The global economy has displayed "surprising resilience" despite the Middle East conflict and tariffs, driven partly by artificial intelligence-related investments. 

That fortitude may be under threat, the Bank for International Settlements (BIS) said in its annual report on Sunday. 

"The global economy remains caught in the crosscurrents of progress and peril," the BIS said. "The perils have grown with pressure points around risks of persistent inflation, the sustainability of AI-related investments, growing financial vulnerabilities and weakening fiscal positions." 

The energy shock due to the war in the Middle East has accelerated inflation and slowed global economic growth. Prices in the US rose to a three-year high of 4.2% in May. The energy index increased 23.5% for the 12 months ending May.

That inflation shock has already forced institutions to reassess the outlook. In April, the International Monetary Fund revised its global growth to 3.1% in 2026, under the assumption of a limited conflict. It warned that a prolonged war could weaken growth and unsettle markets further. 

Tit-For-Tat Strikes

The BIS’s warning about a potential resurgence in inflation cuts against early optimism that the Middle East–driven energy shock may ease. Hopes for a breakthrough in peace talks  pushed oil prices back below pre‑war levels.

However, the latest tit-for-tat military strikes between Washington and Tehran suggest that the conflict may last longer. The two militaries traded attacks targeting each other’s military infrastructure, with each accusing the other of violating a ceasefire agreement. 

US Central Command launched strikes "in direct response to continued Iranian aggression against commercial shipping," it said on X.  Iran said that it had carried out a decisive missile and drone operation in response to "US acts of aggression." 

"The start of the conflict in Iran in late February 2026 and subsequent escalation posed a renewed threat to the global outlook," the BIS said. "The conflict has thrown global supply chains into disarray." 

Supply Chains Stressed

Compounding the inflation shock, war has caused "historically large" disruptions in crude oil volumes. 

Global markets lost over 10 million barrels a day, equivalent to 13% of normal supply, due to the war. By comparison, supply losses in the 1970s energy crises were around 8%.

The war has affected downstream sectors far beyond transport and power. The global economy has experienced shortages of nitrogenated fertilisers, helium and petrochemical inputs. 

This has "threatened production of food, semiconductor and manufactured goods," the BIS said.  

The knock-on effect hit markets. Global equity markets declined 9% from late February to end-March 2026, with the S&P 500 index down 8% over the same period, the BIS said. 

AI-Investment Fears

The conflict in the Middle East isn’t the only concern for the global economy and for markets. An AI-bust could threaten global prosperity, the BIS warned. 

"AI optimism provided an important tailwind to global growth through capital expenditure," the Basel-based umbrella group for the world’s central banks said. "Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust." 

This could lead to "potential knock-on effects on financial conditions," the BIS said. "A major equity-market correction could have larger macroeconomic consequences today than in the past."

Underscoring these concerns, veteran investor Jeremy Grantham warned on CNBC on Friday that the AI boom has pushed the US stock market to its most expensive level ever and could eventually lead to a historic decline. 

Based on the value of the stock market compared to GDP, with modifications, this is the most expensive market in American history," Grantham told CNBC’s "Squawk Box."  The US stock market’s total value is estimated at 235% of GDP — more than twice the size of the entire US economy, CNBC reported, citing Longtermtrends.com.

This underscores BIS’s warning that risks are now converging.