IMF warns of AI bubble risk to global growth outlook
Australia is set for longer, higher inflation, an influential global economic body has said, warning of a “prolonged correction” if the AI bubble bursts.
The International Monetary Fund’s forecast for Australia’s economic growth remains unchanged in its latest World Economic Outlook update, published at AEDT on Monday night.
The Brussels-based organization still expects Australia’s gross domestic product to grow by 2.1 per cent this calendar year and 2.2 per cent in 2027, but noted it was “expected to see some persistence in above-target inflation”.
Australia’s headline inflation rate is currently 3.4 per cent – above the Reserve Bank’s two to three per cent target range – and the Treasury predicts the rate will remain above target until at least June.
“The global economy is incredibly uncertain; persistently high inflation remains a problem for many countries around the world, and this is reflected in this report,” said Finance Minister Jim Chalmers.
Despite the challenges posed by persistent inflation, global growth has shown remarkable resilience to US President Donald Trump’s tariffs, IMF economists Tobias Adrian and Pierre-Olivier Gourinchas said.
But if AI optimism is punctured by disappointing results, that resilience could be put to the test and “a longer-lasting correction in stock market valuations, increasingly leveraged by just a few tech firms, could occur.”
This will lead to costly reallocation of capital and labor and a decline in business dynamism, the report said.
Negative wealth effects will put pressure on private consumption and investment. Spillovers will spread to the rest of the world through tighter global financial conditions.
“The volatility of the global economy was a key feature of my discussions with international colleagues last week and will continue to weigh heavily on Australia in the months and years ahead,” Dr Chalmers said.
“These global challenges place a premium on the type of responsible economic management that has been a hallmark of the Albanian government from day one.”
HSBC Australia chief economist Paul Bloxham said more than responsible economic management was needed from the government.
He called for a more ambitious “pro-growth” reform agenda to pave the way for more business investment and innovation.
“As we see, there are plenty of growth opportunities for Australia, given its vast resource endowment, strong ties to Asia and opportunities related to technology and energy transition,” he wrote in a research report.
“More rapid progress is needed, in particular, in achieving the energy transition and supporting the availability of low-cost energy supplies in the process.”
He said that lower energy costs would help increase investment in critical minerals, and that more steps should be taken to direct exports to the rapidly growing economies of India and Southeast Asia.
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