The global economy is slowing, but it is not collapsing. The International Monetary Fund projects worldwide growth of 3.1% in 2026, down from 3.5% in 2025, followed by a modest acceleration to 3.4% in 2027. Behind those relatively stable figures lies a sharper divide: artificial-intelligence investment is supporting activity in some economies, while war-driven energy costs, trade tensions and fiscal pressure are weighing on others.

The IMF’s October World Economic Outlook describes the economy as resilient but increasingly strained. Its central forecast is being pulled by two opposing forces. The first is a negative supply shock, as conflict in the Middle East raises energy and commodity prices. The second is an AI-led demand shock, as companies and governments pour money into computing infrastructure, data centres and related supply chains.

Why growth has held up

AI investment has become more than a technology story. It is now an important source of capital spending, trade and demand for advanced manufacturing. Economies connected to semiconductors, cloud computing and data-centre construction are benefiting from the spending cycle. The IMF says countries exposed to the AI investment boom or enjoying favourable terms of trade are performing relatively well.

That strength has helped offset weakness elsewhere. The IMF expects advanced economies to grow by 2.1% in 2026 and emerging and developing economies by 3.7%, while China is projected to expand by 4.5%, according to reporting on the October outlook by The Daily Star. These figures conceal substantial differences in exposure to energy prices, export demand and technology investment.

The apparent stability also reflects adaptation. Governments and companies have adjusted supply chains, managed inventories and used targeted support to absorb repeated shocks, according to a New Zealand Ministry of Foreign Affairs summary of the IMF assessment. Such measures can prevent a sudden downturn, but they do not remove the underlying costs.

The costs of the split

For energy-importing and lower-income countries, the recovery is less reassuring. Higher fuel and food prices raise import bills, squeeze household purchasing power and make it harder for central banks to reduce interest rates. Inflation is projected to rise from 4.1% in 2025 to 4.7% in 2026 before easing to 4.1% in 2027, with energy and food prices a major driver.

Higher interest rates create a second pressure point. IMF Managing Director Kristalina Georgieva said borrowing costs in advanced economies had reached multi-decade highs, citing persistent inflation, investor demand, stronger expected growth associated with AI and concerns about fiscal fundamentals. Expensive financing can restrict investment in poorer economies while increasing the burden of servicing public debt.

This creates a distributional problem. Wealthier countries and large firms are better placed to fund AI infrastructure and absorb higher financing costs. Lower-income economies may instead face expensive energy, weaker external demand and reduced fiscal room for education, health and climate investment. Growth can therefore remain positive while living standards and policy capacity diverge.

How durable is the AI boom?

Optimism about AI is not without risk. The IMF identifies a possible correction in AI-related investment as a downside scenario: if expected productivity gains fail to materialise, valuations and capital spending could fall together. That would remove one of the main supports for global demand at a time when energy and geopolitical risks remain elevated.

There is also a more favourable possibility. If AI improves productivity faster than expected, it could lift output, support wages and help contain some inflationary pressure. The IMF has therefore treated AI as a two-sided force rather than a guaranteed engine of prosperity, noting both the prospect of earlier productivity gains and the danger of excessive expectations.

What comes next

The near-term test is whether policymakers can prevent the two shocks from reinforcing each other. A wider Middle East conflict could push energy prices higher and prolong inflation. Renewed trade tensions could raise costs and disrupt the technology supply chains supporting the investment boom. A sudden fall in AI spending could then expose how dependent some sectors have become on a narrow set of expectations.

The IMF’s policy message is consequently cautious: governments need credible fiscal plans, targeted protection for vulnerable households and cooperation to keep trade and financial markets functioning. The immediate outlook is neither a classic boom nor a global recession. It is a fragile expansion in which the gains from technology are arriving unevenly, while the costs of conflict are being distributed widely.

The central question for 2027 is not simply whether global growth reaches 3.4%. It is whether productivity gains become broad enough to compensate for higher energy, debt and security costs—or whether the AI boom merely masks a more unequal and unstable recovery.

Sources: International Monetary Fund; IMF press briefing; New Zealand Ministry of Foreign Affairs; The Daily Star.