The world’s leading economies need to take “urgent” action to rebuild their public finances, the IMF has warned, as it published forecasts showing leading economies are this year heading for their biggest budget deficits since the Covid-19 collapse. In its World Economic Outlook, the IMF predicted on Tuesday that government net borrowing by advanced economies would reach 5.2 per cent of GDP this year, the highest since the world was in the grip of pandemic lockdowns in 2021. Deficits in both China and the US will hit or exceed 8 per cent of GDP in 2026, according to IMF forecasts, which cover a wider range of borrowing than some national gauges.
The forecasts represent a deterioration in the IMF’s outlook since its report in April and follow months of heightened turmoil in global debt markets. Yields have pushed higher as markets grapple with concerns over mounting public debt, inflation and the increasingly aggressive-looking funding requirements of AI. The outlook finds that while the global economy has proven resilient in the face of the oil shock, partly thanks to the AI-driven investment boom, sovereign debt risks are rising as global public debt heads towards 100 per cent of GDP later this decade.
Government borrowing costs have soared to multi-decade highs, as high energy prices and resilient economic growth have prompted central banks to abandon plans to lower policy interest rates. Central banks in the US, the Eurozone and Japan are among those that have lifted interest rates this year. The sell-off worsened in September, increasing pressure on budgets by pushing interest costs higher.
In the US, general government net borrowing is on track to hit 8.5 per cent of GDP this year, according to the IMF forecast, up from 7.1 per cent in 2025 and compared with 5.8 per cent on the eve of the pandemic. The IMF’s measure, which includes state and local government borrowing alongside federal spending, is significantly higher than other estimates for the US. The US Congress’s independent fiscal watchdog, the Congressional Budget Office, projected in February that the federal deficit would hit 5.8 per cent of GDP this year.
The Committee for a Responsible Federal Budget, a think-tank, estimated it would come in at 6.2 per cent. The IMF added that with fiscal costs rising and electoral pressures intensifying in many countries, “central banks may face renewed calls to accommodate higher public borrowing or tolerate inflation above target”. The IMF’s report said it was “essential” to ensure central banks’ independence and to shield monetary policy from political interference.
Despite the oil shock, growth around the world will remain relatively resilient this year, according to the IMF, which marginally upgraded its global GDP growth forecast by 0.1 point to 3.1 per cent this year. The world economy would expand by 3.4 per cent in 2027, it predicted. Part of the explanation is the continuing AI boom.
Extract — continue reading at the source.
