Can AI Save Global Growth? IMF Warns Climate, Aging and Fragmentation Are Raising the Stakes

The IMF warns that climate change, aging, geoeconomic fragmentation and AI could reshape global growth while forcing governments to meet additional spending needs of 3–4% of GDP annually over the next decade. Governments, development partners and businesses will need stronger fiscal buffers, resilient infrastructure, deeper financial markets and flexible policies as AI opportunities collide with rising climate, debt and geopolitical risks.

The global economy is entering a period in which slower growth, climate shocks, aging populations, geopolitical fragmentation and artificial intelligence could hit countries at the same time, leaving governments with fewer resources to respond. An International Monetary Fund departmental paper prepared by researchers from the IMF's Strategy, Policy, and Review Department, Fiscal Affairs Department, and Monetary and Capital Markets Department warns that traditional economic frameworks designed for relatively stable conditions will need to become more flexible and resilient. Its analysis of 143 economies over 2026–2035 suggests that the interaction of demographics, climate change, geoeconomic fragmentation and AI could reshape growth, government finances, inflation, investment and international capital flows.

Four Megatrends Are Rewriting the Global Growth Story

The IMF estimates that advanced economies could lose around 0.7 percentage points of annual per-capita GDP growth from the combined structural forces under its moderate scenario, including acute climate effects. Aging alone could subtract around 0.5 percentage points, while geoeconomic fragmentation could cost about 0.2 points and climate effects roughly 0.3 points. AI could add approximately 0.3 percentage points, providing an important but incomplete offset.

Emerging markets could experience an overall annual growth drag of roughly 0.5 percentage points. Climate effects could subtract around 0.4 points, fragmentation around 0.2 points, and demographic trends about 0.1 point, while AI could contribute approximately 0.2 points.

Low-income countries have a potentially valuable advantage: favourable demographics could add around 0.4 percentage points to annual per-capita growth. But young populations will become an economic dividend only if governments create jobs and expand education, infrastructure and productive investment.

The IMF also warns against analysing these trends separately. Interactions involving migration, trade and slower AI diffusion could impose another 0.4-percentage-point annual growth penalty. Fragmentation, for example, could prevent aging countries from addressing labour shortages through migration while simultaneously restricting technology transfers to developing economies.

Governments Face a 3–4% of GDP Spending Challenge

Public finances could become the biggest constraint. Additional spending associated with structural transformations could average 3–4% of GDP every year over the coming decade, reflecting demands from pensions, healthcare, climate adaptation, infrastructure, security and human-capital investment.

For governments already carrying high debt, borrowing cannot be the default solution. Advanced economies may need to reform unsustainable pension and entitlement programmes, improve spending efficiency and redirect existing resources towards higher-productivity investments.

Emerging markets and low-income countries have greater opportunities to mobilise domestic revenues. The IMF estimates that partially closing tax gaps could generate median annual revenues equivalent to approximately 2.6% of GDP in emerging markets and 2% in low-income economies. Sustained improvements could preserve fiscal space equivalent to around 23% of GDP over a decade.

Governments should therefore stress-test budgets against climate disasters, weak growth, higher interest costs and trade disruptions. Tax systems may also require redesign as AI changes employment and shifts economic value towards capital, technology and intangible assets.

Development Finance Must Move from Projects to Resilience

For international development partners, the findings suggest that financing individual projects will increasingly need to be combined with building countries' capacity to survive repeated economic shocks.

Multilateral development banks and bilateral partners can play an important role by expanding concessional and blended finance, particularly where low-income countries cannot safely borrow enough to finance climate resilience, digital infrastructure, healthcare, education and employment creation simultaneously.

Technical assistance will be equally important. Development partners can support stronger tax administrations, public financial management, debt frameworks, social-protection systems, central banks and domestic capital markets.

Projects should increasingly be evaluated for multiple benefits. A transport, energy or digital investment, for example, should be assessed not only for its immediate economic return but also for whether it improves productivity, climate resilience, employment, technological readiness and the country's ability to withstand external shocks.

Developing deeper local financial markets is another priority. Greater access to long-term local-currency financing could reduce dependence on foreign borrowing and vulnerability to sudden capital outflows or exchange-rate shocks.

Private Investors Face New Markets and New Risks

The same transformations create major commercial opportunities. AI can improve productivity; aging populations will increase demand for healthcare and automation; and climate adaptation can generate investment opportunities in renewable energy, resilient infrastructure, water management, agriculture and risk-management technologies.

But companies will operate in a more uncertain environment. Trade fragmentation could suddenly alter tariffs, supply chains and market access. Climate disasters can disrupt production and logistics. Fiscal stress can increase taxation and borrowing costs, while sovereign financial problems can quickly affect corporate financing.

Governments can reduce these risks by maintaining credible fiscal policies, independent central banks, adequate foreign-exchange reserves and predictable regulations. For businesses, diversification of supply chains, climate-risk assessment, digital investment and workforce reskilling will become increasingly important.

The IMF argues that central banks should also rely more heavily on alternative scenarios rather than a single economic forecast. More frequent supply shocks will make it harder to decide when inflation should be temporarily tolerated and when interest rates need to rise. Countries exposed to volatile international capital flows may need foreign-exchange intervention and macroprudential measures more frequently, but these instruments should complement rather than replace necessary fiscal and monetary adjustments.

The larger message for policymakers, development institutions and businesses is that economic strategy must shift from reacting to individual crises towards preparing for several disruptions occurring together. AI offers considerable upside, but the report does not expect technology alone to cancel the economic costs of climate change, aging and fragmentation. Building fiscal buffers, stronger institutions, adaptable labour markets, deeper financial systems and resilient infrastructure will therefore be critical. In the emerging global economy, resilience is becoming not merely protection against crises, but a prerequisite for sustainable growth and development.