Global economy faces four pressure points, BIS warns

The Bank for International Settlements (BIS) has warned that the global economy is entering a more fragile phase, with inflation risks, stretched public finances, financial-market vulnerabilities and uncertainty around the artificial intelligence investment boom all threatening to weaken growth.

In its Annual Economic Report 2026, released on 28 June, the BIS said the world economy had shown “surprising resilience” over the past year despite tariff shocks and conflict in the Middle East. That resilience, it said, was supported by easier financial conditions, monetary easing and AI-linked investment. Those supports now look less secure.

“Four pressure points stand out in particular: risks of persistent inflation, the sustainability of AI-related investment, growing financial vulnerabilities and weakening fiscal positions,” the BIS said.

The Basel-based institution, often described as the central bankers’ bank, said these pressures could weigh on global growth because several risks are now developing at the same time: repeated supply shocks, fragile financial markets and governments with less room to respond.

The report said global growth and trade initially held up better than expected after sharp US tariff increases in 2025.

Global merchandise trade volumes grew nearly 5% in the first half of 2025 despite higher trade-policy uncertainty, while the effective average US tariff rate stabilized at 10% in the second half of the year, below an announced peak of more than 25%.

That relatively calm phase was disrupted by the Middle East conflict in late February and the closure of the Strait of Hormuz, which triggered an energy and raw-material supply shock. Brent crude jumped 67% to an intraday peak of $120 in less than two weeks before retreating, though the BIS said physical market imbalances remained.

The inflation risk, the BIS said, is that repeated supply shocks could become embedded in expectations. That would make it harder for central banks to bring price pressures under control without damaging growth and employment.

“Policymakers must act now,” BIS General Manager Pablo Hernández de Cos said in the press release. “Delay will only make the necessary adjustments more costly and increase the chance of difficult trade-offs in the future.”

The BIS also flagged a new sovereign-financial stability risk from high public debt and the growing role of non-bank financial institutions.

It said highly leveraged hedge funds and other non-bank companies could amplify stress in government bond markets, leaving central banks to balance market stability against inflation control.

Governments have less room to absorb the next shock. The BIS said higher interest rates and near-record public debt are straining fiscal positions, reducing fiscal space in a world where supply disruptions and market stress have become more frequent.

AI is another source of uncertainty. The BIS said AI investment has helped support markets and activity, but warned that spending could run ahead of demand if companies overbuild capacity before the technology delivers expected productivity gains.