The head of the International Monetary Fund says the technology that investors and governments are counting on to drive the global economy is also creating pressure that threatens growth. She called on policymakers to stop stalling and make difficult decisions on debt.

Speaking to an audience at an event in Singapore on Wednesday, Managing Director Kristalina Georgieva said artificial intelligence "is fast becoming a central force determining the relative position of countries in the global economy." Yet the triple combination of AI development, soaring energy costs, and record public debt is dragging down what was already a "lackluster" decade of economic growth. "Whether you love it, hate it, or fear it, AI is here," Georgieva said.

Ahead of the IMF and World Bank annual meetings next week, Georgieva said the global economy is being pulled by two opposing forces at once: an eight-month conflict in the Gulf region bringing a "negative energy supply shock," and an AI investment boom forming a "positive demand shock." The combined effect, she said, "is highly uneven across the globe."

On the positive side, global AI investment as a share of GDP will reach, and may even exceed, the scale of spending on railways, power grids, or telecommunications networks in their day. She said AI hardware and related technology products now account for more than one-tenth of global merchandise trade. The IMF estimates that, if managed well, AI could contribute up to 0.5 percentage points to annual global economic growth. Georgieva said: "Raising growth from 3% to 3.5% over a decade is equivalent to adding an economy the size of ASEAN to the global economy."

But the gains are likely to be highly concentrated. The boom will largely bypass economies not deeply integrated into global AI supply chains, "raising the risk of widening global economic inequality." The surge has also worsened the inflation that policymakers in Europe, the US, and Asia have long worried about. She said: "The AI infrastructure boom has inflationary effects," and energy and food shocks, tariffs, and defense spending will also push inflation higher. With the Middle East conflict dragging on and little prospect of a diplomatic solution, oil prices remain above $100 a barrel. Constrained refining capacity has also pushed retail diesel prices to record highs. This inflationary pressure feeds directly into bond markets, with yields on US, German, and Japanese government debt surging to multi-decade highs.

Georgieva said large-scale issuance of long-term private bonds by AI-related companies will compete with governments for capital, though part of the rise also reflects market expectations of faster economic growth.

Georgieva said global public debt is at its highest level since shortly after World War II and will soon exceed 100% of GDP, with advanced economies the "worst hit." For the past 17 years, governments had it relatively easy because interest rates stayed below economic growth rates. "The era of high interest rates has ended that." She said the current gap between interest rates and growth has "deteriorated sharply and will continue to widen," meaning that in the near term, the economic growth needed to reduce debt ratios without fiscal austerity is "unachievable."

Pressure is already visible in Europe: spreads relative to German government bonds are widening, and beyond France and Italy, countries such as Ireland and Portugal that cut debt and deficits after the eurozone crisis have not been spared either. A succession of shocks has pushed public debt higher, and fiscal deficits in most countries remain above pre-pandemic levels, "leaving an urgent need to rebuild fiscal buffers," Georgieva said.

Georgieva also noted that the AI boom itself carries financial stability risks. Strong corporate earnings have driven up stock prices, creating a wealth effect, but "once earnings fall short of expectations, the leverage of large technology companies, along with the world's massive and still-growing holdings of US equities, could turn a single earnings miss into a broad shock." She cited Amara's Law, the idea that people tend to overestimate the short-term impact of a new technology and underestimate its long-term impact. She said, "The period of transition from today's AI construction boom to the realization of future AI dividends will be the highest-risk phase."

Georgieva said the first line of defense is regulation and supervision. "For now, monetary policy in many countries should perhaps maintain a prudent hawkish stance."