Just how resilient is the world economy really?
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Resilient – that is the message of the International Monetary Fund (IMF)’s latest outlook on the world economy presented at its semi-annual meeting in Bangkok, Thailand. To quote its report: “Global economic activity has proven resilient once again…In less than seven years, the global economy has been subjected to an exceptional sequence of events. The pandemic and the ensuing disruptions to global supply chains; wars in Ukraine and the Middle East, with the consequent sharp increases in the prices of energy and other commodities; and significant changes in trade barriers and trading relations have tested the resilience of households, firms, financial markets, and governments. Individually, each of these major developments would have been considered unlikely. Their confluence over such a short period of time is even more extraordinary.”
“Yet, despite this barrage of shocks, the global economy has held up. Labor markets have remained unexpectedly strong, financial systems have broadly withstood the shocks and the sharpest monetary tightening in almost half a century, and inflation has receded from its peaks in many economies, although it remains persistent in several cases.” The IMF’s economists reckon global economic growth will be broadly unchanged at 3.1% this year and even rise to 3.4% next year.
The IMF is optimistic because: “first, the rerouting of energy supplies, increased energy production in other countries, inventory drawdowns, substitution to other sources of energy, including renewables, and higher energy efficiency have all helped cushion the impact on energy markets. Without these margins of adjustment, the oil disruption alone would have significantly reduced global growth in 2026. And second, the artificial intelligence-driven investment boom boosted global activity and supported international trade. Investment has continued to rise in anticipation of higher expected returns and real incomes (reflected in stock valuations).”
So all is well? Martin Wolf, the liberal pro-capitalist economic guru of the Financial Times, is less sure. Wolf outlines the reasons for current resilience. “the dominant factors have been the flexibility of the global energy economy and the investment boom triggered by AI.” However, neither is guaranteed to last. Stocks of crude and products are low after six months of drawdowns. Moreover, “the AI investment boom also concentrates risk. Even if AI itself works out, the level of investment is likely to stop growing, if not decline, at some point. Moreover, AI might not work out financially on the hoped-for scale at all.”
And the IMF tempers its optimism too. “resilience is under strain. Without shoring up supply capacity and replenishing policy buffers, the global economy could soon test the limits of resilience. Dwindling energy inventories could allow geopolitical shocks to transmit even more forcefully to energy prices. Other commodity markets also face risks. Low-income countries and households remain especially vulnerable to higher food prices from transport disruptions, higher fertilizer costs, export restrictions, and extreme weather events.” And as many have pointed out, “Technology-related investment, while an important boon against the energy shock, is concentrating risks – making the global expansion heavily reliant on a small number of firms, sectors, and economies. More generally, resilience has been uneven, varying noticeably with economies’ exposure to the war and the AI boom, and causing divergent outcomes.” So if all should go wrong, “global growth in 2027 would be materially lower than in the baseline projections, with inflation significantly higher.”
Indeed, the world economy may be ‘resilient’ right now, but it is a resilience within stagnation. Whereas world real GDP growth averaged an annual 4.4% before the Great Recession of 2008-9; in the 2010s, it managed only 3%; and since the 2020 pandemic slump, annual average growth has slowed to 2.7% a year.
Source: World Bank, author’s calculations
In the advanced capitalist economies of the so-called Global North, real GDP growth is well below even that average. This year, according to the IMF, the US economy, even though driven by record levels of investment in AI, will achieve only a 2.3% increase in real GDP (ie after inflation). And that’s the highest rate in the major advanced economies. The eurozone area economies will manage just 1.1%, with France and Italy below even that. Japan will grow just 0.7% this year; Canada and the UK just above 1%.
As for the Global South economies, even including China and India, average growth in 2026 will be just 3.7%, down from 4.5% in 2025. The World Bank reckons that the perpheral economies face the weakest per capita income growth since the pandemic. Excluding China and India, relative to advanced economies, per capita income is not expected to return to the pre-pandemic level until after 2028, “implying nearly a decade of lost income convergence.”
Everywhere, with the exception of China, investment growth in the major economies has been on a declining trend since the 2000s; and the recovery since the pandemic slump has been weaker than that following the global financial crisis.
Source: World Bank
Like night follows day, slowing investment growth leads to falling global productivity growth. Annual productivity growth has dropped from 1.4% (1995–2000) down to roughly 0.4% after the pandemic, with a slight recovery in the last two years, driven by US investment in AI data centres etc. US economic growth has been slowing in the last three years, but would be even slower without AI investment.
Despite expectations, so far, increased productivity growth from the application of AI technology remains absent, at least as measured by total factor productivity (a crude measure of the impact of technological innovation).
Why has investment and productivity growth slowed? The main reason is the nature of a capitalist economy. Capitalists only invest more to boost the productivity of their labour force if they think they will realise higher profitability. Investment is for profit not social need. But the average profitability of capital invested has been falling through the 21st century, only reviving somewhat since the end of the pandemic. Indeed, average profitability is now no higher than the lows of the early 1980s. No wonder investment growth has slowed and has fallen as a share of GDP over the last few decades.
G7 economies: average (weighted) rate of profit on capital (%)
Source: Penn World Tables 11.0 series, AMECO, author calculation
So the world economy may not have entered a major slump in the 2020s (yet), but its resilience is fragile.
And one new feature of the post-pandemic world economy is that inflation is back. The IMF reckons that global annual inflation will reach 4.7% in 2026 with more to come. Only this week, the official US inflation rate reached 3.7% and is averaging well above the target set by the US Federal Reserve of 2% a year.
The IMF admits that inflation could accelerate next year if the Iran and Middle East conflicts continue until the end of this year and beyond. The global supply chain is under renewed pressure and international trade growth is dropping back.
Source: New York Fed
The price of diesel in Europe, Africa and Latin America could start rising again, the International Energy Agency (IEA) warned this week, adding that there will be a global shortage of the fuel until the middle of next year. Price increases driven by physical supply disruptions have larger and more persistent macroeconomic effects than those driven by geopolitical risks.
The IMF and the World Bank make much of rising global debt. Here they refer only to public sector debt. But public sector debt is only at record highs (relative to GDP) because previous private sector investment crashes (1982, 1990, 2001, 2008, 2020).
Governments have bailed out banks and companies ‘too large to fail’ in every slump and have then imposed ‘fiscal austerity’ measures like raising taxes or cutting public investment and services, pensions and welfare benefits because of ‘excessive debt’. That is now the mantra again from the IMF, World Bank, the OECD and governments.
The periods when government debt ratios rocketed (see figure below, blue block) was after crashes in financial and corporate debt. In the periods in between, policies of austerity were applied (particularly cutting welfare benefits and investment in infrastructure), along with some recovery in economic growth, so debt ratios were more or less stable (see figure, orange block). Cuts in income (particularly for higher income groups) and corporate profits taxes, meant that government tax revenues as share of GDP have remained flat at around 35% of GDP, ensuring a rise in annual deficits.
Bu the IMF and other agencies never mention the risk to the ‘resilience’ of the world economy from corporate debt. And yet it is the trigger of a financial crash and the devaluation of ‘fictitious capital’ (as Marx called it) that is the real danger. For a bursting of the AI investment bubble is on the agenda.
The collapse of previous investment booms knocked about 1 pp on average of US real GDP growth. In the aftermath of the dot.com bubble, private fixed investment dropped more than 12.7% between 2000 and the end of 2002 as a recession took hold in the US. In the initial year after the bubble burst, tech investments dropped 12%, while fixed investments in general dropped 7.6%.
Gita Gopinath, former chief economist at the IMF, has calculated that an AI stock market crash, equivalent to that which ended the dot-com boom, would erase some $20tn in American household wealth and another $15tn abroad, enough to strangle consumer spending and induce a global recession. Indeed, the optimistic economic report from the IMF was balanced by these very fears in its Global Financial Stability report. The IMF worries that AI firms could fail to deliver earnings commensurate with their lofty valuations. Even a moderate correction in AI stock valuations would reduce global growth by 0.4%. “Combined with lower-than-expected total factor productivity gains, and a more significant correction in equity markets, global output losses could increase further, concentrated in tech-heavy regions such as the United States and Asia.”
The “magnificent seven” big tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – account for more than 35% of the S&P 500 share index in the US, up from 12% a decade ago, and their total market capitalisation has increased by more than 50% in the past two years. Yet the IMF warned of “growing evidence” that the successful rollout of AI “may not require investment on the massive scale being undertaken by ‘hyperscaler’ firms,” and that “potential economic gains may not be as large as expected”. Athanasios Vamvakidis, the deputy director of the IMF’s monetary and capital department, said “the exposure of the rest of the world to US assets, particularly AI, is the highest it has ever been. So this is supporting the global economy through wealth effects today; but if we get a market correction it could have broad implications.”
“Weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements,” said the IMF report. Such a reassessment would then “sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers”.
Already there are signs of nervousness among AI investors. The US stock market has shown signs of ‘marking time’ after a period of record highs. With inflation up and with it bond yields reaching new highs, the cost of borrowing is rising – and AI investment is increasingly being financed by more debt. Investors have started to hold back on further purchases of the stock of chipmakers – just before the AI lab company Anthropic launches its public offering of shares in order to raise yet more funds. Meanwhile, Chinese AI companies continue to launch new ‘open-weight’ models that can be used at a fraction of the cost of using the models of the American labs.
“The key concern is increasingly around when the extraordinary AI capex cycle starts to peak,” said Emmanuel Makonga, an equities strategist at Barclays. “Investors are focusing on how much further AI spending can sustain from here,” he said, which was causing a “de-rating of the AI trade”. Resilience may be coming to an end.
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