The world economy is being reshaped by AI investment but held back by ongoing conflict in the Middle East, says the IMF.
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Silvana Tenreyro, newly appointed director of the Research Department at the International Monetary Fund (IMF), delivered a stark yet measured assessment of the global economy at her first IMF World Economic Outlook press briefing in Bangkok, Thailand.
Tenreyro said that the world economy has demonstrated staying power in the face of overlapping geopolitical, climate and fiscal pressures, but that resilience must now be followed by rebuilding.
“The economy has been resilient, but that resilience is reaching its limits,” Tenreyro.
“The task ahead is to move from coping to rebuilding, restoring fiscal space and supply-side resilience, and in that way strengthening countries’ ability to grow sustainably.”
Tenreyro opened with data to underline the fact that global economic activity continues to expand, but at a slower pace than last year.
“Global activity is projected to grow at 3.1% this year, 40 basis points lower than last year, and it’s forecast to rise by 3.4% in 2027.”
AI and Middle East war shape outlook
She said that this performance reflects “the net result of two key forces that are shaping the outlook.”
The first is the surge in energy and commodity prices triggered by conflict. Tenreyro said that the increase in the prices of energy and other commodities triggered by the war are “akin to a negative global supply shock, driving up prices and hampering activity.”
The second is the rapid expansion of artificial intelligence.
“The tech boom, mostly driven by AI, acts as a positive demand shock, driving up both prices and activity, particularly trade and investment.”
These opposing forces are pushing inflation higher. Global headline inflation is projected to rise to 4.7% this year and to 4.1% in 2027 while core inflation expectations are 3.9% and 3.7% for 2026 and 2027 respectively, she added. Higher inflation has collided with already elevated debt levels.
“Borrowing costs in several advanced economies have risen at the time of elevated debt. The interaction of high public debt and higher financing costs, in turn, has heightened fiscal concerns and risks.”
This, she explained, is especially acute for highly indebted countries, where refinancing pressures are intensifying. Tenreyro warned that “higher borrowing costs and interest rate payments could crowd out” essential spending.
IMF highlights uneven global landscape
The IMF’s latest output projections show a highly uneven global landscape. World output is expected to grow 3.5% in 2025, slow to 3.1% in 2026, and recover slightly to 3.4% in 2027.
Output in advanced economies remains subdued, hovering around 2%, with the United States projected to maintain 2.3% output growth from 2025-27. The Euro area lingers at 1.2% while Japan is expected to slump to 0.7% from next year. The United Kingdom remain similarly restrained at 1.2-1.3% until 2027.
Emerging markets, however, tell a different story. Emerging and developing Asia output is projected to grow 5.6% in 2025, 5.1% in 2026 and 4.9% in 2027. India stands out with 7.8% in 2025 and 7% forecast in both 2026 and 2027. Sub-Saharan Africa output is at 4.5% until 2027.
“The outlook is highly uneven across countries reflecting differences in exposure to commodity prices and AI-related activity as well as borrowing costs.”
Going forward, Tenreyro says energy exporters and economies integrated into the AI cycle are expected to perform better.
“Energy exporters not in the conflict region and countries closely integrated in the AI cycle are expected to fare better.”
Meanwhile, “energy importers and those with limited participation in the AI tech boom face weaker growth prospects” with many low-income countries and fragile states identified as falling into the latter group.
Resilience under threat
Tenreyro said global resilience faces three major challenges.
“With renewed tensions in the Middle East, prices of crude oil, gas, and refined oil products such as diesel and jet fuel have risen sharply.”
She warned that “a more prolonged disruption of production and transport in the Middle East could lead to even higher prices of energy and other commodities.”
While markets have adjusted through rerouting, inventory drawdowns and efficiency gains, she said “some of these margins, in particular, inventories and energy efficiency gains are reaching their limits.” Without these buffers, she noted, “this year’s global growth would have been 60 basis points lower at 2.5% instead of 3.1%.”
The second limit is technological concentration.
“The AI-related boom through investment and trade has been a key driver of global growth.”
But she cautioned that “AI supply chains are highly concentrated in a few countries, sectors, and firms, which creates potential choke points.”
She added that “a market value correction and AI threats to cyber security could weigh on growth and add financial stability risks.”
The third limit is fiscal. The IMF’s risk scenario shows how quickly conditions could deteriorate.
“Higher commodity prices and concerns with the fiscal outlook lead to a reassessment of public borrowing risks. This causes an increase in both the term premium and inflation expectations.”
Under this scenario, “growth in advanced and emerging economies would be 50 to 60 basis points lower by 2027 relative to the baseline forecast with inflation materially higher.”
IMF tags AI opportunities and perils
Tenreyro concluded with a detailed reflection on AI’s “big role” in shaping global growth.
Between 2023 and 2024, “global trade grew 8.3% cumulatively. Global trade in goods related to AI grew by 29%.”
Without AI, “overall trade would have been only 4.6% instead of 8.3%.”
In relation to the pros and cons of the AI boom, Tenreyro said the IMF considered three scenarios. In scenario A, “we assume that this momentum lasts for longer over time” and productivity gains expand growth. In scenario B, demand persists “but it doesn’t come with the gains in productivity and so the gains are smaller and that comes with higher levels of inflation.” Scenario C envisions “a reassessment of the profitability gains from AI, and that reassessment leads to a downward adjustment in demand.”