IMF: Global economy recovers from tariff shock with tech-driven boom

Global economic growth continues to show notable resilience despite significant US-led trade disruptions and heightened uncertainty.

The IMF latest projections released at the weekend, indicate that global growth will hold steady at 3.3 per cent this year, an upward revision of 0.2 percentage points compared to October estimates, with most of the improvement accounted for by the United States and China.

The joint report by Chief Economist and Director of Research Department at the IMF, Pierre-Olivier Gourinchas and IMF Director of the Monetary and Capital Markets Department, Adrian Tobias said the current projections are broadly unchanged from a year earlier, as the global economy shakes off the immediate impact of the tariff shock.

 “This surprising strength reflects a confluence of factors, including easing trade tensions, higher-than-expected fiscal stimulus, accommodative financial conditions, the agility of the private sector in mitigating trade disruptions and improved policy frameworks especially in emerging market economies,” they said.

The explained that another key driver of this resilience is the continued surge in investment in the information technology sector—especially in artificial intelligence.

“While manufacturing activity remains subdued, IT investment as a share of US economic output has surged to the highest level since 2001, providing a major boost to overall business investment and activity. Although this IT surge has been concentrated in the United States, it is also generating positive spillovers globally, most notably to Asia’s technology exports,” they said.

Accoriding to the report, the IT investment boom reflects businesses and markets’ optimism about the transformative potential of recent tech innovations—in automation and AI—to deliver sizable productivity gains and to lift profits. Since late 2022, coinciding with the introduction of the first widely used generative-AI tools, stock prices have risen sharply.

 “Favorable financial conditions and robust earnings­­ have supported rising stock prices and helped fund new capital spending. But as the expansion accelerates, debt financing is becoming more prevalent, increasing leverage. This shift introduces notable risks: higher leverage could amplify shocks if returns fail to materialize, or if broader financial conditions tighten, adversely impacting firms and raising concerns about spillovers to the broader financial system,” they said.

The report further explained that profitability could become sensitive to assumptions around depreciation schedules for advanced processors. Frequent equipment upgrades will squeeze profit margins, weigh on earnings, and require significant additional debt financing. These factors underscore the importance of monitoring leverage accumulation and its potential to amplify vulnerabilities.

 “The comparison with the dot-com boom of 1995-2000 is instructive. Even though IT investment as a share of gross domestic product is broadly similar to levels then, the recent rise has been more gradual, accelerating markedly only last year. Furthermore, while market valuations relative to economic output have expanded at a similar pace in both episodes, the rise in price-earnings ratios has been more modest in the current boom given more robust earnings,” it said.

 “Overall, our analysis suggests that potential overvaluation for the broad equity index in the United States is only about half that of the dot-com episode. That said, the overall vulnerability of global macroeconomic growth to a repricing of technology stocks may be substantial for three reasons”.

 “First, rising stock prices over the past few years have been driven predominantly by the technology sector, in particular AI-related stocks, and this narrow group has become a major driver of the index. Second, many critical AI-related firms are not currently listed on stock markets. Their debt borrowings could have consequences that were not seen during the dot-com era. Third, market capitalization is now much higher relative to output, from 132 percent in 2001 to 226 percent now for the United States; so even a more modest correction could have a sizable effect on overall consumption”. 

Looking ahead, they insisted that that the current tech boom raises important upside and downside risks for the global economy. On the upside, AI could start to deliver on its productivity promises, raising US and global activity by 0.3 percent this year, relative to the baseline.

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 “Given the decade-long increase in foreign ownership of US equities, this sharp correction could also trigger sizable wealth losses outside the United States and exert a drag on consumption, spreading the downturn more globally. Even economies that have little exposure to technology, including many high-debt and low-income countries, would be buffeted by negative external demand spillovers and higher external borrowing costs,” they said.

 “Such downside risks arise at a time of heightened geopolitical uncertainty, increased use of export controls on critical inputs and trade-related restraints, and eroded fiscal space in many countries. This could interact with any reassessment of AI-related productivity growth and repricing of risky asset valuations in a self-reinforcing manner”.