- AI drives growth but adds strain amid soaring energy costs and record public debt
- AI investment may boost world growth by up to half a percentage point annually
- Economic gains from AI are concentrated, risking wider global inequality
Investors and governments are pinning their hopes for growth on AI, yet it is also loading the world economy with new strain, IMF chief Kristalina Georgieva said in Singapore on Wednesday.
She called on policymakers to quit putting off tough debt decisions. AI is "rapidly becoming a key driver of countries' relative fortunes in the world economy," she said, but it arrives alongside soaring energy costs and record public debt. "Love it, hate it, or fear it, AI is here."
Two Shocks At Once
Ahead of next week's IMF and World Bank meetings, Georgieva described an economy pulled two ways: a "negative energy supply shock" from the Gulf war, now in its eighth month, and a "positive demand shock" from the AI investment boom.
AI investment as a share of GDP will match and probably exceed the sums that built railroads, power grids and telecom networks, and AI hardware and related technology products already account for more than a tenth of world goods trade. The IMF estimates AI could add up to half a percentage point to annual world growth if done right. "Going from 3% to 3.5% over a decade that is like adding an economy the size of ASEAN to the world economy," she said.
Who Gains
The gains are likely to be highly concentrated. Economies with a smaller role in the global AI supply chain are largely bypassed, "increasing the risk of widening economic inequality across the globe."
ALSO READ | AI Could Triple Unemployment In Next Decade, Warns Nobel Laureate Daron Acemoglu
Inflation And Bond Yields
"The AI building boom is inflationary," she said, a pressure it shares with energy and food shocks, tariffs and defence spending. Oil has held above $100 a barrel, retail diesel has hit record highs, and bond yields in the US, Germany and Japan have climbed to their highest levels in decades. Part of that rise may reflect expectations of faster growth.
The Debt Squeeze
Global public debt is close to its highest level since the Second World War and set to pass 100% of GDP before long, Georgieva said, with advanced economies the "worst offenders." Governments enjoyed "a relatively easy ride" for 17 years because interest rates stayed below growth rates, but higher rates have ended that, and growth strong enough to shrink debt ratios without fiscal effort is now "out of reach in the near term." In Europe, yield spreads over German bunds are widening for France, Italy, Ireland, Portugal and others.
ALSO READ | AI Debt, Iran Conflict Can Deepen Financial Market Risks, BoE Warns
A Risk Inside The Boom
The AI boom carries a risk of its own: "should earnings fall short, however, hyperscaler leverage and large and growing global holdings of U.S. equities could turn a disappointment into a far-reaching shock." Regulation and supervision are the first line of defence, she said, adding: "Now may be a good time for a prudently hawkish bias in many countries' monetary policy."
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.