IMF lifts 2026 global growth forecast on AI investment, warns of debt and market risks

The International Monetary Fund has nudged up its forecast for the world economy this year, saying a surge in artificial intelligence and other technology investment is offsetting trade frictions and geopolitical shocks. But the Fund warned that the apparent resilience—global growth holding at 3.3%—rests on fragile foundations of high debt, frothy markets and strained low-income countries.

Forecasts revised up, risks still to the downside

In its World Economic Outlook update released Jan. 19 and presented at a news conference in Brussels on Jan. 21, the IMF said it now expects the global economy to expand by 3.3% in 2026, up 0.2 percentage points from its projection in October. The forecast for 2027 is unchanged at 3.2%.

“Global growth will hold steady at 3.3 percent this year,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters. “This is an upward revision of 0.2 percentage points compared to our October estimates, driven mainly by the United States and China.” He added that “risks to the outlook remain tilted to the downside.”

The January update, titled “Global Economy: Steady amid Divergent Forces,” said the world has largely shaken off the immediate impact of last year’s tariff shocks. Yet the Fund cautioned that deeper vulnerabilities—high public debt, ongoing trade tensions and weakening support for low-income countries—could amplify the damage from any future shock.

The IMF projects global growth at 3.3% in 2024, 3.3% in 2025 and 3.3% in 2026, edging down to 3.2% in 2027. Inflation, measured by world consumer prices, is expected to ease from 4.1% in 2025 to 3.8% in 2026 and 3.4% in 2027.

A split picture across regions

Behind the steady global headline figure, the report highlighted sharp differences among regions.

Advanced economies: U.S. leads upgrades

Advanced economies as a group are now expected to grow 1.8% in 2026, a 0.2-point upgrade from October. The United States accounts for much of that shift.

The IMF raised its 2026 U.S. growth forecast to 2.4%, from 2.1% previously, citing a surge in information-technology investment—particularly AI-related capital spending—and supportive financial conditions. The forecast for 2027 was trimmed slightly to 2.0%.

“In the United States, IT investment as a share of output is at its highest level since 2001,” Gourinchas said, calling it a “significant boost to business investment and activity.”

In Europe, the euro area is expected to expand 1.3% in 2026, up 0.1 point from October, with modest upgrades for Germany and Spain. Germany’s growth next year is now put at 1.1%, helped by stronger public spending and tech investment, while Spain is forecast to grow 2.3%, supported by exports and tourism.

Japan’s 2026 outlook has been nudged higher to 0.7%. The United Kingdom’s projection for 2026 remains around 1.3%, broadly unchanged.

Emerging markets: Asia strong, Latin America softer

Among emerging markets and developing economies, the IMF now sees output rising 4.2% in 2026, up 0.2 points from October, before slowing slightly to 4.1% in 2027. Emerging and developing Asia remains the fastest-growing region, with growth projected at 5.0% in 2026, 0.3 points higher than previously forecast.

China’s 2026 forecast was revised up to 4.5%, from 4.2%, as exports of higher-tech goods proved more resilient than expected. But the IMF cut its 2027 projection to 4.0%, warning that weak domestic demand and a protracted housing downturn could keep growth on a downward trend unless authorities shift the economy toward more consumption-driven growth.

“China’s growth is increasingly export-driven, with a changing export basket toward more complex products, while domestic demand, especially housing, remains weak,” the report said, warning that without reforms to strengthen social protection and household incomes, the model risks “fueling further protectionism abroad.”

India remains a standout. On a calendar-year basis, the IMF said India is on track to grow around 6.4% in 2026 and 6.5% in 2027, marginally higher than in October, underpinned by robust domestic demand and investment.

Other regions were less buoyant. The Fund trimmed its 2026 growth forecast for Latin America and the Caribbean to 2.2%, from 2.3%, citing tight monetary and fiscal policy and weaker external demand, before a projected pickup to 2.7% in 2027.

Sub-Saharan Africa improves; low-income countries under strain

The outlook for Sub-Saharan Africa improved, with growth now forecast at 4.6% in both 2026 and 2027, a 0.2-point upgrade for 2026. Deniz Igan, a division chief in the IMF’s Research Department, cited stronger commodity prices, stabilization in key economies such as Ethiopia and Nigeria, and structural reforms in South Africa—though she flagged risks from possible cuts in development aid and tighter global financial conditions.

Low-income developing countries are projected to grow 5.1% in 2026, slightly higher than in October, but the IMF underscored acute fiscal strain.

“Foreign aid cuts add to the fiscal challenges in low-income developing countries,” the update said, warning that higher borrowing costs and limited buffers are constraining investment in health, education and infrastructure.

Trade, oil prices and the “divergent forces” narrative

Global trade is expected to expand more slowly than output. The IMF projects world trade in goods and services to grow 2.6% in 2026, up 0.3 points from October, after an estimated 4.1% in 2025.

The report assumes average oil prices of about $62 a barrel in 2026 and 2027, based on futures markets as of late November, implying a 7% drop in energy prices next year.

The IMF said its baseline reflects “divergent forces.” Tailwinds include surging AI and IT investment—especially in the United States—strong demand for technology goods in Asia, and companies’ ability to reroute supply chains despite tariffs and export controls. Fiscal policy in some advanced economies, including the United States and Germany, remains mildly expansionary, and financial conditions are described as broadly accommodative.

Headwinds include a still-unsettled trade environment and persistent policy uncertainty. The IMF noted that U.S. tariff levels remain elevated, and that a temporary truce with China over semiconductors and rare earths—including mutual tariff reductions and a pause on new export controls until November 2026—has not removed uncertainty.

“Policy uncertainty is lower than at the height of 2025 but still much higher than in January 2025,” the report said.

The Fund also pointed to geopolitical flashpoints—including U.S. military action in Venezuela, tensions around Greenland and potential escalation involving Iran and the Strait of Hormuz—as shocks that could disrupt oil markets and trade routes.

Debt, markets and AI: opportunity—and downside risk

Beyond trade and geopolitics, the update devoted unusual attention to debt and financial vulnerabilities. The IMF said fiscal discipline in many advanced economies has “eroded since the pandemic,” with governments slower to adjust when debt rises. Gourinchas said this behavior could add between 2% and 8% of GDP to debt levels in rich countries compared with pre-pandemic norms.

“With higher interest rates and slower trend growth, the debt equation is no longer benign,” he said. “Failure to undertake credible consolidation could lead to rising yields and self-reinforcing negative dynamics.”

A separate section on financial stability warned of stretched asset valuations, record sovereign bond issuance by emerging markets and growing reliance on short-term, price-sensitive investors such as money market funds and leveraged hedge funds. It also cautioned that complex and leveraged financing structures in the AI sector could amplify shocks.

The IMF framed AI as both an opportunity and a risk. Faster-than-expected adoption could raise global growth by about 0.3 percentage points in 2026 and 0.1 to 0.8 percentage points per year over the medium term, the report estimated—if countries invest in energy infrastructure, worker skills and competition policies.

But if expectations for AI-driven productivity gains are revised down sharply, the Fund warned investment could retreat and trigger a correction starting with AI-linked firms. Gourinchas referenced earlier IMF simulations suggesting such a correction could shave roughly 0.4 percentage points off global growth in 2026.

Policy message: rebuild buffers and broaden the gains

The report urged governments to invest in education and training, strengthen active labor-market policies and maintain competitive markets to prevent dominant firms from capturing the bulk of AI-related gains.

It also reiterated support for central bank independence and rules-based trade, warning that political interference in monetary policy is rising. The IMF recalled earlier analysis suggesting a loss of Federal Reserve credibility could lower global output by about 0.3% in 2026.

Projections in the January update were finalized at the end of December, before some recent data releases and policy announcements. The IMF plans to publish a fuller set of forecasts and analysis in its comprehensive World Economic Outlook in April.

For now, the Fund’s message is one of cautious continuity: the global economy has proved more resilient than many expected, but that resilience is narrow—heavily reliant on a concentrated tech and AI boom—and vulnerable to a turn in markets, policy or geopolitics.

“The global economy is steady amid divergent forces,” Gourinchas said. “The challenge for policymakers is to use this moment to strengthen the foundations—reducing debt vulnerabilities, restoring buffers and ensuring that the gains from new technologies are more broadly shared.”