IMF trims global outlook as Middle East war and AI risks linger

The latest forecast from the International Monetary Fund (IMF) is built on the fragile assumption that the Strait of Hormuz will begin reopening in mid-July, with shipping gradually returning to pre-war conditions by March 2027.

The forecast, finalised on 10 June, also assumes an average oil price of US$89 a barrel.

The Fund lowered its 2026 global growth forecast again, trimming it to a sluggish 3.0 per cent on Wednesday (July 8).

It warned that the world economy remains exposed to risks from the Middle East war, trade fragmentation and a possible correction in market expectations surrounding artificial intelligence.

The Fund said a deeper downturn had been avoided so far.

Demand for AI and other technologies helped offset the sharp fall in energy supplies caused by the war.

Growth is expected to rebound to 3.4 per cent in 2027, although that would remain below the 3.5 per cent average recorded in 2024 and 2025.

In April, the IMF had expected growth of 3.1 per cent for 2026.

Inflation, however, moved in the wrong direction.

The IMF raised its 2026 headline inflation forecast by 0.3 percentage points from April to 4.7 per cent, before an expected fall to 3.9 per cent in 2027.

Energy prices are now 25 per cent higher than before the war began on 28 February and are expected to remain elevated.

“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 revisions split countries into clear winners and losers.

Some energy exporters and economies closely linked to the technology sector received upgrades.

Commodity importers that are less able to benefit from AI-related developments generally saw their growth forecasts cut.

Global trade is also expected to slow sharply.

The IMF now sees trade growth falling to 3.5 per cent in 2026 from 5 per cent in 2025, when activity was boosted by heavy front-loading ahead of US tariffs.

Trade growth is then projected to recover to 4.3 per cent in 2027.

Brooks said the rise in oil prices during the war had been restrained by the release of strategic oil reserves and commercial inventories, increased production outside the Gulf, higher energy efficiency and the steady expansion of renewable energy.

The private sector, she said, had also adjusted quickly by finding alternative routes and supplies.

“There's still a lot of uncertainty,” Brooks 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 correction in the AI sector, she added, was another downside risk.

Higher oil prices could also de-anchor inflation expectations, Brooks warned, potentially setting off a correction in financial conditions.

The new outlook was issued as the US military launched another wave of strikes against Iran.

US 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 said many countries had already tapped out their oil reserves, leaving them with less room to manoeuvre.

A major effort to rebuild those reserves could push prices higher.

IMF officials said inflation and inflation expectations remained broadly well anchored, apart from a few cases.

So far, they said, there was little evidence that expectations were shifting over the medium term.

The updated World Economic Outlook also changed its format.

The IMF dropped the three separate scenarios it had published in April, before the US and Iran reached their ceasefire deal, and returned to a more traditional baseline forecast.

Its comparisons were made against the April reference forecast, which had assumed a shorter war.

For the US, the IMF kept its 2026 growth forecast unchanged at 2.3 per cent and raised its 2027 forecast by 0.1 percentage point to 2.2 per cent.

The euro area’s 2026 forecast was lowered to 0.9 per cent from 1.1 per cent in April, while its 2027 outlook was left unchanged at 1.2 per cent.

Japan’s 2026 growth forecast was cut by 0.1 percentage point to 0.6 per cent, while the same margin raised its 2027 forecast to 0.7 per cent.

South Korea’s outlook was upgraded by 0.7 percentage points to 2.6 per cent, helped by strong growth in AI hardware exports.

Emerging market and developing economies had their 2026 growth forecast reduced by 0.1 percentage point to 3.8 per cent, although the 2027 forecast was lifted by 0.3 percentage points to 4.5 per cent.

China is now expected to grow 4.6 per cent in 2026, up from 4.4 per cent in April after a strong first quarter, while its 2027 forecast rose to 4.1 per cent from 4.0 per cent.

India, one of the world’s fastest-growing economies, received a small downgrade for 2026, to 6.4 per cent from 6.5 per cent, but its 2027 forecast was raised to 6.7 per cent from 6.5 per cent.

The Middle East and Central Asia, the region hardest hit by the war, had its 2026 growth forecast cut by 1.2 percentage points to 0.7 per cent, while its 2027 forecast was raised by 1.9 percentage points to 6.5 per cent.

Source: Reuters