This morning, the International Monetary Fund published its quarterly global outlook. It concluded that escalating geopolitical tensions could derail an otherwise resilient world economy. In what can only be described as a coincidence both fortunate — for vindicating the report’s authors — and unwanted, it came on the same day that Europe and the US finally squared off over Greenland.

The world economy has struggled to regain the momentum of its pre-Covid years, to say nothing of the years before the 2008 Global Financial Crisis. Growing at 3.3% per year over the last two years, and expected to maintain that momentum in 2026, the forecast for 2027 has been set at 3.2%. Much of the expansion, in turn, is being driven by the developing world, which bounced back quickly from the pandemic and now averages a growth rate over 4%. The developed economies, in contrast, are struggling to get back above 2% annual growth. In some cases — notably the United States — the growth is entirely offset by new debt, raising serious doubts about the long-term sustainability of the rebound.

All the same, the IMF expects more of this fiscal stimulus to pour into the global economy, almost entirely from Western countries. This should sustain growth, though the fact that developing countries are expanding much faster than developed ones indicates a good deal of the stimulus is finding its way to the former global periphery. Indeed, the outsized performance of emerging markets last year, compared to those of the West and especially the US, suggests that investors may be happy to take their dollars and euros and head off to new markets.

The deeper fragility of this superficially robust economy is further underscored by the potential risks to growth flagged by the IMF, which the Fund maintains are tilted to the downside. These include a “reevaluation of productivity growth expectations about AI”, trade tensions, domestic or geopolitical tensions, and pressure on interest rates from the rising fiscal deficits of Western countries.

Among investors, the optimistic view supporting today’s record-high asset prices is that AI will deliver the goods and political leaders will continue to work through their differences, smoothing over geopolitical tensions. And if AI does raise productivity, and consequently economic growth, that will solve any lingering fiscal crunch.

The pessimistic view would be that the very complacency which has led investors to shrug off every geopolitical maelstrom so far could embolden leaders to take things too far. Alternatively, if AI fails to deliver meaningful changes to productivity in 2026, the possibility of a sharp repricing of assets will rise. Finally, it bears noting that across developed markets, bond yields have been steadily rising of late, pointing to a loss of patience among investors with the fiscal largesse on which the continued recovery depends. Were a debt crisis to erupt in one of the developed economies, the effects would ricochet quickly through the global economy.

A taste of this was provided earlier today, when world markets responded to the showdown over Greenland by selling off sharply, all while gold and silver rose. As this territorial dispute deepens, optimists will buy the dip, confident that market ructions will push Western leaders back to the negotiating table where they’ll restore calm to world markets. The pessimists, on the other hand, will feel confident that sooner or later, one of these disputes will prove too big to resolve.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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