AI is both a hope and a danger for world leaders, says IMF chief

SINGAPORE — The technology that investors and governments are relying on to revive the global economy is also adding pressure that threatens growth, the head of the International Monetary Fund said, urging policymakers to stop delaying painful debt choices.

Director-General Kristalina Georgieva told the audience at an event Wednesday in Singapore that artificial intelligence is “rapidly becoming a key driver of the relative fortunes of countries in the global economy.”

But the triple forces of AI progress, soaring energy costs and record public debt are calling into question this decade’s already “disappointing” growth.

“Love it, hate it or fear it, AI is here,” Georgieva said.

Speaking ahead of a series of annual IMF and World Bank meetings that begin next week, Georgieva described the global economy as being pulled in two directions at once: a “negative energy supply shock” due to the Gulf war, now in its eighth month, and a “positive demand shock” due to the AI ​​investment boom. The combined effect, she said, is “very uneven across the world.”

In contrast, global investment in AI as a percentage of GDP will reach, and likely exceed, the amounts spent on building the railways, electricity grid or telecommunications network. AI hardware and related technology products already account for more than a tenth of global trade in goods, she said.

The IMF estimates that AI could contribute up to half a percentage point to annual global growth if used well. “Going from 3% to 3.5% over a decade is like adding an economy the size of ASEAN to the global economy,” Georgieva said.

But the benefits are probably very concentrated. This boom largely bypasses economies less involved in the global AI supply chain, “increasing the risk of worsening economic inequality across the world,” she said.

The boom is also fueling inflation concerns that are preoccupying policymakers from the United States to Europe and Asia. “The AI ​​building boom is inflationary,” she said, as are energy and food shocks, tariffs and defense spending.

Oil prices remained above $100 a barrel as the Middle East conflict dragged on with few signs of a diplomatic exit. Retail diesel prices have also hit record highs as refining capacity cuts into energy supplies.

This inflationary pressure is reflected directly in bond markets, as bond yields in the United States, Germany and Japan have reached their highest levels in decades. The surge in long-term private bond issuance by AI-linked borrowers also competes with governments for access to capital, although some of that rise may reflect expectations for faster growth, Georgieva said.

Global public debt is near its highest level since World War II and is on course to soon exceed 100% of GDP, with advanced economies the “worst offenders,” Georgieva said. For 17 years, governments had “a relatively easy life” because interest rates remained below growth rates. “Higher interest rates now put an end to this situation.”

The interest rate/growth differential is now “much less favourable” and “expected to increase”, she said, meaning the growth needed to reduce debt ratios without fiscal effort is now “out of reach in the short term”.

The tension is already visible in Europe, where German bond spreads are widening not only for France and Italy, but also for Ireland, Portugal and other countries that reduced their debt and deficits after the eurozone crisis.

After a series of shocks caused public debt to balloon and most countries’ budget deficits remained above pre-pandemic averages, “fiscal space is in dire need of replenishment,” Georgieva said.

Georgieva also highlighted a risk to financial stability in the AI ​​boom itself. Strong corporate earnings boost stock prices and wealth effects, she said, but “if earnings prove insufficient, hyperscaler leverage and large and growing global holdings of U.S. stocks could turn a disappointment into a large-scale shock.”

Citing Amara’s Law, which states that people overestimate a new technology in the short term and underestimate it in the long term, she said it is “somewhere in the transition between today’s AI construction boom and tomorrow’s arrival of AI benefits that we will go through the period of maximum risk.”

Georgieva said the first line of defense is regulation and supervision. “Now may be the time for cautiously hawkish monetary policy in many countries,” she said.