IMF cuts global growth forecast to 3% for 2026 amid Middle East war, AI boom

July 09, 2026 (MLN): Global economic growth is projected to slow to 3% in 2026 before recovering to 3.4% in 2027, down from an average of 3.5% recorded in 2024-25, as the war in the Middle East weighs on activity even as an accelerating artificial intelligence (AI)-driven technology cycle partly offsets the drag.

Global headline inflation is expected to rise from 4.1% in 2025 to 4.7% in 2026, before easing to 3.9% in 2027, marking a stall in the disinflation trend that had been in place since early 2024.

The International Monetary Fund (IMF), in its July 2026 World Economic Outlook (WEO) Update titled "Global Economy in Crosscurrents of War and Technology," said the projections are broadly unchanged on a cumulative basis compared with the April 2026 WEO, though the aggregate picture masks sharp divergence across countries depending on their exposure to the conflict and their position in the global technology value chain.

Two Opposing Forces

The Fund said the global economy has, so far, weathered the shock from the Middle East war better than feared, with transmission through commodity prices, inflation expectations, and financial conditions remaining relatively limited.

Energy prices are running roughly 25% above prewar levels, with the oil futures curve in backwardation and an average petroleum spot price index of $78 per barrel projected for 2026 lower than the $82 assumed in the April reference forecast and well below the $100 assumed under April's adverse scenario.

Retail gasoline prices have risen 30% in emerging Asia against just 15% in Latin America since the war began, while liquefied natural gas prices have climbed about 50% in Asia and 25% in Europe, compared with only 10% for US Henry Hub prices.

Global growth in the first quarter of 2026 came in stronger than expected, slowing to 3.0% quarter-over-quarter annualized versus the 2.7% forecast in April.

The surprise was concentrated in economies tied to the AI hardware supply chain: Korea posted 7.5% growth against an April projection of 1.8%, China expanded 8.1%, Japan grew 1.8%, and Germany's GDP rose 1.4%, twice its April projection.

The top four AI-hardware exporters  Taiwan, Korea, Thailand, and Malaysia  posted an average growth surprise of 4.4%age points, against -0.3% point for the rest of the world.

Regional Breakdown

Growth in advanced economies is projected at 1.7% in 2026 and 1.8% in 2027.

The United States is projected to grow 2.3% in 2026 and 2.2% in 2027, largely unchanged from April, supported by technology-related investment.

The euro area's 2026 forecast was cut to 0.9% on weak momentum and higher energy prices, while the UK is projected at 1.0% and Japan at 0.6%.

Emerging market and developing economies are projected to grow 3.8% in 2026, recovering to 4.5% in 2027.

China's growth was projected at 4.6% and India's at 6.4% for 2026.

The Middle East and Central Asia region is projected to see growth collapse to 0.7% in 2026  a downward revision of 1.2% points before rebounding to 6.5% in 2027, reflecting a longer assumed closure of the Strait of Hormuz.

Iraq, Kuwait, and Qatar are projected to see sharp contractions in 2026 followed by double-digit rebounds in 2027, while Iran's economy is projected to contract 5.4% in 2026.

Key Projections at a Glance

Source: IMF World Economic Outlook Update, July 2026

Commodity and Inflation Outlook

Energy prices are projected to rise 32% in crude oil and 22% in natural gas in 2026 relative to 2025, with fertilizer prices up 26% and food prices up 8%, driven by higher energy and transport costs. Core inflation is expected to return to target only by mid-2027 in the UK, by end-2027 in Japan and the US, and not until 2028 in the euro area.

Risks and Policy Response

The Fund said risks to the outlook are more balanced than in April but remain tilted to the downside, with renewed Middle East conflict, trade fragmentation, and a possible correction in technology-driven valuations cited as the principal threats.

Upside risks include a swifter normalization in energy markets and stronger-than-expected technology investment.

On policy, the IMF called for central banks to keep real rates broadly constant where inflationary pressures are judged temporary, while safeguarding central bank independence.

It said fiscal support tied to the energy shock should be temporary and tightly targeted, with countries urged to rebuild fiscal buffers and pursue structural reforms in energy security and AI readiness.

The Fund also renewed calls for international cooperation, warning against export bans and urging orderly debt resolution for countries facing distress.

Selected Country Growth Projections for 2026

Source: IMF WEO Update Annex Table 1, July 2026

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