IMF: Global economy has weathered shock of Middle East war better than feared

Global growth is projected to be three per cent in 2026 and 3.4 per cent in 2027, down from the average of 3.5 per cent observed in 2024–25 and broadly unchanged on a cumulative basis compared with the forecasts in the April 2026 World Economic Outlook, the International Monetary Fund (IMF) said in its July 2026 World Economic Outlook update.

The modest slowdown reflects the effects of the war in the Middle East being partly offset by accelerated demand-driven momentum in the global technology cycle thanks to advances in artificial intelligence (AI) and its adoption, the IMF said.

The impact varies widely based on countries’ exposure to the war and position in the technology value chain, the update said.

Energy exporters outside the conflict zone benefit from favourable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers, it said.

The IMF said that in contrast, activity weakens for energy importers with limited participation in the technology value chain, a group that includes many low-income countries.

Global headline inflation is expected to increase from 4.1 per cent in 2025 to 4.7 per cent in 2026 before declining to 3.9 per cent in 2027.

Slightly revised upward from April, these projections indicate that the disinflation trend in place since the beginning of 2024 has stalled, the IMF said.

Risks to the outlook are more balanced than in April but still tilted to the downside, the report said.

“The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions,” the IMF said.

“Trade fragmentation could accelerate, possibly hurting output and increasing prices.”

A possible correction in technology-driven expectations adds to the downside risks, whereas eroded policy buffers can amplify those risks.

Upside risks stem from a swifter-than-expected normalization in energy markets, stronger-than-expected technology investment, a revival of durable cooperation that lowers trade barriers, and structural reform that raises medium-term growth.

Policy priorities are restoring price stability, supported by clear communication, central bank independence, and strong financial oversight, while rebuilding fiscal buffers and using fiscal tools sparingly through temporary, targeted support that preserves price signals, the IMF said.

Structural reforms are needed to promote energy security, AI readiness, domestic rebalancing, and international cooperation should be strengthened to relieve the strain of ongoing tensions, the report said.

Global economic activity and the outlook are being shaped by two major forces, pushing in opposite directions with asymmetric effects across countries, the IMF said.

First is the negative supply shock induced by the war in the Middle East.

Second is the ongoing positive technology shock manifesting in accelerated momentum of the global technology cycle, in no small part driven by advances in and deployment of AI tools.

“The global economy as a whole has, so far, weathered the shock from the war better than feared,” the IMF said.

Movements in and repercussions from the main channels of transmission—commodity prices, inflation expectations, and financial conditions—have been relatively limited.

However, transmission is still in the early stages—commercial and strategic destocking have provided temporary relief from reduced energy flows, whereas forward-looking indicators such as supply chain pressure and manufacturing purchasing managers’ indices point to softer momentum ahead—and some countries are experiencing more strain than others, the report said.

(Illustration: Jhon Casso)