IMF lifts global growth outlook as AI boom offsets trade and debt risks

Global outlook improves, but fragility remains

BRUSSELS — The world economy is growing a little faster than expected, helped by a boom in artificial intelligence and other technology investment, but remains vulnerable to trade fights, legal uncertainty in the United States and record debt levels, the International Monetary Fund said Monday.

In its January 2026 update to the World Economic Outlook, released in Brussels, the IMF nudged its global growth forecasts slightly higher and described the outlook as “steady amid divergent forces.” The fund now estimates that the world economy expanded 3.3% in 2025 and will grow at the same pace this year, before easing slightly to 3.2% in 2027.

Those figures are up from the IMF’s October 2025 projections, which saw growth at 3.2% in 2025 and 3.1% in 2026. They remain below the roughly 3.7% average annual growth the world enjoyed in the two decades before the 2008 financial crisis.

“The global economy has shown remarkable resilience,” the report said, crediting robust demand in the United States and parts of Asia, “solid investment in digital and AI‑related technologies,” and still‑supportive financial conditions. At the same time, it warned that “downside risks remain elevated,” including a reassessment of AI‑driven productivity hopes, renewed trade friction and fiscal strains in highly indebted countries.

A change in tone—and a narrower engine of growth

The update, presented at the National Bank of Belgium, marks a tonal shift from the fund’s October flagship forecast, which carried the subtitle “Global Economy in Flux, Prospects Remain Dim.” The new subtitle — “Global Economy: Steady amid Divergent Forces” — signals a more balanced view: the IMF no longer expects an imminent global slowdown, but sees a recovery that is slower than past decades and heavily reliant on a narrow band of fast‑growing, tech‑rich economies.

For households and businesses, the new outlook suggests that interest rates may eventually ease from today’s elevated levels but are unlikely to return soon to the ultra‑low era that followed the financial crisis. For governments, it underscores the pressure to rein in deficits without choking off growth or undercutting spending on social protection and climate policy.

Inflation easing, but not evenly

The IMF’s inflation projections are largely unchanged from October. Global headline inflation is expected to fall from an estimated 4.1% in 2025 to 3.8% in 2026 and 3.4% in 2027. The fund said it has “increased confidence” that inflation is on a downward path, but warned that U.S. inflation is likely to return to the Federal Reserve’s 2% target more slowly than in other major advanced economies.

Behind the aggregate numbers lies a sharper divergence.

Advanced economies are expected to grow at just under 2% this year, slightly faster than previously forecast, lifted mainly by the United States and a handful of technology‑intensive countries. Emerging market and developing economies are projected to expand above 4%, with modest upward revisions for 2025 and 2026. Yet many poorer and heavily indebted countries face higher borrowing costs and limited fiscal space, leaving them exposed to shocks.

Regional snapshots: U.S. leads, Europe lags, China slows

The United States remains the standout. The IMF noted that U.S. growth in 2025 was stronger than expected, with annualized growth of about 4.3% in the third quarter. Staff estimate that a pickup in technology and AI‑related investment contributed roughly 0.3 percentage point to annualized growth over the first three quarters of the year, helping offset drags from high interest rates and a federal government shutdown late in 2025.

The euro area, by contrast, is described as “subdued but improving.” France has benefited from strong aerospace exports, but Germany’s economy was essentially flat between the second and third quarters of 2025, weighed down by weak exports and lingering industrial challenges. Overall, the currency bloc is expected to grow modestly, with some support from fiscal measures and tech‑related exports but without the scale of AI‑driven investment seen in the United States.

In Asia, China remains a concern. IMF staff estimate that Chinese growth slowed to about 2.4% in the third quarter of 2025, as a prolonged housing downturn and fragile domestic demand offset resilient exports, including technology goods. Elsewhere in emerging Asia, however, exports of semiconductors and other tech products to the United States and other markets have been “growing briskly,” the report said, underpinning regional trade despite broader headwinds.

Japan’s economy contracted by about 2.3% at an annualized rate in the third quarter of 2025, dragged down by weak residential investment and exports, though consumption provided some offset.

The AI paradox: support today, risk tomorrow

At the core of the IMF’s message is a paradox: the same AI and technology boom that is propping up global growth could become a source of instability if expectations overshoot reality.

The fund warned that if businesses and investors conclude that AI will not deliver the expected productivity gains, they could pull back on investment, and “equity valuations in AI‑intensive sectors could correct sharply.” A sudden drop in tech stock prices would likely spread to broader markets by eroding household wealth and tightening financial conditions, it said.

Financial markets are already showing signs of strain. Global financial conditions remain “broadly accommodative,” but the IMF pointed to a widening gap in equity prices between a small group of large technology companies and the rest of the market. An abrupt correction in that segment, the report cautioned, could expose vulnerabilities in leveraged investors and in parts of the banking system.

Trade fights and U.S. legal uncertainty

Trade and geopolitics form the second major fault line.

The fund noted that since October, Washington and Beijing have reached a limited truce over semiconductor and rare earth export controls, cutting some bilateral tariffs until November 2026 and pausing certain export restrictions. The United States has also dropped tariffs on some agricultural imports. Taken together, these steps leave the overall effective U.S. tariff rate “broadly unchanged” from what the IMF assumed in October.

Even so, the report said trade policy uncertainty “remains elevated compared with early 2025.” One reason is legal. The IMF highlighted that the U.S. Supreme Court is widely expected to rule this year on whether the president can use the International Emergency Economic Powers Act, a 1977 law, to impose extensive tariffs.

Former President Donald Trump used IEEPA to justify wide‑ranging tariffs on trade partners, arguing that deficits, drug trafficking and migration constituted national emergencies. A federal appeals court has since questioned that use of the statute, finding that it exceeded the powers Congress intended to delegate, while leaving some measures in place pending further review. The Supreme Court’s decision could either curb the use of emergency powers in trade policy or entrench a more unilateral approach, shaping global trade conditions for years.

Debt risks, tightening room for policy

A third area of concern is public debt. Many advanced and emerging economies entered 2026 with high debt loads and sizable deficits after the pandemic and energy‑price surges. Long‑term government bond yields have risen, even as overall financial conditions remain fairly loose, raising the risk of “sovereign stress” in countries with large refinancing needs, the IMF said.

The report projected that several advanced economies will loosen fiscal policy in 2026, providing some short‑term support to growth. But it urged governments to “restore fiscal buffers” over time, arguing that persistently high deficits could push up borrowing costs further and stoke financial instability. It called for support to households to be “targeted and temporary,” rather than broad subsidies, and for public money to focus on productivity‑enhancing investment such as digital infrastructure and skills.

In lower‑income countries, the arithmetic is harsher. Many face higher interest bills, limited access to capital markets and growing needs for climate adaptation, health and education. The IMF warned that without debt relief or concessional financing, some governments may be forced into sharp spending cuts that could undermine long‑term development and social stability.

Policy message: finish disinflation, rebuild buffers, keep trade predictable

The fund’s policy advice followed familiar lines: keep monetary policy tight enough to finish the disinflation job while monitoring financial risks, rebuild fiscal space gradually, avoid new trade barriers and pursue structural reforms to raise productivity. It paired those recommendations with a call to ensure that the gains from AI and digitalization are more broadly shared, noting that countries lacking digital infrastructure, human capital and strong institutions risk falling further behind.

For now, the numbers suggest that the global economy has dodged the worst‑case scenarios that loomed in recent years. Growth is holding up, inflation is easing and a handful of large economies are investing heavily in technologies that could, over time, lift global productivity.

Whether that resilience endures, the IMF made clear, will depend less on algorithms than on policy choices: how governments manage debt, regulate and tax digital industries, train workers for an AI‑intensive labor market, and resolve trade disputes within a predictable legal framework. In a world the fund describes as “steady amid divergent forces,” it is those decisions, rather than the current uptick in the data, that will determine how long the calm lasts.