A fragile sense of optimism in the global economy is being threatened by overvalued stock markets and hype surrounding artificial intelligence, the International Monetary Fund (IMF) has warned. In its latest report, the fund cautioned that “stretched valuations” in equity markets could lead to a sharp “correction” if investor sentiment shifts.
While the IMF modestly upgraded its global growth forecast for this year to 3.2%, it stressed that the outlook remains precarious. A significant portion of recent investment growth has been driven by capital pouring into datacentres and AI infrastructure. The IMF warns that if markets begin to doubt the promised productivity gains from AI, this investment could dry up rapidly, triggering a sharp economic downturn.
This warning comes as part of a broader cautionary message about the state of the world economy. Despite showing “unexpected resilience” to trade tariffs, the fund believes underlying vulnerabilities are growing. The report suggests the current stability is misleading, with the full impact of protectionism and other policy shocks yet to be felt.
The IMF’s chief economist, Pierre-Olivier Gourinchas, presented a report that also flagged risks from restrictive immigration policies and persistent inflation in key economies like the United Kingdom. In the UK, inflation is projected to be the highest in the G7 next year, driven by strong wage growth and public expectations of future price rises.
Ultimately, the IMF’s message is that the global economy is walking a tightrope. While it has navigated recent challenges better than expected, the risks of a fall are increasing, with volatile financial markets and the sustainability of the AI investment boom posing a clear and present danger to future growth.