BIS flags 4 major risks to global economy despite AI-led resilience

The global economy faces four growing risks despite its resilience to tariffs and geopolitical shocks, the Bank for International Settlements (BIS) has warned.

In its Annual Economic Report, the BIS said the global economy had shown "surprising resilience" over the past year as investment in artificial intelligence helped offset the impact of higher tariffs and geopolitical uncertainty.

But it said "four pressure points demand attention."

"First, inflation has risen," the BIS said, warning that the energy supply shock following the disruption to the Strait of Hormuz could have lasting effects as "it will take several quarters to purge the imbalances in oil physical markets," while "inflation expectations could de-anchor more quickly than in the past."

The second risk is that "the optimism surrounding AI may not last, despite its promise of future productivity gains."

"The current surge in capital expenditure could prove unsustainable if supply bottlenecks restrain production," the report said. "Intense competition for market leadership may fuel overinvestment further... increasing the risk of a sharp reversal if AI payoffs disappoint."

Third, the BIS warned that "financial vulnerabilities persist."

"Easy financial conditions could tighten and become a potent amplifier in adverse scenarios where interest rates rise and AI payoffs disappoint," it said, adding that "compressed risk premia and stretched valuations highlight the scope for unwinding."

It also warned that "the current tension between exuberant risk appetite and elevated macroeconomic risks could unwind abruptly."

The fourth risk is mounting pressure on government finances.

"Fiscal pressures are mounting," the BIS said. "With already high debt levels, governments face rising demands for spending amid energy shocks and geopolitical tensions."

It added that "interest payments as a share of GDP have risen across many countries," while "higher public debt is cutting fiscal space."

The institution, often described as the central bank for central banks, said the combination of these risks would make policymaking more challenging.

"In the near term, monetary policy must be vigilant to anchor inflation expectations. This is crucial in a world with more frequent supply shocks," it said.

The BIS also urged governments to restore public finances, saying fiscal measures responding to energy shocks should be "temporary, targeted and tailored," while regulators should adopt "congruent regulation" to tackle growing risks from non-bank financial institutions.

"Building on the resilience of the past year, the challenge for authorities is to work towards greater robustness and thus to contribute to sustainable growth going forward," the report said.