AI boosts global growth but disguises fiscal frailties

Is the global economy bearing up surprisingly well or sliding towards a debt crisis?

Visitors to the 2026 Annual Meetings of the International Monetary Fund (IMF) and World Bank Group in Bangkok may have come away believing both things at once. The event mixed cautious optimism with a growing concern for the state of global public finances. 

There was plenty of good news, even after the IMF revised global growth forecasts down from 3.7% to 3.1%. AI provided the lion’s share, with economists now seeing AI as a structural growth driver rather than just the latest technology cycle. Other reasons to be cheerful included the accelerating integration of ASEAN economies and strong Indian growth. New Federal Reserve (Fed) Chairman Kevin Warsh told the meeting “Institutional credibility is key,” an encouraging message amid questions over the Fed’s independence.  

Against that were worries around soaring debt in major economies and the impact on borrowing costs. Despite ongoing wars in Ukraine and the Gulf, rising prices appeared of lesser concern to attendees than high debt and continued government spending.

While AI was the star of the show, economists identified a widening gap between winners and losers in the AI ecosystem. Many attendees were also concerned about the world’s growing dependence on an increasingly narrow set of economic drivers.  

AI kickstarts an era of nervy growth 

The spectacular growth of AI was a core theme of the meeting. According to the IMF, strong investment in AI technology and infrastructure is offsetting energy shocks from the US-Iran war. That investment will help to push real GDP growth to 3.1% in 2026 and 3.4% in 2027. 

Fed Chairman Warsh underlined the global economy’s reliance on AI. On the demand side, growth is being driven by huge investment in AI infrastructure, he said. On the supply side, AI use is set to raise wealth by boosting productivity.    

But the IMF also noted that just 32 countries account for 95% of global growth, highlighting a growing divide between AI’s haves and have nots. Economic activity is increasingly concentrated in countries developing key AI platforms or supplying hardware. The US and China are obvious winners, but other beneficiaries include a clutch of ASEAN economies with key roles in the AI supply chain: Thailand, Singapore, Malaysia and Vietnam. 

Too many eggs in the AI basket? 

AI’s success in driving economic growth was welcomed by attendees but not without reservation. If growth is increasingly concentrated in countries and sectors with strong links to the AI ecosystem, what happens if momentum stalls? 

IMF leaders conceded that, while the global economy had proved resilient, that resilience had limits. Alongside war in the Middle East and the impacts of a super El Niño, the IMF identified concerns around AI’s valuation and profitability as a downside risk to growth. 

Many economists echoed that concern. If AI is overvalued, the world should be wary of an over dependence on AI-related investment, productivity and trade. If the AI revolution falters, what would that mean for the global economy? 

 “The general tone of the conferences was optimistic, sometimes even bullish, mostly because of spectacular developments in AI,” says Atradius Chief Economist John Lorié, who attended the event.  

“But there were fears that trade growth, which remains relatively strong, has a narrow basis and is overly dependent on trade in AI-related goods between a small selection of countries. In the ASEAN block, for example, a lot of growth is focused on countries that import intermediary AI-related products from China, add value and then export them, predominantly to the US.” 

Fiscal and financial frailty 

While the meeting’s air of positivity was real, behind it lay a sense that AI’s success was masking a more uncertain economic and fiscal outlook. Public debt is becoming a major risk, the conference heard. The precarious fiscal position of countries like the US, France, and China was a recurring theme.  

As governments borrow more, money becomes more expensive or less accessible for business. Eventually, debt becomes unsustainable. The US and France offer contrasting case studies. Both are heavily indebted, both carry hefty budget deficits, and both are paying the price in high interest costs. But France seems more prepared to apply fiscal adjustments to get debt under control than its transatlantic counterpart. 

“It could be heard in the meetings that fiscal adjustment in the US is unlikely in the coming two years, whichever party is dominant in Congress after the midterm elections," says Lorié. “Taxes need to go up, but there is zero political will for that in Washington, even if the current situation is patently unsustainable. By contrast, there appears growing political recognition in France that action is necessary.”  

Fed Chairman Warsh told the audience that the period of stagnation and low growth was over, along with the era of low interest rates. Many economists think that a low-growth problem has been replaced by a high-debt, as well as a high cost of debt, one. As economic activity ramps up, businesses need to grasp opportunities while adjusting to a new reality of higher capital costs.  

Asia’s major economies travel diverging paths 

In keeping with the contrasting emotions of the conference, there was good and bad news from Asia’s dominant economies.  

India’s strong economic performance makes it the exception to the rule in Asia, with 7% growth despite minimal participation in AI supply chains. The conference heard that India’s abundance of skilled labour puts it in a good position to further develop its food processing, manufacturing and business service sectors.  

But while India is a closed economy, China is a driver of global growth. China’s downgraded structural growth path is a problem for the world. 

China’s GDP grew by 4.5% year-on-year between July and September, putting it on track to hit the government’s 2026 target. Nevertheless, the country faces a challenging period as weak domestic demand and an ongoing property crisis weigh on the economy. Some in the conferences feared non-performing loans in the property sector could rise to around 30%, with potentially serious repercussions for banks and investors. 

Chinese GDP is being supported by thriving exports, which go beyond AI-related manufacturing to include cars, electric vehicles, solar panels and pharmaceuticals. But trade restrictions will begin to bite over the next year. The US is already closing its markets to Chinese goods and the EU is restricting imports in key sectors. Against this background, the question asked at the conference is whether the Chinese export engine can continue to compensate for weak domestic demand. 

Balancing risk and reward 

How should businesses interpret this string of mixed messages? The obvious takeaway is that rising borrowing costs cut into margins, even as growth presents new opportunities. Over time, a higher-rate environment could impact customer payment behaviours and potentially elevate insolvency rates. Warsh and others confirmed that policy makers see higher borrowing costs as the new norm. The zero or near-zero rate environment seen before 2022 is well and truly over. 

Attendees in Bangkok identified a world in transition, with growth recovering from post-pandemic lows and fiscal frailty becoming the overriding macroeconomic concern. With that in mind, businesses need to monitor financing conditions as closely as growth forecasts. The era of stagnation is over, but growth comes at a price.  

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