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The IMF projects global growth to slip from 3.3% in 2024 to 3.2% in 2025, a 20 basis point downgrade from July, with 2026 growth forecast at 3.1%. Over the medium term, the world economy is expected to expand at an average annual pace of 3.2% from 2027-2030, well below the pre-pandemic average of 3.7%, with emerging markets and middle-income economies bearing the brunt of the slowdown.
“The risks to this fragile global growth outlook remain heavily tilted to the downside,” the IMF warned. AI, in particular, stands out as a double-edged sword: on one hand, a potential AI bust could rival the dot-com crash of 2000-01, threatening market stability and household wealth; on the other, faster AI adoption could unleash powerful productivity gains, offering a rare upside in an otherwise subdued global growth landscape.
“Optimism is fuelling tech investment, lifting stock valuations, and boosting consumption via capital gains. This could push the real neutral interest rate upwards. Continued exuberance may require tighter monetary policy just as in the late 1990s,” Pierre-Olivier Gourinchas, Chief Economist of the International Monetary Fund said.
“But there is also a flip side. Markets could reprice sharply, especially if AI fails to justify lofty profit expectations. That would dent wealth and curb consumption, with adverse effects potentially reverberating through the financial system,” he added.
Downside risks: A potential AI bust
The IMF cautioned that excessively optimistic expectations for AI could be revised as early adopter data comes in, triggering a market correction. Elevated valuations in tech and AI-linked sectors, fuelled by expectations of transformative productivity gains, could face sharp reassessment if these gains fail to materialize.
“A potential bust of the AI boom could rival the dot-com crash of 2000-01 in severity,” the report said, citing the dominance of a few tech firms in market indices and the reliance on less-regulated private credit loans financing much of the industry’s expansion. Such a correction could erode household wealth, dampen consumption, and slow the broader economic recovery.
“Elevated valuations in tech and AI-linked sectors have been fuelled by expectations of transformative productivity gains. If these gains fail to materialize, the resulting earnings disappointment could lead to a reassessment of the sustainability of AI-driven valuations and a drop in tech stock prices, with systemic implications,” it said.
Excessive capital flows into a narrow set of firms may further exacerbate the problem, while constrained fiscal space could limit the effectiveness of policy responses.
“To the extent that the AI hype has led to excessive capital flows into a narrow set of firms and sectors, any unwinding of these positions could then entail a slow economic recovery hampered by capital misallocation. These vulnerabilities are compounded by constrained fiscal space, which may limit the effectiveness of policy responses,” the IMF added.
Upside potential: Productivity gains and economic dynamism
On the positive side, faster AI adoption could unlock strong productivity growth as firms deploy AI-based tools at high speed. Business dynamism could improve if policies allow high-productivity firms to expand and less productive ones to exit efficiently.
“Faster AI adoption could help unleash strong productivity gains as firms increase uptake of the various AI-based tools being developed and deployed at high speed. This may be accompanied by increased business dynamism if the right policies are in place to enable high-productivity firms to continue to grow- and allow unproductive ones to exit the market- prompting an efficiency allocation of resources that supports aggregate productivity growth,” the IMF said in its report.
The IMF noted that AI gains could exceed potential employment costs, especially if governments implement regulatory frameworks and labour market programs to upskill and reskill displaced workers.
“Artificial intelligence could play a transformative role in boosting aggregate productivity,” the report said, emphasizing that policy choices will be crucial in determining whether the AI surge becomes a sustainable driver of growth or a source of economic vulnerability.
