicts, and a positive demand shock generated by the AI investment boom. She emphasized that the combined effects of these forces are highly uneven across countries, with many economies particularly vulnerable due to their war-ravaged infrastructures, such as Ukraine and several Gulf countries.

The IMF's upcoming growth forecasts, to be disclosed during the Bangkok meetings, will reveal that the sharpest growth downgrades will be observed in economies heavily impacted by war, particularly Ukraine and Gulf countries. Georgieva didn't disclose whether the latest World Economic Outlook would alter the global growth forecast from the previous 3.0% projection in July, which anticipated a rebound to 3.4% by 2027.

The forecast was based on the Strait of Hormuz reopening by mid-July 2026 and returning to pre-war conditions by March 2027, with oil prices expected to average $89 per barrel in 2026 and $78 in 2027.

Despite the current high energy prices at $100 per barrel, Georgieva noted that refining capacity disruptions add another $100 in "crack-spread" margins per barrel for key products, including diesel. She highlighted that the winter heating season would further strain energy demand, exacerbated by restricted natural gas supplies due to threats to LNG shipping through the Strait of Hormuz.

Even if the Gulf conflict ends soon, Georgieva cautioned that the high energy prices are likely to persist for some time, with Brent crude oil futures predicting high oil prices through 2027.

The IMF warns that the growing public debt burden is detrimental to growth and adds inflationary pressures. Public debt has reached the highest level since World War Two and is projected to exceed 100% of GDP by 2030. Georgieva specifically criticized advanced economies, led by the United States, for their excessive debt-to-GDP ratios compared to emerging markets and low-income countries.

She stressed that policymakers must abandon the reliance on higher growth rates alone to address fiscal issues and instead implement credible medium-term fiscal consolidation plans, supported by upfront fiscal measures if necessary.

After prolonged periods of inflation above target, Georgieva noted that inflationary pressures remain, originating from AI development, energy and food price shocks, tariffs, increased defense spending, and higher debt service costs. She suggested that a more cautious approach in monetary policy may be warranted, with rate hikes by the US Federal Reserve, the European Central Bank (ECB), and the Bank of Japan being "highly appropriate."

In less formal remarks, Georgieva emphasized that the most critical task for monetary policy currently is to prioritize price stability. She stated that central banks should maintain their resolve in achieving this objective, without succumbing to fiscal pressure to ease the burden through debt purchases or other measures. Georgieva warned against monetary "cowboys" rushing to rescue fiscal agents, advocating for independence and resistance to such pressures.