Global borrowing costs are climbing again, and Kristalina Georgieva, the IMF’s managing director, is warning that the world’s finances face a triple threat: an energy price shock, public debt at its highest level since World War II, and an artificial intelligence investment boom that could yet unravel.
Georgieva told policymakers in a speech ahead of next week’s annual meetings of the IMF and World Bank in Bangkok that the global economy is being pulled in two directions at once. A negative energy supply shock from the Middle East war is colliding with a positive demand shock from AI, and both are driving inflation higher. The combined impact, she said, is highly uneven across the world, with the AI boom bypassing many countries.
The fiscal picture is the most alarming element for bond investors. Public debt is forecast to exceed 100% of global GDP before 2030, and Georgieva singled out advanced economies, led by the United States, as the “worst offenders”, with debt to GDP ratios higher than those of emerging markets and low-income countries. Governments can no longer rely on higher growth alone to solve fiscal problems, she argued, calling for credible medium-term fiscal consolidation plans, supported in some cases by upfront fiscal measures to take pressure off monetary policy.
“We cannot keep delaying necessary policy action. You have the tools, now have the wisdom to use them,” she said, adding that now may be a good time for a prudently hawkish bias in many countries’ monetary policy. She described recent rate hikes by the US Federal Reserve, the European Central Bank and the Bank of Japan as “highly appropriate”. The Bank of England has left borrowing costs unchanged but is expected to raise its base rate in November.
Markets reflected the anxiety. French 10-year borrowing costs jumped as much as 12 basis points to 4.85%, reversing Tuesday’s drop, while the euro fell 0.6% against the dollar to $1.1192. UK 10-year gilt yields rose 4.6bps to 5.42%, though still short of last week’s 19-year peak of 5.51%, and US Treasury yields added 4bps to 5.31%. European equities slid, with the FTSE 100 down 0.4% at 10,500, Germany’s Dax and Spain’s Ibex each losing 0.8% and Italy’s FTSE MiB down 1.3%. Oil has climbed back above $100 a barrel, with Brent at $101.19, as investors weigh storm threats to North American production and Houthi attacks on Saudi Arabia against strong Middle East supply flows.
On AI, Georgieva acknowledged the upside: if done right, the technology could add half a percentage point to global growth a year, according to IMF research. But she cautioned that AI investment as a share of GDP is likely to exceed that of railroads, electricity grids or telecoms, and that companies under pressure to justify sky-high valuations could disappoint markets, turning that disappointment into a “far-reaching shock”. She flagged risks including labour market fallout, cyber threats and frontier models escaping human control.
In the UK, the chancellor John Healey met economists from primary dealers, known as gilt-edged market makers, on Tuesday ahead of his first budget on 28 October. Bank of America forecasts the budget will add £15bn to public borrowing in each of the current and next financial years.
Corporate news added to the day’s mix. Rank Group’s Grosvenor Casinos was fined £5m by the Gambling Commission over money laundering and safer gambling failings, awkward timing for a sector lobbying against a rumoured rise in machine games duty from 20% to 40%. Rank, which draws 44% of revenue from slot machines, warns the increase would force venue closures and job cuts.
Billionaire Mike Ashley’s Frasers Group bought an 8.8% stake in Under Armour worth about $80.1m, adding to holdings in Puma and the Norwegian retailer XXL. HSBC is reportedly cutting half of management and specialist roles and 70% of financial advisers in UK wealth management as it deploys AI. Meanwhile, Equinor’s chief executive Anders Opedal warned the UK could become “uninvestable” if the Rosebank and Jackdaw North Sea fields are not approved, though he expressed confidence that prime minister Andy Burnham’s “pragmatic approach” suggests both will go ahead. UK house prices, per Lloyds data, were flat at an average of £298,441, with buyer enquiries at their highest since February.
Whether the AI boom delivers its promised growth or tips into the “far-reaching shock” Georgieva fears may hinge on whether governments act before markets force their hand.