The International Monetary Fund on Wednesday adjusted its outlook for the global economy, lowering the 2026 growth forecast to 3.0% and warning that the war in the Middle East, narrowing trade links and possible market corrections related to AI remain sources of significant downside risk.
In an update to its World Economic Outlook, the global lender said the economic impact of the conflict in the region has not triggered a deeper downturn as many had feared. That resilience was partly attributed to demand-driven momentum in the technology sector, which has helped to offset reductions in energy supplies stemming from the war.
Despite that resilience, the IMF expects growth to rebound to 3.4% in 2027, a recovery that still leaves the medium-term expansion rate below the 3.5% average recorded in 2024 and 2025.
Inflation and energy
The IMF raised its 2026 headline inflation forecast by 0.3 percentage points from April, to 4.7%, while projecting inflation will ease to 3.9% in 2027. The update highlights elevated energy prices, noting that energy costs were about 25% higher at the time of the report than before the war began on February 28. The Fund said energy prices would remain higher under its assumptions.
The new baseline assumes that the Strait of Hormuz will begin to reopen in mid-July and will return to prewar conditions by March 2027. That assumption underpins the Fund's assessment of energy market conditions and the path for prices.
Winners and losers
The IMF said the global outlook is brighter for energy exporters and for economies closely integrated into the technology sector. By contrast, commodity-importing countries that are not well placed to gain from developments in AI generally received downgrades to their growth prospects.
Trade growth is expected to slow sharply to 3.5% in 2026 from 5% in 2025 - a year in which trade was boosted by heavy front-loading ahead of U.S. tariffs - before recovering to 4.3% in 2027.
Regional and country forecasts
The IMF left its 2026 growth forecast for the United States unchanged at 2.3% and nudged its 2027 U.S. projection up by 0.1 percentage point to 2.2% compared with the April forecast.
For the euro area, the Fund trimmed the 2026 growth projection to 0.9% from 1.1% in April, while keeping the 2027 forecast at 1.2%. Japan's 2026 forecast was edged down by 0.1 percentage point to 0.6%, with the 2027 projection increased by 0.1 point to 0.7%.
Emerging market and developing economies saw a 0.1 percentage point reduction in the 2026 growth forecast to 3.8%, while the 2027 forecast rose by 0.3 points to 4.5%.
China's growth is now expected to reach 4.6% in 2026, up from the April outlook of 4.4%, with 2027 growth forecast at 4.1%, an increase from 4.0% in April. India received a slight downgrade for 2026 to 6.4% from 6.5% in April, while its 2027 forecast was lifted to 6.7% from 6.5%.
The Middle East and Central Asia region, which the IMF identified as the area hardest hit by the war, had its 2026 growth forecast cut by 1.2 percentage points to 0.7% compared with April. The Fund nonetheless lifted its 2027 forecast for the region by 1.9 percentage points to 6.5%.
Comments from IMF research leadership
Deniz Igan, chief of the IMF Research Department's World Economic Studies division, said the global economy showed greater resilience than expected in April, despite the conflict and the temporary closure of the Strait of Hormuz. She noted that while prices have risen and confidence has weakened, the release of strategic oil reserves and commercial inventories, together with improvements in energy efficiency, helped offset supply shortages. The private sector has also adapted quickly, finding alternative shipping routes and supply sources.
"So far things have been okay, but that does not take away the risk factors that are there, particularly with the war," Igan said.
Igan warned that a collapse of the ceasefire or renewed fighting could present substantial risks, given that many countries have largely exhausted their reserves and would have less room to maneuver. She said the U.S. military had launched a new wave of strikes against Iran on Tuesday and that Washington had revoked a licence allowing Iran to sell oil after three tankers were hit in the Strait of Hormuz - actions that have put pressure on an already fragile ceasefire.
Igan added that a renewed conflict could catch the world economy in a worse position than earlier in the year and that a simultaneous global effort to rebuild oil stocks could spark a sharp upward move in prices. "If there is a perception that this is going to be more prolonged, then both the incentive and the room to use those reserves is going to shrink very fast," she said.
On inflation, Igan said that inflation and short-term inflation expectations had risen, but there was little evidence at present of a medium-term shift in expectations.
Methodology and scenarios
In this update, the IMF abandoned the three separate scenarios it had published in April - which were prepared before the United States and Iran reached a ceasefire deal - and reverted to a more conventional baseline forecast. The Fund compared its new baseline to the April reference forecast, which had assumed a shorter conflict.
The IMF's update presents a cautiously optimistic baseline that nevertheless highlights a cluster of near-term risks centered on geopolitical developments, energy market dynamics and shifts in expectations attached to key technologies. Policymakers and markets will likely watch developments in the Strait of Hormuz, energy inventory levels and the tech sector closely as the Fund's assumptions play out over the coming quarters.