Higher Energy Costs, debt, and uneven AI boom gains threaten global growth

IMF/World Bank Annual Meetings | GLOBAL ECONOMY

The International Monetary Fund warned Tuesday that the global economy has weathered a succession of shocks in recent years, but its ability to absorb new pressures is reaching its limits, as rising energy prices, mounting debt, and higher borrowing costs threaten to weaken growth and complicate governments’ responses to future crises.

In its latest flagship World Economic Outlook report, the Fund warned that the resilience demonstrated by the global economy masks growing vulnerabilities.

It noted that while businesses and governments have adapted to disruptions in energy supplies, and investment in artificial intelligence has helped sustain economic activity, some of these adjustments are becoming harder to maintain with public finances already under pressure; underscoring that another prolonged shock could leave economies with less room to respond.

Speaking to reporters Tuesday in Bangkok following the report’s release, IMF’s new chief economist Silvana Tenreyro said, “The global economy has been resilient, but that resilience is under strain,” urging policymakers to build fiscal buffers.

The Fund projects global growth of 3.1% in 2026, 40 basis points below last year’s rate, before rising to 3.4% in 2027. Tenreyro said risks to the outlook were tilted to the downside.

She said the immediate pressure comes from the conflict in the Middle East, which has driven up energy and other commodity prices, raising costs for import-dependent economies. At the same time, investment in artificial intelligence is supporting demand and trade, providing a partial offset to the drag from higher commodity prices. 

These two forces are shaping the global outlook in different ways, with the benefits of the technology boom concentrated in economies connected to its supply chains, while countries exposed to higher energy costs face a more difficult adjustment.

This combination is particularly challenging for African and low-income economies as many depend on imported fuel and other essential commodities, have limited room to increase public spending, and have yet to benefit substantially from the expansion of AI-related trade and investment.

Higher import bills and more expensive borrowing are also adding to existing fiscal pressures, leaving policymakers and governments in those economies to manage inflation and debt while meeting demands for food security and social protection.

Deniz Igan, chief of the IMF Research Department’s World Economic Studies said this scenario presents a difficult balancing act for policymakers trying to meet immediate needs, including providing food and energy security, while maintaining fiscal stability over the medium term.

She noted that the challenge is particularly acute as higher food and energy prices put pressure on household budgets, while governments face limits on how much additional support they can provide without worsening deficits or debt burdens.

Flagging Nigeria to illustrate that tension, she noted that although the country has benefited from its position as an energy exporter, growth alone has not shielded Nigerian households from economic hardship.

“Growth has held up because it is an energy exporter, but food insecurity remains high and the population is suffering,” Igan said.

She recommended temporary, targeted cash transfers and income support for the most vulnerable households low income econonies to alleviate poverty and protect food security. Such measures, Igan said, should be accompanied by a medium-term fiscal framework, improvements in the quality of public spending and stronger revenue collection.

The approach reflects the policy challenge many governments and policymakers face in managing targeted relief and broader subsidies need to respond to the immediate effects of the energy shock without allowing temporary interventions to undermine their public finances.

Tenreyro also addressed the dilemma facing central banks in countries that import oil and other energy products, noting that higher prices can push inflation up even as the supply shock constrains economic activity, making the policy response more complicated than when inflation is driven primarily by strong demand.

Central banks must keep monetary policy sufficiently restrictive to bring inflation back toward target and prevent price increases from becoming entrenched, she said, while accounting for the effects of the energy shock on economic activity.

That contrast between targeted relief and broader subsidies is important to the IMF’s assessment which recommends that governments need to cushion the effects of higher prices on vulnerable households without committing to spending that further weakens their finances. That becomes more difficult as borrowing costs rise and debt payments compete with spending on essential services and investment.

The Fund’s main concern is that the financial and economic adjustments that have helped contain the Middle East-conflict-induced energy shock may not be sustainable indefinitely.

Businesses and governments, including the U.S., have so far limited the effects of energy supply disruptions by rerouting shipments, drawing down inventories, increasing production elsewhere, and switching to alternative energy sources. Tenreyro said without those adjustments, global growth this year would be closer to 2.5% rather than the Fund’s current projection of 3.1 %

However, she said if commodity prices remain elevated for another six months, the result could be weaker growth and higher inflation, which would translate into increase in long-term interest rates and higher risk premiums, higher cost of servicing and refinancing debt, potentially squeezing the resources available for public investment and social spending for with high debt and large budget deficits.

Tenreyro urged countries with high debt and large deficits to begin consolidating their public finances and put debt and deficits on a downward path, recommending that governments providing assistance to households should keep it temporary and targeted at the most vulnerable, while allowing prices to reflect underlying supply conditions.

The pressure on public finances also complicates the response to inflation, she noted. In energy-importing economies, she said higher fuel prices can push inflation up even as the resulting increase in production and transportation costs weighs on economic activity. Central banks must therefore contain inflation and prevent price increases from becoming entrenched without ignoring the damage higher costs can do to growth, Tenreyro said.

The IMF’s call to rebuild fiscal buffers reflects the risk that governments could face another shock before they have restored their capacity to respond. As debt levels remain elevated and borrowing becomes more expensive, the Fund said, countries need to bring deficits and debt onto a sustainable path while preserving the ability to protect vulnerable households.

The outlook also shows while Investment in AI has helped offset some of the weakness caused by higher commodity prices, the benefits are concentrated in a relatively small number of countries and industries.

On one hand, countries such as those in Asia linked to AI supply chains have benefited significantly from the rise in technology investment and demand. On the other hand, countries with less exposure have received a smaller boost, leaving them more vulnerable to rising commodity prices and tighter financial conditions.

The AI investment boom also carries risks. The IMF pointed to concentrated supply chains and the possibility of a market correction if valuations fall, as well as cybersecurity threats that could disrupt economic activity.

Meanwhile, strong demand, AI-related investment, increased government spending since the pandemic, higher energy and commodity prices, and risk premiums associated with elevated debt are contributing to higher long-term borrowing costs, according to the IMF.

For governments already facing expensive imports and limited access to affordable financing, the combination makes it harder to respond to immediate economic pressures without undermining longer-term fiscal sustainability.

Notably, global trade grew by 8.3% between 2023 and 2025, while trade in AI-related goods expanded by 29%. Without these AI-related goods, overall trade growth would have been 4.6%, the outlook indicated.

Tenreyro said policymakers should focus on containing inflation, restoring room in public finances, and strengthening their economies’ ability to withstand future disruptions. Fiscal policy should avoid adding unnecessarily to demand pressures, while monetary policy should remain focused on price stability. The IMF also called for stronger supply-side resilience and measures to support private-sector activity.