The IMF has officially lowered its global economic growth forecast for 2026 to 3.1% due to the direct impact of the US-Israeli-Iranian war. The failure of negotiations and disruptions to energy supply chains in the Strait of Hormuz have wiped out the growth momentum previously driven by the technology sector. The IMF warned that the world economy is now at risk of a "near miss" if the military conflict is not brought under control immediately.
Three economic scenarios have been drawn up based on the intensity of the conflict: a reference scenario (3.1%), a bad scenario (2.5%), and a severe scenario (2.0%). In the most extreme scenario, crude oil prices are expected to surge above $125 per barrel by 2027. This would trigger a global cost-of-living crisis that would force central banks to keep interest rates high for a longer period to curb expectations of excessive inflation.
Advanced economies such as the United States and the Eurozone have shown varying degrees of resilience. The US forecast was revised down slightly to 2.3%, supported by AI data center investment, while Europe took a bigger hit with growth forecast at just 1.1% due to high reliance on imported energy. Japan is expected to maintain weak growth below 1% with faster interest rate hikes expected.
Emerging markets and economies at the epicenter of conflict are hit hardest. The Middle East and Central Asia region is expected to see drastic GDP contractions, with countries such as Qatar, Iraq, and Iran forecast to experience growth drops of between 6% and 8%. India is the only bright spot with a forecast increase to 6.5% thanks to strong domestic momentum and reduced trade tariffs with the US.
The IMF also advised governments to be cautious in implementing fuel subsidies or tax cuts to ease the burden on the people. While such measures are “legitimate” to protect the vulnerable, the IMF warned that untargeted fiscal spending could worsen the already high budget deficit and public debt. Governments are urged to rebuild fiscal buffers to cope with long-term uncertainties.
