Andrew Bailey's speech at the AlUla Conference

Speech given by Andrew Bailey, Governor of the Bank of England, at the AlUla Conference for Emerging Market Economies 2026

The World Today 

It is a great pleasure to be here in AlUla and share thoughts at this important conference.

You have given me the task of setting the scene in terms of the current context of the world economy. In other words, you have unfurled a large canvas, and given me 15 minutes to cover it with paint. Here goes.

I will start by drawing out the key points from the latest update of the IMF World Economic Outlook. The good news is that the world economy has been remarkably resilient in the face of much higher policy uncertainty. Although this uncertainty, including the impact of tariffs, has weighed on the level of activity, and accepting that there is varying momentum of economic activity across countries and sectors, the world economy has shown an impressive ability to adapt to the shifting landscape. Inflation has not risen markedly in the last year, though the cost of living (which is an issue of price levels relative to income levels) remains an important concern in quite a few countries.

Alongside this resilience of the world economy, global financial conditions have been accommodative, despite episodes of volatility and rising sovereign yields. An important part of this story has been equity valuations in the technology sector, and particularly in the AI part.

Overall, market conditions could have been much worse given the backdrop. That they have not been so reflects, I think, a number of factors at work. First, markets have become cautious in their reactions since not all of the initial announcements of policy shifts have been followed through, and on occasions the impact of the announcement on economies and financial markets has not been as initially predicted. Second, markets are cautious to trade geopolitical risk when some of the traditional safe haven assets are close to the epicentre of the risks themselves and exhibit close correlations to risky assets, thus negating the safe-haven protection. Third, we have seen evidence of fear of missing out, backed by arguments along the lines of “this time is different”, for instance because of the expected productivity benefits of AI. The net result is a risk of some complacency in financial markets.

The IMF cautions in their update that risks to the world economic outlook are tilted to the downside. Four reasons for this can be drawn out. First, there could be a significant escalation of geopolitical tensions. Second, and closely aligned, there could be further disruption to the fragile balance of trade policy. Third, fiscal vulnerabilities could emerge against a context of elevated public debt levels. And fourth, expectations of AI-driven productivity gains could be disappointed.

I think this summary from the latest World Economic Outlook fairly describes the current state of the world economy and the risks. Let me now move on to describe the more structural economic backdrop that conditions both the current situation and where it goes from here. I am going to cover five broad areas, so necessarily it will be brief.

The first is the change in the nature of the economic shocks that we have been facing. These have been larger supply-side shocks, going back at least to the global financial crisis and then more recently Covid, the impact of Russia's appalling invasion of Ukraine, and tariffs. These have been much larger shocks than those that were seen in the preceding period of time. And they have been supply-side shocks. On the whole, our macroeconomic frameworks are less well equipped to deal with supply-side than demand-side shocks.

The second broad area of backdrop concerns the deeper structural parameters of many of the advanced economies. Over the last fifteen years, the potential growth rate of our economies has declined. For the UK, as an illustration, the decline has been from an average of around 2½ per cent per annum over the preceding twenty years to around 1½ per cent in the last fifteen years. The largest contribution to that decline has come from productivity growth.

Productivity growth has had a pattern of long cycles since the Industrial Revolution. To borrow from the economist Joseph Schumpeter's phraseology, industrial development involves change that occurs in “discrete rushes” but is “separated by spans of comparative quiet”. The key idea here is that innovation and diffusion are at the heart of the growth process known as creative destruction. Cumulative innovation matters, as do clear property rights, and there is a positive role for public policy and institutions to support innovation.

The destruction point is that new innovation makes former innovation obsolete. A key issue is the nature of innovation, which comes in rushes as so-called General Purpose Technologies. The essence of GPTs – think steam engines, electricity, ICT and the internet – is that they enable innovation very broadly across our economies.

However, there have also been long periods between waves of innovation when growth has been slower. The late nineteenth century in the UK was such a period. I think that for the last fifteen years we have been in such a slower phase, as the growth effects of ICT and the internet matured.

The third broad area of structural economic backdrop comes from the common feature of advanced economies, and some others too, of population ageing and falling replacement rates. This creates lower economic growth by reducing labour supply and putting more pressure on fiscal positions. While the economics of ageing populations has been much discussed in academic and policy circles, I am not persuaded that its significance is properly understood in the wider debate.

The fourth broad area concerns trade and global imbalances. Before Schumpeter gave us the theory of creative destruction, the classical economists gave us the trade-based model of growth. Adam Smith set out how trade facilitated the division of labour, which became a basis for supporting technological innovation and growth. A reversal of trade openness has negative growth effects, and those effects are likely to be larger for more open economies.

The fifth and final broad area concerns the financial system. Here I speak wearing both of my hats, as Governor of the Bank of England and Chair of the Financial Stability Board. Since the financial crisis, we have seen profound changes to the financial system. It has undoubtedly become more robust and has absorbed recent large supply-side shocks well. There has been a relative shift from bank-based to non-bank financial intermediation, but banks remain a crucial source of credit, liquidity and funding. Banks are unique in holding most of the stock of money in the system, alongside central banks. Alongside this, we have seen major changes in government debt markets, the rise of private asset markets, and innovations seeking to broaden the scope of private sector money.

Having covered the canvas, I will use the rest of my time to look a little more into the future, focusing on productivity and imbalances.

On productivity, innovation has historically been associated with General Purpose Technologies. The obvious question is what comes next. The best guess is AI and robotics, both separately and in combination.

I am an optimist about the potential for AI and robotics to raise productivity and growth, but a realistic optimist. So far, progress has been greater in applying AI to well-defined task-based work than to more ambitious goals, which is unsurprising.

Growth through innovation takes time. This is a lesson of economic history, seen in the adoption of steam engines, electricity and ICT.

A key question is how AI and robotics will affect the labour market. Recent work by Edward Egan identifies four channels: productivity augmentation; displacement automation; reinstatement through new tasks; and compositional reallocation across sectors. The overall employment effect will depend on the balance between these channels, which remains highly uncertain.

In the UK, new online vacancies in the most AI-exposed roles have fallen more than twice as much as in the least exposed roles over the last three years. At the same time, there has been growth in new tasks, such as integrating AI tools into firm workflows.

Two conclusions follow. First, education and training in AI skills will be critical. Second, we should avoid oversimplified conclusions about employment effects.

I will finish on global imbalances. Since the financial crisis, weaker growth has made it harder to sustain domestic support for international openness. While openness has supported growth and reduced global poverty, it has also had distributional consequences that have undermined domestic cohesion in many countries.

The international financial system depends on national support and legitimacy. International goals must align with domestic objectives, but they must also shape them. This applies to all participants. There is an inherent tension between globalisation and domestic objectives, and we must address excessive imbalances robustly.

The system must be robust to many states of the world, requiring flexibility in design and operation. Three lessons from history stand out. First, we must focus on raising potential growth, including through innovation and openness. Second, the transition to a more multipolar world inevitably strains the system. Third, since Bretton Woods, international financial institutions such as the IMF and World Bank have shown a strong ability to adapt.

Some argue for a future of variable geometry or partnerships of the willing. While this may apply in some policy areas, it does not suit international finance, where benefits arise precisely because borders do not constrain activity. This strength must be balanced with effective tools to manage risks to monetary and financial stability within a global institutional framework. For the Financial Stability Board, this reinforces the importance of international standards, a level playing field, and active surveillance of emerging risks.

Let me end on a personal note. Strong collective and individual leadership is essential. An important part of that is the International Monetary and Financial Committee, which advises the IMF. We are fortunate to have Minister Aljadaan as its chair.