Outside of IMF headquarters in Washington, where central bankers and finance officials gathered for a biannual meeting of the IMF and World Bank.KENT NISHIMURA/AFP/Getty Images
The International Monetary Fund has downgraded its outlook for the global economy as conflict in the Middle East has upended energy markets and compounded geopolitical uncertainty.
In its latest World Economic Outlook, published Tuesday, the IMF projects global growth of 3.1 per cent in 2026 – 0.2 percentage points below its January forecast and slower than the 3.4-per-cent pace in 2025. Global inflation is now expected to average 4.4 per cent in 2026, up from a projected 3.8 per cent in January.
“Once again, the global economy is threatened with being thrown off course – this time by the outbreak of war in the Middle East at the end of February 2026,” the IMF said in the report, as central bankers and finance officials from around the world gather in Washington for the biannual meeting of the IMF and World Bank.
Iran war will slow global economic growth, IMF chief says
Alongside its “reference forecast,” the IMF outlined two downside scenarios with significantly weaker growth and higher inflation if the ceasefire between the United States, Israel and Iran collapses and oil prices surge.
In an adverse scenario, with the benchmark oil price staying around US$100 per barrel through 2026 and US$75 in 2027, the IMF sees the global economy growing only 2.5 per cent this year, while inflation would hit 5.4 per cent. In a severe scenario, where oil costs US$110 in 2026 and US$125 in 2027, global growth would slow to around 2 per cent. “This would mean a close call for a global recession,” the IMF said.
“The likelihood of these scenarios materializing rises progressively as hostilities and associated disruptions continue.”
Last week, the U.S. and Iran agreed to pause the six-week long conflict. However, peace negotiations between the countries collapsed over the weekend, and the U.S. has begun a blockade of the Strait of Hormuz to restrict Iranian oil exports.
The IMF said the economic fallout from the Iran war will be uneven. Oil-importing countries, particularly emerging-market and developing economies in Asia, are being hit particularly hard, as are Gulf countries that cannot get their oil and natural gas to world markets because of the closing of the Strait of Hormuz.
As a major energy producer and exporter, Canada is relatively insulated from the economic downsides of the oil-price shock, though it faces headwinds from North American trade uncertainty and slower population growth.
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“In Canada, growth is projected to slow from 1.7 percent in 2025 to 1.5 percent in 2026 before recovering to 1.9 percent in 2027,” the IMF said.
“The softer near-term profile reflects weaker momentum at the end of 2025 and slower population growth, while earlier monetary easing and supportive fiscal policy help sustain domestic demand. This is broadly unchanged from the October 2025 WEO forecast, with the positive terms-of-trade shock of higher oil prices offsetting the other effects of the war in the Middle East.”
Before the conflict began, the IMF had expected to upgrade its 2026 forecast.
The global economy has remained resilient to U.S. tariffs, while investment in artificial intelligence – particularly in the U.S. – has buoyed economic growth. This relatively robust baseline, however, is now being challenged.
“Over the past year, headwinds from higher trade barriers and elevated uncertainty have been offset by tailwinds from technology-related investment; accommodative financial conditions, including a weaker U.S. dollar; and fiscal and monetary policy support. The Middle East conflict presents a significant counterforce to these tailwinds through its impact on commodity markets, inflation expectations, and financial conditions,” the IMF said.
Oil-price shocks are difficult for policy makers to manage, as they tend to slow economic activity while also increasing inflation – a combination sometimes referred to as stagflation. This pulls central banks in different directions: Should they raise interest rates to head off inflation, or lower borrowing costs to support economic activity?
“Central banks should remain vigilant and be prepared to act clearly and decisively in line with their mandates. They must guard against prolonged supply shocks destabilizing inflation expectations,” the IMF said.
At the same time, the IMF added, “monetary policymakers should reserve the option to look through negative supply shocks – such as the current one – as long as inflation expectations remain well anchored and the monetary policy stance is already properly calibrated.”
This appears to be the Bank of Canada’s approach. Last month, Governor Tiff Macklem, who is attending the meetings in Washington, said the central bank will look through near-term energy price spikes, but remains ready to raise interest rates if the price shock at the gas pump and in the grocery aisle starts morphing into a broader inflationary process.
When it comes to other government measures to shield consumers from rising gasoline and food prices, such as price caps or subsidies, the IMF advised that they should be “targeted, timely, temporary, and funded within current budget envelopes by reprioritizing spending, and if that is not possible, with the path to restoring fiscal balances clearly communicated.”
Prime Minister Mark Carney announced Tuesday a tax break on gas and diesel, which the government said is expected to shave 10 cents per litre from the cost of regular gasoline and reduce the price of diesel by four cents per litre. The temporary tax break will begin April 20 and remain in place until Sept. 7.
Looking further ahead, the IMF warned of tepid growth and downside risks, including further geopolitical conflict and a possible bursting of the AI investment bubble.
“Many countries are facing challenges in lifting medium-term growth prospects, compounded by geoeconomic fragmentation and rising geopolitical risks. Absent decisive policy actions or technological breakthroughs, growth forecasts over the five-year WEO horizon remain mediocre,” it said.