Central bank for central banks’ annual report flags inflation, AI investment and fiscal risks as key threats
Global economic growth proved remarkably resilient over the past year, absorbing the impact of steep US tariff hikes and a Middle East conflict that shut down the Strait of Hormuz, according to the Bank for International Settlements' latest annual assessment.
The BIS, often described as the central bank for central banks, said in its Annual Economic Report for 2026 that growth held up through 2025 despite the biggest disruption to global trade in decades, with merchandise volumes still expanding by close to 5% in the first half of the year. The bank credited artificial intelligence investment, trade rerouting, and companies' willingness to absorb costs through thinner margins for softening the blow.
That resilience was tested again in early 2026, when the Strait of Hormuz, the world's most critical energy corridor, was effectively shut down amid conflict in the region. The closure cut crude oil flows by more than 10 million barrels a day, a loss of roughly 13% of normal supply, larger in percentage terms than the disruptions of the 1970s oil crises.
Inflation risk moves back into view
The BIS said global headline inflation has already climbed by half a percentage point since the conflict began, with fertiliser and plastics prices each surging 50%. Whether those increases broaden into a repeat of 2021-23 remains the central question for policymakers, the report said, noting that labour markets currently have more slack and interest rates sit higher than they did heading into the last inflation surge.
Asia bore the heaviest direct exposure to the shock. Japanese refiners sourced 95% of their crude from Gulf states, with 70% of that volume passing through Hormuz. Malaysia, Korea and Thailand each imported 60% to 70% of their oil from the Gulf. The report noted that helium supplies, critical to semiconductor manufacturing and sourced heavily from Qatar, were also disrupted, though major Asian technology firms said existing inventories had so far staved off production problems.
AI spending boom faces its own risks
The report devoted significant attention to the sustainability of the artificial intelligence investment wave that has propped up US growth and rippled through Asian supply chains via demand for chips and data infrastructure. The five largest hyperscalers are on track to spend more than a trillion US dollars combined on AI-related capital expenditure between 2025 and 2026, a pace the BIS said is outrunning free cash flow and pushing some firms toward debt financing.
The report warned that intense competition for market dominance could be fuelling overinvestment, drawing parallels to historical booms including Britain's 19th-century railway mania, the exuberance of the 1920s, and the dotcom bubble. Each episode, the BIS noted, ended when investment reversed sharply after returns disappointed.
Financial vulnerabilities were flagged as a potential amplifier of any downturn. Equity valuations remain elevated even after accounting for strong earnings, and the report pointed to growing complexity in AI-sector financing, including circular arrangements where chip makers and hyperscalers take equity stakes in AI labs that then commit to multi-year purchases of their products. Private credit exposure to the AI and technology sector has quadrupled over five years to around 15% of lending portfolios at direct lending funds, the bank said.
Fiscal space narrows further
Public debt levels across advanced economies have climbed steadily, leaving many governments with less room to cushion the latest energy shock. Cyclically adjusted primary deficits in advanced economies have averaged 1.9% of GDP since 2022, nearly double the 1.1% recorded over the prior two decades, and emerging markets have seen an even sharper shift.
The BIS said the relationship between government bond yields and nominal economic growth, once favourable to debt reduction in many countries, has turned unfavourable, meaning governments can no longer count on growth alone to stabilise debt-to-GDP ratios. Interest payments as a share of GDP are projected to rise further by 2027 across most jurisdictions covered in the report.
The bank called on central banks to stay focused on medium-term price stability even where that creates near-term fiscal strain, arguing that credibility on inflation helps keep borrowing costs and risk premia contained. It also urged finalising Basel III banking rules consistently across jurisdictions and extending stronger prudential oversight to non-bank financial institutions, whose expanding role in credit and government bond markets was identified as a structural risk running through the report's other chapters.
