Bailey assesses global economy, warns of AI and debt risks

Bailey noted the world economy's remarkable resilience, adapting impressively to a shifting landscape despite policy uncertainty and tariffs.

Global financial conditions have remained accommodative, partly due to strong equity valuations in the technology and AI sectors.

He identified three factors contributing to this: market caution following unfulfilled policy shifts, reluctance to trade geopolitical risk when safe havens are compromised, and a 'fear of missing out' driven by anticipated AI productivity gains.

This combination, Bailey warned, creates a risk of complacency in financial markets.

The IMF's latest World Economic Outlook update, he added, points to downside risks from escalating geopolitical tensions, trade policy disruptions, fiscal vulnerabilities due to elevated public debt, and potential disappointment in AI-driven productivity gains.

Bailey outlined five structural economic shifts.

First, the economy faces larger, more frequent supply-side shocks (e.g., global financial crisis, COVID-19, Ukraine war, tariffs), for which macroeconomic frameworks are less equipped.

Second, advanced economies show declining potential growth rates, primarily due to slower productivity growth, following long cycles of innovation.

Third, ageing populations and falling replacement rates reduce labour supply and strain fiscal positions, a significance he believes is underestimated.

Fourth, a reversal of trade openness poses negative growth effects, particularly for more open economies.

Finally, the financial system has become more robust since the crisis, with a shift towards non-bank intermediation, but banks remain crucial for credit and liquidity, alongside profound changes in government debt markets and private asset innovations.