The Bank for International Settlements said in its June 28 Annual Economic Report and related release that the global economy faces four closely linked risks: inflation pressures from more frequent supply disruptions, uncertainty over the sustainability of the artificial intelligence investment surge, financial vulnerabilities tied to high asset valuations and weak liquidity in core bond markets, and near-record public debt combined with higher interest rates.
The BIS said temporary supply shocks can have more persistent effects if inflation expectations become less firmly anchored, and cited a disruption in the Strait of Hormuz as an example of an event that could quickly raise energy prices and worsen the inflation-output trade-off even if prices later retrace.
On AI, the BIS said competitive pressures have lifted capital spending sharply and warned that bottlenecks, overinvestment or weaker-than-expected returns could trigger a pullback in financing and investment. It said the five largest hyperscalers are on course to spend more than $1 trillion on AI-related capital expenditure across 2025 and 2026.
In financial markets, the BIS pointed to compressed risk premia, high household equity exposure, debt-funded investment along the AI supply chain, and growing reliance on leveraged non-bank intermediaries in sovereign bond markets. It said hedge funds’ sovereign debt exposures in the United States, relative to GDP, have more than doubled since 2022, with many repo transactions occurring at zero or near-zero haircuts, increasing sensitivity to margin and funding changes. The BIS said higher debt levels and changes in market structure can transmit sovereign stress faster, reduce fiscal space and leave central banks more likely to use temporary and targeted liquidity backstops, while calling for consistent monetary, fiscal, prudential and structural policy settings.