The global economy faces slower growth and rising inflation as the US-Israeli war against Iran disrupts energy supplies and increases uncertainty, the International Monetary Fund said in its latest World Economic Outlook.
The IMF now expects global output to grow by 3.1 per cent in 2026, down from an earlier forecast of 3.3 per cent issued before the conflict began at the end of February. Growth is projected at 3.2 per cent in 2027, assuming the conflict remains limited in scope and duration. Global inflation is set to rise to 4.4 per cent this year before easing in 2027.
The downgrade reflects the impact of higher oil, gas and fertiliser prices following attacks on energy infrastructure and disruption to shipping through the Strait of Hormuz, a route that carries about a fifth of global oil and liquefied natural gas supplies.
The IMF warned that risks to the outlook remain tilted to the downside, with a prolonged conflict likely to weaken growth further and increase price pressures. In a severe scenario, global growth would fall below 2.5 per cent, a level the IMF associates with recession conditions.
Under the most adverse assumptions, growth could approach 2 per cent while inflation rises above 6 per cent, driven by sustained energy shortages and supply disruptions.
“Once again, the global economy is threatened with being thrown off course,” the IMF said in the report, citing the war and its effects on commodity markets. Chief economist Pierre-Olivier Gourinchas warned that the impact would be uneven, with emerging and low-income countries facing the greatest strain.
The fund said economies closest to the conflict have seen the largest revisions. Growth in the Middle East and North Africa is now forecast at 1.1 per cent for 2026, a cut of 2.8 percentage points. Iran’s economy is expected to contract by 6.1 per cent this year, while Saudi Arabia’s growth forecast has been reduced to 3.1 per cent.
In the eurozone, growth is projected at 1.1 per cent in 2026, down from 1.4 per cent last year. The IMF said high energy costs continue to weigh on industry and household spending, while uncertainty has led to increased saving and weaker consumption.
The report links rising energy prices directly to inflation pressures. Inflation in Finland rose 1.3% in March as higher energy prices pushed up consumer costs.
The IMF also highlighted structural risks beyond the conflict, including high public debt, trade tensions and geopolitical fragmentation. Increased defence spending in response to rising tensions could support growth in the short term but add to inflation and fiscal pressure over time.
Despite the challenges, the fund said faster productivity gains, including those linked to artificial intelligence, and easing trade tensions could support growth if realised.
The outlook assumes that energy production and transport routes begin to normalise later this year. The IMF cautioned that this assumption may change if the conflict expands or damage to infrastructure proves more severe.
HT