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Global economy shows resilience but faces downside risks, IMF says
The International Monetary Fund (IMF) has cautioned that a potential reversal in the artificial intelligence (AI) boom and escalating trade tensions pose significant threats to global economic growth. In its latest World Economic Outlook, the IMF described the global economy as "steady" but warned that risks remain "tilted to the downside."
Growth projections revised upward amid resilience
The IMF projects global growth to reach 3.3% in 2026, an improvement from its earlier forecast of 3.1%, before easing slightly to 3.2% in 2027. IMF Chief Economist Pierre-Olivier Gourinchas noted that the global economy has demonstrated resilience, recovering from the trade disruptions of 2025 better than anticipated.
"We're seeing a global economy that is growing at a steady, if not outsized, rate," Gourinchas told the BBC. While he acknowledged that trade barriers, such as those threatened by former U.S. President Donald Trump, have slowed activity, he added that other factors, including surging technology investments, have offset these effects.
AI boom and debt risks could trigger market correction
The IMF report highlighted that the global economy has benefited from "tailwinds" driven by AI-related investments. However, it warned that if expectations for AI growth prove overly optimistic, an abrupt market correction could follow. Even a mild downturn could have outsized effects, given the role of rising share prices in recent wealth gains.
Gourinchas cautioned that firms accumulating debt to fund AI investments could amplify vulnerabilities. "A market reaction doesn't need to be large to impact wealth relative to income, prompting consumers to cut spending and businesses to scale back investment plans," he said.
Trade tensions and geopolitical risks loom large
The IMF identified escalating trade tensions as another major risk, warning that prolonged uncertainty could weigh on economic activity. The report also highlighted the potential for domestic or geopolitical conflicts to disrupt financial markets, supply chains, and commodity prices.
"Trade tensions could flare up, introducing new layers of uncertainty and disrupting the global economy," the IMF said.
UK growth outlook improves, but political divisions persist
The IMF upgraded its UK growth forecast for 2025 to 1.4%, up from 1.3%, while maintaining its 2026 projection at 1.3%. This would place the UK as the third-fastest growing G7 economy, behind the U.S. and Canada, with growth expected to rise to 1.5% in 2027.
Chancellor Rachel Reeves welcomed the upgrade, stating that the UK was "on course to be the fastest-growing European G7 economy this year and next." However, Shadow Chancellor Sir Mel Stride dismissed the 0.1% revision as insignificant, accusing Reeves of "desperation."
Inflation and central bank independence under scrutiny
Global inflation is projected to decline from 4.1% in 2025 to 3.8% in 2026 and 3.4% in 2027. In the UK, the IMF expects inflation to return to the 2% target by year-end, as wage growth slows amid a weakening labor market.
The IMF emphasized the critical role of central bank independence in maintaining macroeconomic stability. Gourinchas warned that challenges to this independence, particularly in countries with high borrowing needs, could lead to inflation and higher long-term borrowing costs.
"Preserving the independence of central banks is paramount for avoiding fiscal dominance and anchoring inflation expectations," the IMF stated.
The warning follows recent controversy involving U.S. Federal Reserve Chair Jerome Powell, who revealed he is the subject of an "unprecedented" criminal investigation by the U.S. Justice Department. Powell suggested the probe may stem from political pressure, though former President Donald Trump denied involvement. The incident prompted global central bank leaders to express solidarity with Powell.
