Inside the vast, glass-walled Queen Sirikit conference centre in Bangkok, the air-conditioned atmosphere was calm as policymakers from more than 100 countries gathered this week for the International Monetary Fund’s annual meeting – and contemplated the surprising strength of the global economy.
A small army of smiling, uniformed Thai staff were on hand to explain the baffling geography of the heavily guarded building, where lunch options were as cosmopolitan as the delegates – including, improbably, a Burger King.
“Resilience” was the buzzword at one event after another, after six months in which sky-high oil prices and geopolitical chaos have made less of a dent in the global economy than first feared.
Growth has not fallen off a cliff, buoyed up by the AI investment boom; stock markets haven’t crashed. “We had Covid, the war in Ukraine, supply-chain shocks, the war in Iran, and the alarm bells go off. And yet we haven’t had that massive synchronised crisis. So I think there’s this feeling that a lot of countries are sort of defying gravity at all income levels,” said Clemence Landers, the vice-president of the Washington-based Center for Global Development.
Yet the IMF was also keen to remind delegates that the resilience of the past six months had been bought at a cost and may not last. The message – “Resilience under strain, urgent choices” – leapt out from the front page of its flagship publication, the World Economic Outlook (WEO).
According to IMF experts, the cost of the energy support measures governments have put in place to protect their citizens from soaring oil prices, as a result of Donald Trump’s war in Iran, has been an extraordinary 0.5% of global GDP.
It said many countries would be unable to sustain support on this scale for much longer – and some had already begun to phase out subsidies, exposing the public to more of the costs of the conflict.
The IMF urged governments to limit the costs and let market signals do their work, by sticking to temporary, targeted measures, rather than across-the-board subsidies.
Aside from how to cope with the practicalities of a conflict that has persisted far longer than many governments had hoped – and whose end point remains elusive – the IMF was also keen to highlight two pressing risks.
The first was what it sees as the unsustainable state of the public finances, particularly in the world’s richest countries. The WEO projected the highest budget deficits this year for advanced economies since the depths of the Covid pandemic.
That means government debt in these countries is expected to keep rising – from 108% of GDP last year, to 115% of GDP in five years’ time.
“Public debt is high in many economies, and fiscal buffers that could otherwise have helped meet rising spending pressures from ageing populations, climate change and national security needs have instead been used to absorb the repeated shocks,” the WEO said.
Anxiety about spendthrift governments appears to have been one factor driving the recent sell-off of government bonds – pushing up yields, or interest rates, to their highest levels in decades; though it also reflects higher expectations for inflation and growth.
The IMF’s managing director, Kristalina Georgieva, lamented: “Too many countries, they did not use the post-pandemic recovery to rebuild fiscal buffers, and each new shock has pushed debt levels higher.”
Fretting that this leaves governments exposed when the next shock comes, as well as pushing up the share of tax revenues required just to service debt, Georgieva repeatedly implored governments – not least Washington – to tighten their belts. “What is our loudest call to policymakers right now? Make urgent repairs to the fiscal house before the cracks widen,” she said. It seems a message unlikely to land well with voters buffeted by one shock after another.
The US Treasury secretary, Scott Bessent, did not bother to travel to Bangkok to hear it; nor to oversee the meeting of G20 finance ministers, of whom he is formally the chair this year.
The UK chancellor, John Healey, stepped in to chair the meeting instead. He spent much of his brief time in Bangkok stressing the importance of standing shoulder to shoulder with Ukraine – which the US has notably not been doing of late. Russia’s delegation was allowed to attend the G20 meeting, to the deep discomfort of UK delegates.
The UK received a positive review from Georgieva and her colleagues, for setting out a plan to balance the books; though she conceded the bond markets had not rewarded its prudence.
“The UK is actually one country where action to reduce the deficit has been taken decisively,” she said. Asked why the UK’s bond yields have not fallen accordingly, Georgieva said London’s status as a global financial centre tended to put the UK under additional scrutiny.
“Traditionally we’ve seen more attention, in relative terms in the UK, to what the government is doing. [There is] a bit more sensitivity, and I think the government recognises they need to stay the course.”
Unusually, no communique was issued after the G20 meeting: a stark signal of how difficult it has become to reach multilateral agreement in the current fissiparous period.
The UK will take over the G20 presidency next year and has ambitious plans, on AI regulation and international development; but Bessent’s no-show was a reminder of the tough task they face in rekindling multilateralism.
The other alarming message the IMF was keen to land, concerned the threat of an AI market crash. As Georgieva put it in a blogpost on Friday: “The risk is that expectations may run rapidly ahead of productivity gains, setting the stage for near-term disappointment.”
The Federal Reserve chair, Kevin Warsh, while professing himself an optimist about the long-term gains of “superintelligence”, as he insisted on calling it, put it another way: “We really don’t know what the market structure is going to be of these new technologies. Who’s going to get to make the money? What are the consequences for those that bet that they were going to make money, but the market structure doesn’t allow it?”
And AI is not just a stock market phenomenon but a huge driver of real-world exports, of the hardware and infrastructure necessary – albeit the benefits are heavily concentrated in a small number of economies, including Taiwan and South Korea. The knock-on effects, then, would be significant.
It is a familiar fear; but in its twice-yearly Global Financial Stability Review, the IMF laid out in detail the rising levels of debt being used to finance the AI boom; the intricate financial linkages between the companies involved; and the increasingly leveraged position of the investors – including hedge funds – backing them up.
As far back as the Wall Street crash of almost a century ago, the economist JK Galbraith was highlighting the fact that leverage – betting with borrowed money, effectively – tends to amplify booms and busts.
And as ministers met in the Thai capital, elsewhere in Asia there were tremors that may suggest Georgieva’s fear of “near-term disappointment” may already be gripping some investors.
South Korea’s Kospi share index recorded its biggest weekly loss since October 2008, at the height of the financial crisis, tumbling by 14.5% during the week, as traders ditched chip manufacturers such as Samsung and SK Hynix.
Analysts reported that questions around the borrowing, spending commitments and future profitability of AI companies unsettled the markets. Bonds issued by the datacentre CoreWeave slumped almost to distressed levels as these worries swirled.
Expectations of future increases in US interest rates also rose, after data showing that consumer price inflation rose in September, as did inflation at the US factory gate. US tech stocks were also hit, knocking 2% off the Nasdaq index between Monday and Thursday.
It was just the latest of a series of market wobbles of late, and finance ministers and central bankers probably gave it little thought as they were whisked in air-conditioned comfort back to their capitals this weekend.
But if the boom does turn to bust, sending shock waves through the global economy, they won’t be able to say they weren’t warned that the “resilience” we have been enjoying rests on shaky foundations.
