The International Monetary Fund inched its 2026 global economic outlook lower again to 3.0 per cent. Sees rebound to 3.4 per cent in 2027.Benoit Tessier/Reuters
The International Monetary Fund on Wednesday inched its 2026 global growth forecast lower again to a sluggish 3.0 per cent, warning of ongoing risks linked to the war in the Middle East, trade fragmentation and potential corrections in market expectations for AI.
The global lender said the world economy had dodged a sharper downturn, with demand for AI and other technologies helping to offset a sharp drop in energy supplies as a result of the war. Growth should rebound to 3.4 per cent in 2027, but that is still below the average of 3.5 per cent seen in 2024 and 2025. In April, the IMF had forecast 3.1 per cent growth.
The inflation outlook was less rosy. The IMF raised its 2026 headline inflation forecast by 0.3 percentage points to 4.7 per cent from April, and said it should drop to 3.9 per cent next year. Energy prices were 25 per cent higher now than before the war began on Feb. 28 and would remain higher, it said.
The new forecast, which was locked in on June 10, assumes the Strait of Hormuz will start to reopen in mid-July, with traffic gradually normalizing to reach prewar conditions by March, 2027. It assumes an average oil price of US$89 per barrel.
“In effect, we expect a V-shaped recovery, weaker growth this year relative to our pre-war forecast, followed by a rebound next year,” Petya Koeva Brooks, deputy director of the IMF’s research department, told reporters. “The world economy has weathered the shock from the war better than feared so far, with limited evidence of second round effects.”
The IMF raised its forecast for some energy exporters and countries that are closely integrated into the technology sector, while commodity importers that are not well-positioned to benefit from AI developments generally saw downgrades in their growth forecasts.
Growth in global trade was projected to slow sharply to 3.5 per cent in 2026 from 5 per cent in 2025, a year marked by heavy front-loading ahead of U.S. tariffs, before rebounding to 4.3 per cent in 2027.
Brooks said the spike in oil prices during the war was limited by the release of strategic oil reserves and commercial inventories, expanded production outside the Gulf, rising energy efficiency and a steady rise in the share of renewable energy. The private sector had also adapted quickly, finding alternative routes and supplies.
“There’s still a lot of uncertainty,” she said. “A renewed escalation in the conflict could reignite commodity price volatility, tighten financial conditions, strain policy buffers, and worsen food insecurity in low-income countries.” A market correction in the AI sector was another downside risk.
Higher oil prices could also de-anchor inflation expectations, which would unleash a correction in financial conditions, she said.
The U.S. military unleashed a new wave of strikes against Iran. U.S. President Donald Trump said a memorandum of understanding with Iran to end the conflict was “over,” raising fresh concerns about the future of an already fragile ceasefire.
“A renewed conflict in the region is going to catch the global economy in a worse position than it was the first time,” Deniz Igan, who leads the IMF’s work on economic updates, told Reuters.
Igan noted that many countries had tapped out their oil reserves, leaving them with less room to manoeuvre. A big push by countries to rebuild those reserves could drive up prices.
Inflation and inflation expectations had remained fairly well-anchored, except in a few cases, and there was little evidence thus far that expectations were shifting in the medium term, the IMF officials said.
Scenarios change
The IMF’s updated World Economic Outlook dropped the three separate scenarios it had released in April, before the U.S. and Iran reached their ceasefire deal, reverting to a more traditional baseline forecast. Comparisons were made to the April reference forecast that assumed a shorter war.
The IMF left its 2026 growth forecast for the U.S. economy unchanged at 2.3 per cent and raised its 2027 forecast by 0.1 percentage point to 2.2 per cent from the April forecast.
It lowered the 2026 growth forecast for the euro area to 0.9 per cent from its previous forecast of 1.1 per cent in April, and left its 2027 forecast unchanged at 1.2 per cent.
Japan’s growth forecast for 2026 edged lower by 0.1 percentage point to 0.6 per cent, with the 2027 forecast raised by the same amount to 0.7 per cent. South Korea’s growth was revised upward by 0.7 percentage point to 2.6 per cent, given strong growth in AI hardware exports.
Emerging market and developing economies also saw a 0.1 percentage point cut in their growth forecast to 3.8 per cent in 2026, while the 2027 forecast was raised by 0.3 points to 4.5 per cent.
China’s growth was now expected to reach 4.6 per cent in 2026 after a strong first quarter, up from the April forecast of 4.4 per cent, with 2027 growth expected to reach 4.1 per cent, up from 4 per cent in April.
India, one of the world’s fastest-growing economies, also got a small downgrade to 6.4 per cent for 2026 from 6.5 per cent in April, but the IMF lifted its 2027 forecast to 6.7 per cent from 6.5 per cent.
The Middle East and Central Asia region, hardest hit by the war, saw its growth forecast cut by 1.2 percentage points to 0.7 per cent from the April forecast, although the IMF also raised its 2027 forecast by 1.9 percentage points to 6.5 per cent.