The Bank for International Settlements published its Annual Economic Report on Sunday, warning that the global economy faces growing risks from persistent inflation pressures, fragile AI investment, high public debt and vulnerable financial markets.
BIS General Manager Pablo Hernández de Cos said the institution’s message was urgent, calling on governments and central banks to act before conditions worsen. The BIS said delaying policy adjustments would make them more costly and increase the risk of harder trade-offs later.
On artificial intelligence, the report struck a cautious tone. It said AI has lifted confidence and expectations for long-term productivity growth, but warned that the current surge in capital spending could prove difficult to sustain. Supply bottlenecks, intense competition and the risk that actual returns disappoint high market valuations could turn the boom into a prolonged investment slowdown.
The BIS also raised concern about how parts of the AI expansion are being financed. The report pointed to increasingly complex funding structures, including so-called circular financing deals that mix equity, debt and supplier-client contracts. Such arrangements, it warned, could become difficult to unwind if expectations around AI revenues weaken.
A major equity-market correction linked to AI disappointment could also have wider economic consequences. The BIS said a sharp repricing could disrupt credit markets and echo previous periods of financial stress, including the global financial crisis and the market turmoil seen in March 2020.
Public debt was another major warning point. The report said near-record government borrowing costs and the growing role of non-bank financial institutions in sovereign debt markets have created what it called a new fiscal-financial stability nexus.
Frank Smets, acting head of the BIS monetary and economic department, warned that this nexus could make sovereign bond markets more prone to sharp moves. In a stressed environment, falling bond prices could rapidly tighten financial conditions and raise borrowing costs for governments, businesses and households.
The BIS also warned that inflation risks have not disappeared. It said central banks must remain alert to the possibility that inflation expectations could become entrenched again, particularly if new supply shocks hit energy, food or trade flows.
The report said policymakers should focus on restoring fiscal sustainability, preserving price stability and strengthening financial resilience. Its central message was that the global economy is not facing one isolated threat, but several linked risks that could reinforce each other if left unaddressed.
For governments, the warning is clear: high debt leaves less room to respond to shocks. For markets, the concern is that optimism around AI and other growth stories could reverse quickly if financing conditions tighten or expected returns fail to materialise.
