IMF trims global growth outlook again as renewed Middle East conflict clouds recovery

The International Monetary Fund (IMF) on Wednesday revised down its global growth forecast for 2026, citing rising geopolitical uncertainty and renewed fighting in the Middle East as fresh risks to the economic outlook.

In its latest World Economic Outlook update, the IMF projected global growth at 3.0 per cent for this year, compared with 3.1pc in its April forecast. The revision was prepared before the latest escalation involving the United States and Iran, but IMF officials said overnight developments underscored the fragility of the outlook.

Petya Koeva Brooks, deputy director of the IMF’s research department, said the institution would continue monitoring events closely as tensions evolve. The downgrade marks the second reduction in the fund’s global growth forecast this year and also points to slower expansion than in 2025.

The IMF now expects global inflation to reach 4.7pc in 2026, above its earlier projection. Koeva Brooks said the economic effects of the conflict could take roughly three quarters to normalize, while any sustained rise in oil prices or inflation expectations would create additional headwinds for global activity.

Despite the weaker outlook, the IMF said strong demand linked to artificial intelligence has helped cushion the broader impact of the conflict. The fund expects global growth to recover to 3.4pc in 2027, a rebound IMF economist Deniz Igan described as a “V-shaped recovery.”

According to the fund, countries are being affected unevenly. Energy exporters outside the conflict zone are benefiting from stronger terms of trade, while economies integrated into the AI-driven technology boom are maintaining relatively strong activity even if they import energy. By contrast, energy-importing countries with limited exposure to the technology supply chain are seeing weaker growth.

The renewed volatility follows US and Israeli strikes on Iran and Tehran’s subsequent retaliation, which disrupted traffic through the Strait of Hormuz and drove oil prices sharply higher. Although energy shipments resumed after a temporary pause in hostilities, fighting has since resumed, renewing concerns over supply disruptions.

Regional growth forecasts were revised accordingly. The IMF cut its projection for the Middle East and Central Asia by 1.2 percentage points to 0.7pc, while the euro area is now expected to grow 0.9pc this year. Growth for France was lowered to 0.6pc, down 0.3 percentage points from the previous forecast.

The United States is still expected to expand by 2.3pc this year, while China’s forecast was revised slightly upward to 4.6pc.

The IMF cautioned that the full economic impact of the conflict has yet to be felt. While the release of strategic energy reserves has provided temporary relief, reduced energy flows and increasing trade fragmentation could still push prices higher and weaken growth further.

One notable bright spot, the fund said, has been the resilience of economies central to the global technology supply chain. The four largest net exporters of AI-related hardware — Taiwan, South Korea, Thailand and Malaysia — have continued to post relatively strong growth despite disruptions linked to the conflict.

Igan said the expected rise in inflation this year should be viewed as a temporary interruption rather than a reversal of the broader disinflation trend.