AI frenzy adds to risks facing already vulnerable global economy, warns BIS

The optimism surrounding artificial intelligence may not last, increasing the risks for a global economy already vulnerable due to energy supply shocks and strained public finances, the Bank for International Settlements (BIS) said in its annual economic report, released Sunday.

Up until early 2026, the global economy remained resilient due to AI-related investments and “surprisingly strong global trade,” but the closure of the Strait of Hormuz triggered an energy supply crisis that has posed a renewed threat to the global outlook, said the international organization that works with central banks to promote financial stability.

“Despite signs of easing geopolitical tensions and a significant drop in oil prices, the disruption’s impact may linger,” the report said. “A key risk is that higher inflation could become ingrained if inflation expectations de-anchor.”

At a press conference ahead of the report’s release, BIS general manager Pablo Hernández de Cos said that repairing the damaged facilities impacted by the Middle East conflict and normalizing shipping traffic will take time, which could complicate and delay the ramp-up of oil output.

“Meanwhile, the need to rebuild depleted oil reserves could keep demand and price pressures elevated,” he said.

Global headline inflation picked up shortly after the conflict began and prices of plastics and fertilizers rose by 30 and 50 per cent respectively, the report said. Whether the price increases will broaden and persist, as they did in the period following the pandemic, is a “central question,” the report said.

“Post-pandemic inflation surges are still fresh,” it said. “Given that it will take several quarters to purge the imbalances in oil physical markets, further volatility in energy prices could arise. In turn, inflation expectations could de-anchor more quickly than in the past.”

In addition, the intense competition for market leadership in the field of AI may fuel over-investment, as seen in previous innovation waves, which raises the risk of a “sharp reversal if AI payoffs disappoint,” the report said. “The current surge in capital expenditure could prove unsustainable if supply bottlenecks restrain production.”

Hernández de Cos said that while AI represents the most transformative technological breakthrough of our generation, it also raises fundamental questions about the future of work and income distribution.

“Its impact on inflation is uncertain,” he said. “Today, AI has provided an impetus to growth through both real and financial channels. The question is whether this can be sustained.”

The report further said easy financial conditions could tighten and become a potent amplifier in adverse scenarios where interest rates rise and AI payoffs disappoint.

It also noted that the expanding role of non-banks, such as hedge funds, can amplify and accelerate the transmission of market stress in some major advanced economies. “This creates mounting challenges for central banks,” it said.

Accordingly, policymakers must prioritize price stability, strengthen financial stability, ensure sound monetary and fiscal foundations and undertake reforms to ensure sustainable growth, the BIS said.

“Policymakers must act now,” said Hernández de Cos. “Delay will only make the necessary adjustments more costly and increase the chance of difficult trade-offs in the future. By addressing these challenges today, we can help to safeguard the stability of the global economy in the years to come.”

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