The Bank for International Settlements has warned that the global economy is facing a more difficult stability test, as high public debt, fragile financial markets, inflation risk, and uncertainty around artificial intelligence investment create a tougher backdrop for policymakers and companies.
The Basel-based institution used its 2026 Annual Economic Report to set out four pressure points across the global economy: renewed inflation risk, possible overinvestment and bottlenecks linked to AI, vulnerabilities in core bond markets and leveraged finance, and the strain of elevated government debt.
Although the global economy has remained resilient, the BIS said that resilience could not be assumed to continue without stronger fiscal and financial foundations. Governments and central banks are trying to preserve price stability and financial stability while rebuilding room for fiscal support after years of heavy public borrowing.
Pablo Hernández de Cos, general manager of the BIS, said: “Policy actions must reinforce each other to avoid a pull and push on the global economy. Ultimately, success depends on sound fiscal and financial foundations.
“Policymakers must act now. Delay will only make the necessary adjustments more costly and increase the chance of difficult trade-offs in the future. By addressing these challenges today, we can help to safeguard the stability of the global economy in the years to come.”
The BIS said high levels of public debt were creating a new “sovereign-financial stability nexus”, in which government borrowing, bond-market volatility, bank balance sheets, and investor behaviour can reinforce one another. As higher interest rates increase debt servicing costs, governments have less fiscal room to respond if economic conditions weaken.
Frank Smets, head of the BIS monetary and economic department, said: “Public debt levels are uncomfortably high and, on current trends, set to rise further. This is raising debt service costs, narrowing the room for fiscal policy manoeuvre and increasing the risk of financial stress. To safeguard macroeconomic stability, governments need to put public finances on a sustainable path. This should be a top policy priority.”
Companies are already operating inside a more expensive funding environment. Expectations of a rapid fall in interest rates after the inflation shock have repeatedly been pushed back, while credit conditions remain uneven across sectors. Finance teams are weighing growth investment against balance sheet protection, with refinancing plans, working capital discipline, and liquidity assumptions under closer scrutiny.
AI adds another layer to that calculation. The BIS did not dismiss the technology’s economic potential, but warned that the investment cycle around AI could create strain if capital spending runs ahead of realistic deployment, infrastructure capacity, and productivity gains. Data centres, power demand, chips, cooling systems, and skilled labour are becoming central to the economics of adoption.
Concerns over AI agents outrunning enterprise governance controls have already highlighted the operational side of rapid adoption. The BIS report adds a financial stability layer, linking technology investment to market liquidity, leverage, energy demand, and infrastructure bottlenecks.
Boards are likely to face a less forgiving investment environment during the second half of 2026. AI programmes will need credible returns, stronger operational controls, and clearer energy plans. Debt-funded expansion will face greater scrutiny where margins are exposed to higher borrowing costs. Treasury teams will also need to test assumptions around asset liquidity and refinancing under stress.
The BIS said central banks should remain focused on price stability while governments repair public finances and financial authorities address vulnerabilities before conditions deteriorate. Its central concern is that monetary, fiscal, and financial policy cannot pull in different directions indefinitely without increasing instability.
Inflation may have eased from its recent peak, but policy rates, public borrowing, geopolitics, and AI-related capital spending are now interacting in ways that could reshape funding conditions and investment decisions across the economy.
You must be logged in to post a comment.