Bailey highlights global economic resilience, warns of AI and fiscal risks

Andrew Bailey, Governor of the Bank of England, assessed the current state of the world economy at the AlUla Conference for Emerging Market Economies 2026. He noted global resilience despite uncertainty but warned of downside risks from geopolitical tensions, trade policy, fiscal vulnerabilities, and potential AI disappointment.

Resilience meets downside risks

Bailey highlighted the world economy's remarkable resilience despite high policy uncertainty and global financial conditions remaining accommodative.

He noted that inflation has not risen markedly, though cost of living remains a concern in several countries.

However, the IMF cautions that risks are tilted to the downside, citing four key reasons: potential escalation of geopolitical tensions, further disruption to trade policy, emerging fiscal vulnerabilities amid elevated public debt, and the possibility of AI-driven productivity gains being disappointed.

Bailey also pointed to a risk of some complacency in financial markets due to cautious reactions to policy shifts, geopolitical risk correlation, and a "fear of missing out" on AI benefits.

Shifting structural foundations

Bailey outlined profound structural changes shaping the global economy.

He noted larger, supply-side economic shocks, such as the Ukraine war and tariffs, for which traditional macroeconomic frameworks are less equipped.

A decline in potential growth rates in advanced economies over the last fifteen years, primarily due to slower productivity, is another key factor.

He also cited ageing populations, which reduce labor supply and pressure fiscal positions, and the negative growth effects of reduced trade openness.

Finally, Bailey described the financial system's increased robustness since the financial crisis and a shift in intermediation towards non-banks, though banks remain crucial for credit and liquidity.

AI's promise, cooperation's challenge

Bailey remains an "optimist" on AI's productivity potential, but cautions that significant growth takes time, a lesson from economic history.

He stresses the critical need for education and training in AI skills, warning against oversimplified conclusions on employment effects.

The speech underscores that global cooperation is vital for financial stability, requiring a balance between national objectives and international goals in an increasingly multi-polar world.