AI investment supports global growth, but war and debt threaten outlook

The International Monetary Fund (IMF) expects global economic growth to reach 3.1% in 2026, as strong investment in artificial intelligence (AI) helps offset the impact of the war in the Middle East and higher energy prices.

The forecast, published in the IMF’s latest World Economic Outlook on Tuesday, marks a slight improvement on the 3% growth projected in July. However, it remains below the 3.5% expansion recorded in 2025.

The Fund expects global growth to rise to 3.4% in 2027, unchanged from its July forecast, but warned that mounting risks could undermine the outlook.

AI investment supports growth

Continued investment in AI infrastructure has helped support growth, particularly in advanced economies developing AI platforms and countries supplying related hardware.

South Korea, Malaysia, Mexico and Thailand are among the countries benefiting from demand linked to AI supply chains.

The IMF also revised its 2026 growth forecast for the eurozone upwards to 1.1%, from 0.9% in July. Stronger AI investment, Germany’s role in AI-related supply chains and higher defence spending across EU countries contributed to the upgrade.

The United Kingdom’s growth forecast was raised by 0.3 percentage points to 1.3%.

The US economy is expected to grow by 2.3% in both 2026 and 2027. Robust consumer spending, tax cuts and AI investment are expected to support activity, although imports linked to AI investment will offset part of the boost.

China’s growth is forecast at 4.5% in 2026 and 4% in 2027, reflecting weak domestic demand and higher oil prices despite strong exports.

India is projected to remain the fastest-growing major economy, with growth of 7% in both years.

Middle East conflict threatens outlook

The IMF warned that a prolonged or intensified war in the Middle East could drive energy prices higher, increase inflation and weaken global economic activity.

The Fund’s baseline forecasts assume that the Strait of Hormuz will reopen in March 2027, with shipping conditions broadly returning to pre-war levels by October 2027. They also assume average oil prices of $96 per barrel in 2026 and $87 in 2027.

Under an adverse scenario in which oil prices reach $130 per barrel through the first quarter of 2027, global growth would be 0.2 percentage points lower in 2026 and 0.5 points lower in 2027. Inflation in 2027 would rise to 5.2%, 1.1 percentage points above the baseline forecast.

The conflict has also sharply weakened the outlook for several Gulf economies. Saudi Arabia is now expected to contract by 3.3% in 2026, compared with a 1.7% growth forecast in July.

The IMF also projects contractions of 7.6% for Iran, 16% for Iraq, 16.7% for Kuwait, 15.6% for Qatar and 3.9% for the United Arab Emirates.

More countries risk falling behind

The IMF said the benefits of AI investment were becoming increasingly concentrated. Just 32 countries now account for 95% of global growth, compared with 54 countries in April.

The Fund has downgraded its growth forecasts for 47% of economies since April, including several energy-importing countries that are less integrated into AI supply chains.

IMF officials said measures taken by governments and companies to cushion the oil shock — including drawing on reserves, finding alternative suppliers and reducing demand – had helped limit the damage. However, their impact is fading as the conflict continues.

Global headline consumer price inflation is forecast at 4.7% in 2026 before easing to 4.1% in 2027.

AI and rising debt add to uncertainty

The IMF identified uncertainty over the returns from AI investment as another major risk. If productivity gains fail to materialise, a sharp drop in investment could trigger falling asset prices, tighter financial conditions and weaker consumption.

In such a scenario, US GDP could fall by 0.8% directly, while Asian technology exporters could also suffer. The combined impact could reduce global output by 1.1% by 2028, including a 1.8% decline in US output.

Conversely, faster AI adoption and increased investment could lift global GDP by a further 0.6% by 2029, with most of the gains accruing to the US and China.

High public debt, particularly in advanced economies, presents an additional threat. The IMF warned that rising borrowing costs could weigh on growth and urged governments to rebuild fiscal reserves and set out credible medium-term plans to stabilise debt.

The warnings are expected to feature prominently at the IMF and World Bank annual meetings in Bangkok, where global economic and financial leaders are discussing the effects of the conflict, energy prices and debt pressures.

What the outlook means for Cyprus

The IMF’s latest global growth outlook highlights risks for Cyprus from higher energy prices, weaker European demand and uncertainty in the tourism sector. Cyprus’s annual inflation rate reached 3.7% in September 2026, while petroleum product prices rose by 25.8% year on year, putting additional pressure on households and businesses.

Tourist arrivals also fell by 7% in the first eight months of the year, to 2.82 million from 3.03 million in the same period of 2025. The IMF had projected Cyprus’s economy to grow by 2.6% in 2026 in its earlier assessment, but warned that higher energy costs and weaker tourism posed downside risks.

Although strong investment in artificial intelligence is supporting global growth, prolonged conflict and further increases in energy prices could weigh on Cyprus’s tourism, consumer spending and economic activity.

Also read: Cyprus trade deficit reaches €6.3 billion in the first eight months
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