International Monetary Fund warns of AI-driven market correction in global economy

A “reassessment” of the financial returns and efficiency gains expected from artificial intelligence (AI) could trigger a big correction in equity markets, the International Monetary Fund (IMF) has warned.In its latest Global Financial Stability report, the Washington-based fund said that while financial markets remain resilient in the face of war and inflation, there were “three salient risks ahead”.These included an “AI-driven market correction”, another sharp rise in sovereign bond yields and further cyber threats.[ IMF chief alarmed at AI threat to jobs and taxesOpens in new window ]The annual meetings of the IMF and World Bank are taking place in Bangkok, Thailand, this week under the shadow of war in the Middle East, the ongoing energy supply shock and rising interest rates.READ MORE“Weaker or less durable investment and profitability in AI would not only undermine a key engine of growth that has helped offset the economic drag from the war in the Middle East and heightened policy uncertainty, but also lead to a correction in AI-linked equities and credit, which now account for a large share of both markets,” the IMF said.It also warned that “resurgent inflation” and tighter fiscal conditions could spark a further jump in sovereign bond yields and “broader market turmoil”.Global bond yields, including the State’s, have rocketed in recent months as persistent inflation and ballooning government debt unnerves creditors.Pressures from a prolonged war in the Middle East and persistent fiscal concerns could further drive up yields in a “fragile bond market”, it said.Market confidence could also be undermined by “severe cyber incidents” that had the potential to disrupt “critical financial market infrastructure and operations”.In its World Economic Outlook report, published alongside the Global Financial Stability report, the IMF said the global economy was in the grip of two competing economic forces.While the energy price shock continues to stoke inflation and weaken demand, the rapid investment in AI is acting as a counterweight, producing what the fund described as a “demand impulse”.The global economy, it said, was “split” between these forces, with some countries faring better than others.The IMF said activity in the first half of 2026 had held up better than expected despite these three challenges.“Flexible supply responses, rerouting of shipments, inventory drawdowns, fiscal support measures, and lower energy intensity than in previous decades have helped contain the hit to activity from the war,” it said.The AI-driven technology cycle was also providing a boost to demand, it added.However, the IMF warned that further trade fragmentation and prolonged uncertainty related to the war could eventually weigh more heavily on activity and confidence while “constraints on energy could impair the AI-led impetus”.Budget 2027: Does this giveaway budget have potential banana skins that might lie ahead for the Government?“Financing conditions could [also] change abruptly for any number of reasons, including fiscal sustainability concerns,” it said.Global growth was forecast to be 3.1 per cent this year, unchanged from its previous projection in April, and 3.4 per cent in 2027. Global headline inflation is projected to increase to 4.7 per cent in 2026 before easing to 4.1 per cent in 2027, marking a cumulative upward revision of 0.7 percentage points “with the temporary increase driven mainly by energy and food prices”.A reassessment of AI-related prospects could sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers.