The IMF forecasts global growth to decline from 3.3% in 2024 to 3.2% in 2025, a rating downgrade of 20 basis points from July, with 2026 growth forecast at 3.1%. Over the medium term, the global economy is expected to grow at an average annual rate of 3.2% between 2027 and 2030, well below the pre-pandemic average of 3.7%, with emerging market and middle-income economies bearing the brunt of the slowdown.
“The risks to this fragile global growth outlook remain strongly tilted to the downside,” the IMF warned. AI in particular stands out as a double-edged sword: on the one hand, a potential AI crisis could rival the Internet crash of 2000-2001, threatening market stability and household wealth; on the other hand, faster AI adoption could yield powerful productivity gains, providing a rare advantage in an otherwise subdued global growth landscape.
“Optimism boosts investment in technology, boosts stock valuations and boosts consumption through capital gains. This could push real neutral interest rates higher. Continued exuberance may require tighter monetary policy, as in the late 1990s,” said Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund.
“But there is also a downside. Markets could reprice sharply, especially if AI fails to justify lofty profit expectations. That would erode wealth and curb consumption, with potentially negative consequences that could ripple through the financial system,” he added.
Downside risks: a potential AI crisis
The IMF warned that excessively optimistic expectations for AI could be revised once data on early adopters comes in, triggering a market correction. Elevated valuations in technology and AI-related sectors, fueled by expectations of transformative productivity gains, could undergo a sharp revaluation if these gains fail to materialize.
“A potential bust of the AI boom could rival the dot-com crash of 2000-2001 in severity,” the report said, citing the dominance of a few tech companies in market indices and the reliance on less regulated private credit lending that finances much of the industry’s expansion. Such a correction could erode household prosperity, dampen consumption and slow the broader economic recovery.
“Elevated valuations in technology and AI-related sectors have been fueled by expectations of transformative productivity gains. If these gains do not materialize, the resulting earnings disappointment could lead to a reassessment of the sustainability of AI-driven valuations and a decline in technology stock prices, with systemic implications,” the report said.
Excessive capital flows to a limited number of companies could further exacerbate the problem, while limited fiscal space could limit the effectiveness of policy responses.
“To the extent that the AI hype has led to excessive capital flows to a limited number of companies and sectors, any unwinding of these positions could entail a slow economic recovery hampered by capital misallocation. These vulnerabilities are exacerbated by limited fiscal space, which could limit the effectiveness of policy responses,” the IMF added.
Upside potential: productivity gains and economic dynamism
On the plus side, faster AI adoption could drive strong productivity growth as companies deploy AI-based tools at high speed. Business dynamics could improve if policies allow highly productive firms to expand and less productive firms to exit efficiently.
“Accelerated adoption of AI could help realize strong productivity gains as companies increase the variety of AI-based tools being developed and deployed at high speed. This could be accompanied by greater business dynamism if the right policies are put in place to enable high-productivity companies to continue growing – and allow unproductive companies to exit the market – leading to an efficient allocation of resources that overall 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 labor market programs to upskill and reskill displaced workers.
“Artificial intelligence could play a transformative role in boosting overall productivity,” the report said, highlighting that policy choices will be crucial in determining whether the AI wave becomes a sustainable driver of growth or a source of economic vulnerability.
