Singapore – A representative from the International Monetary Fund ( IMF ) stated that while investors and governments are hopeful for technologies that can boost the global economy, these same factors are also increasing the pressures that threaten growth. Therefore, they urge policymakers not to delay any longer in making the difficult choice to address debt issues.

President Kristalina Georgieva stated during an event in Singapore on Wednesday that artificial intelligence "is rapidly becoming a key driving factor in the relative fates of countries within the world economy."

However, three forces – the progress of AI, soaring energy costs, and record-high public debt – are challenging the already “disappointing” growth of this decade.

Georgieva said, "Whether you like it, hate it, or fear it, AI has already arrived."

Tugged between two forces

Before a series of IMF events and the World Bank Annual Meeting that will commence next week, Gueorguieva described the global economy as being pulled in two opposite directions: on one hand, there is the "negative energy supply shock" brought about by the Gulf War, which has entered its eighth month; on the other hand, there is the "positive demand shock" resulting from the AI investment boom. She stated that the combined impact of these two factors is "highly uneven on a global scale."

On a positive note, the proportion of global AI investment in GDP is set to reach, and is likely to exceed, the scale of investment previously used for building railways, power networks, or telecommunications networks. She said that AI hardware and related technology products currently account for more than one-tenth of the total global trade in goods.

IMF It is estimated that, if operated properly, AI could contribute up to 0.5 percentage points to global annual growth. Georgieva said, "Raising 3% to 3.5% for a sustained period of ten years would be equivalent to adding an economy the size of ASEAN to the world economy."

But these gains are likely to be highly concentrated. She said that this boom has largely bypassed economies that are less involved in the global AI supply chain, “increasing the risk of widening global economic inequality.”

She also stated that this boom has exacerbated inflation concerns for policymakers in the United States, Europe, and Asia. “The construction boom is inflationary,” she said, as are the impacts of energy and food prices, tariffs, and defense spending.

Due to the ongoing conflicts in the Middle East and with little prospect for diplomatic resolution, oil prices have remained above $100 per barrel. As refining capacity is tightened, energy supply is reduced, and retail diesel prices have also reached record highs.

This inflationary pressure has directly affected the bond market, with yields on government bonds in the United States, Germany, and Japan soaring to their highest levels in decades. She said that the continuously expanding issuance of long-term private bonds by AI related borrowers is also competing with the government for capital, although part of this increase may reflect market expectations for faster growth.

Debt issues

Goryeva stated that global public debt is approaching its highest level since World War II and is expected to soon exceed 100% of GDP, with developed economies being the "most serious violators." Over the past 17 years, governments have been able to "get by relatively easily" as interest rates have remained below growth rates. "Now, higher interest rates have put an end to that."

She said that the current gap between interest rates and growth is “not so favorable,” and that it “will further increase.” This means that without fiscal efforts, the rate of growth required to reduce the debt-to-growth ratio is now “difficult to achieve” in the short term.

Signs of pressure are already visible in Europe: not only are the yield spreads between French and Italian government bonds and German bonds widening, but similar situations have also emerged in countries such as Ireland and Portugal, which reduced their debt and deficits after the eurozone crisis.

After a series of factors that have pushed up public debt, and with most countries still experiencing fiscal deficits higher than pre-pandemic levels, Georgieva said, "There is an urgent need to replenish fiscal space."

AI Risks are underestimated

Goryeeva also pointed out that the AI craze itself carries financial stability risks. She said that strong corporate profits are driving up stock prices and creating wealth effects, but "if profits fall short of expectations, the leverage of ultra-large cloud service providers, along with the large and growing holdings of US stocks globally, could turn disappointment into a far-reaching impact."

She cited Amara's Law, stating that people tend to overestimate a new technology in the short term and underestimate it in the long term, and said, "We are currently in a transition period from the current AI construction boom to the future AI revenue generation, and this transition period will be the most risky time."

Georgieva said that the first line of defense is regulation and supervision. "Now may be a good time for many countries to adopt a prudent, hawkish stance in monetary policy."