IMF Forecasts Slower Global Economic Growth in 2026 Amid Geopolitical and Market Risks

The International Monetary Fund (IMF) has adjusted its 2026 global growth forecast downward to 3.0 per cent, citing persistent risks associated with ongoing conflict in the Middle East, increased trade fragmentation, and market uncertainties surrounding artificial intelligence (AI). This revision reflects a continued trend of cautious optimism tempered by geopolitical and economic volatility. The IMF’s previous projection in April had anticipated 3.1 per cent growth for 2026; however, the updated estimate, finalized on June 10, now presents a more subdued outlook.

The global lender noted that the world economy had so far avoided a more severe downturn, with robust demand for AI and other technological advancements partially offsetting the impact of a significant reduction in energy supplies linked to the war in the Middle East. Despite current challenges, the IMF predicts a rebound in economic activity, projecting growth to rise to 3.4 per cent in 2027. This anticipated recovery, however, remains below the average growth rate of 3.5 per cent observed in 2024 and 2025.

The war, which began on February 28, has disrupted key energy supply chains, notably through the closure of the Strait of Hormuz, a critical maritime passage for global oil shipments. The IMF’s baseline scenario assumes that the strait will begin to reopen in mid-July 2026, with traffic expected to normalize and return to prewar levels by March 2027. As a consequence of these disruptions, energy prices have risen by approximately 25 per cent compared to prewar levels, with the IMF’s forecast based on an average oil price of US$89 per barrel.

The inflation outlook has also shifted. The IMF raised its 2026 headline inflation forecast by 0.3 percentage points to 4.7 per cent, up from its April estimate. Inflation is projected to decline to 3.9 per cent in 2027. The organization noted that the increase in energy prices was mitigated somewhat by the release of strategic oil reserves, increased production in regions outside the Gulf, improvements in energy efficiency, and a growing share of renewable energy sources in the global energy mix. The private sector’s ability to adapt—by finding alternative routes and suppliers—also played a role in limiting the inflationary impact.

Petya Koeva Brooks, deputy director of the IMF’s research department, described the anticipated trajectory as a "V-shaped recovery," with weaker growth in 2026 relative to prewar forecasts, followed by a rebound in 2027. Brooks stated, “The world economy has weathered the shock from the war better than feared so far, with limited evidence of second round effects.” Nevertheless, she warned of continued uncertainty, particularly regarding the potential for renewed conflict, which could exacerbate commodity price volatility, tighten financial conditions, place additional strain on policy buffers, and worsen food insecurity in low-income countries. Brooks also identified the risk of a market correction in the AI sector as a potential downside.

The IMF’s regional and country-specific forecasts reflect varying impacts of these global developments. The United States’ 2026 growth forecast remains unchanged at 2.3 per cent, while the 2027 forecast is slightly higher at 2.2 per cent, a 0.1 percentage point increase from the earlier projection. The euro area’s 2026 growth forecast was reduced to 0.9 per cent from 1.1 per cent, with the 2027 outlook remaining at 1.2 per cent. Japan’s 2026 forecast declined marginally by 0.1 percentage point to 0.6 per cent, while the 2027 forecast was raised by the same amount to 0.7 per cent. South Korea received a significant upward revision for 2026, with growth now expected at 2.6 per cent, reflecting strong performance in AI hardware exports.

For emerging market and developing economies, the aggregate 2026 forecast was lowered by 0.1 percentage point to 3.8 per cent, but the projection for 2027 was raised by 0.3 points to 4.5 per cent. China’s growth is now expected to reach 4.6 per cent in 2026, up from the April forecast of 4.4 per cent, after a strong first quarter. The 2027 forecast for China is 4.1 per cent, a slight increase from the previous 4 per cent estimate. India’s 2026 forecast was revised downward to 6.4 per cent from 6.5 per cent, while its 2027 outlook was increased to 6.7 per cent from 6.5 per cent.

The Middle East and Central Asia region, which has been most affected by the conflict, saw its 2026 growth forecast reduced by 1.2 percentage points to 0.7 per cent. However, the region’s forecast for 2027 was revised sharply upward by 1.9 percentage points to 6.5 per cent, suggesting expectations of significant recovery once the conflict’s immediate effects subside.

Trade growth is also expected to decelerate. The IMF projects global trade growth will slow to 3.5 per cent in 2026 from 5 per cent in 2025, a year characterized by accelerated activity in anticipation of U.S. tariffs. Trade growth is forecast to rebound to 4.3 per cent in 2027. The IMF’s analysis indicates that countries benefiting from increased energy exports or those with strong integration into the technology sector—especially AI—were better positioned in the current environment, while commodity importers less involved in technological advances faced sharper downgrades.

Deniz Igan, who leads the IMF’s work on economic updates, emphasized that a renewed escalation of conflict in the Middle East could place the global economy in a more vulnerable position than during the initial outbreak. Igan noted that many countries had depleted their oil reserves to mitigate the impact of the crisis, leaving them with diminished capacity to respond to further shocks. A concerted effort to rebuild these reserves could put additional upward pressure on prices.

The IMF indicated that inflation and expectations for future inflation had remained generally well-anchored, except in a few instances, and there was little evidence so far of a shift in medium-term expectations. However, Brooks cautioned that higher oil prices risk de-anchoring inflation expectations, potentially triggering corrections in financial markets.

The IMF’s latest World Economic Outlook marks a return to a traditional baseline scenario, abandoning the three separate scenarios presented in April, which reflected heightened uncertainty prior to the U.S.-Iran ceasefire agreement. The current projections are benchmarked against the April reference forecast, which had assumed a shorter duration of conflict.

The global economic outlook remains subject to considerable uncertainty tied to geopolitical developments, energy markets, and technological innovation. The IMF highlighted the adaptability of both governments and the private sector in navigating the immediate fallout of the Middle East conflict, but warned that renewed instability or corrections in high-growth sectors such as AI could present further challenges. The ongoing situation underscores the interconnectedness of energy security, trade flows, and technological change in shaping global economic prospects.