IMF predicts global growth to slow less in 2026 but warns of ‘split’ outlook

The International Monetary Fund (IMF) on Tuesday forecast that global growth in 2026 would slow less than previously expected due to advanced economies’ “resilience” in the face of war-fuelled energy prices, but warned that low-income countries remained vulnerable to the supply shock.

In its World Economic Outlook (WEO) released at the organization’s Annual Meetings in Bangkok, the Fund raised its 2026 global growth forecast by 0.1 percentage points to 3.1 percent, compared to 3.5 percent growth in 2025.

The IMF warned that while many advanced economies have been buoyed by rising investment in artificial intelligence (AI) technology, poorer countries that are not benefiting from that boom face stark choices as they deal with high energy prices due to the US war on Iran.

“The global economy has been resilient, but that resilience is under strain, with risks to growth tilted to the downside,” said Silvana Tenreyro, the IMF’s chief economist.

– ‘Bifurcated outlook’ -The United States’ war on Iran, launched in February, has plunged the Middle East into violence and seen global energy prices skyrocket as a result of Tehran’s retaliatory actions.

Prices of refined petroleum products remain between 70 and 95 percent above pre-war levels, putting pressure on countries dependent on energy imports for economic activity.

The war is in its eighth month, and Tenreyro warned that “a prolonged conflict in the Middle East could put additional pressures on inflation and slow down growth.”

Energy-importing countries not exposed to the AI boom remain the most vulnerable, creating what the IMF termed a “bifurcated outlook” in its WEO report.

The report detailed that the twin economic forces of the war in Iran and the AI technology boom had created a “fragmented” world economy.

“Headwinds from a prolonged war and persistent geopolitical tensions could revive inflationary pressures, strain fiscal and external positions, and hit energy-importing and low-income countries hardest,” it said.

“At the same time, the current technology tailwind could stop abruptly if expectations about AI-related profits and productivity gains are reassessed, weakening investment and tightening financial conditions.”

– Contraction here, growth there -The IMF’s split view of the world economy was evident in its specific projections.

The Middle East and Central Asia region, exposed directly to the Iran war as Tehran has targeted Washington’s Gulf allies, saw the IMF forecast economic contraction of 0.3 percent in 2026.

Saudi Arabia saw one of the sharpest falls in projected growth, with the IMF forecasting a contraction of 3.3 percent — a cut in the forecast of 5.0 percentage points.

The IMF said the region is expected to bounce back quickly once the war is over, but there remains high uncertainty as to when that will be.

In advanced economies, growth fuelled by the AI boom and other factors remained strong.

The world’s advanced economies were forecast to grow by 2.1 percent in 2026, with those in the AI supply chain such as Taiwan and South Korea posting significantly higher figures.

Growth in China, the world’s second-largest economy, was expected to slow by 0.5 percentage points to 4.5 percent this year, the IMF said, mainly due to weak domestic demand.

Global inflation remained set to accelerate to 4.7 percent in 2026, fuelled by the Iran war and the AI boom, with effects spread across both advanced and developing economies.

– ‘Urgent action’ -IMF Chief Economist Tenreyro warned that “urgent action” was required by all countries in the face of downside risks.

On the fiscal side, she called on governments to only use temporary and targeted measures to help ease the burden on the public of high energy and other costs.

In lockstep, “monetary policy should remain firmly focused on price stability,” she added, indicating that interest rate hikes to curb high inflation were appropriate.

“The economy has been resilient, but that resilience is reaching its limits,” she said. “The task ahead is to move from coping to rebuilding, restoring fiscal space, and rebuilding supply-side resilience.”

The International Monetary Fund (IMF) has sharply cut growth forecasts for the Middle East and Central Asia in 2026, as the ongoing war has sent economies into a tailspin.

In its latest World Economic Outlook report, the IMF said the regional economy was projected to contract by 0.3 percent, compared to its projected 1.9 percent growth six months ago.

It cited “a longer closure of the Strait of Hormuz, compared with the baseline assumptions in the April” report, predicting a major rebound in 2027 based on the expected reopening of the waterway.

Since the Middle East war began in late February with US-Israeli strikes on Iran, Tehran has sought to impose its control over the Strait of Hormuz, repeatedly attacking ships that transit without its authorisation.

The United States has imposed its own counter-blockade on Iranian ports, and has escorted friendly ships through the waterway in increasing numbers.

According to the IMF, the countries most affected by shipping and production disruptions are Iraq, Kuwait, Qatar and Bahrain, all of which suffered damage to oil installations during the fighting.

They are “projected to experience double-digit contractions of their economies in 2026, followed by double-digit expansions in 2027 as production, exports, and logistics normalise”.

Saudi Arabia’s GDP is expected to contract by 3.3 percent this year, before rebounding to 7.9 percent growth next year, the global lender said.

The forecast was made before a series of deadly attacks on the Riyadh airport that began last week.

The fund noted that the kingdom — the world’s largest crude exporter — is among the least affected in the region, pointing to “an economy with more diversified export routes”.

Saudi Arabia has made use of its East-West oil pipeline to bypass the Hormuz strait and send crude to its Red Sea coast.

However, the pipeline was temporarily shut in September after it was hit by strikes blamed on Iran-backed groups in Iraq.

And Tehran’s allies in Yemen, the Houthis, have repeatedly targeted Saudi oil infrastructure and its tankers in the Red Sea since their civil war with Yemen’s Riyadh-backed government reignited in July.

The United Arab Emirates, which has coastal access to both sides of the Hormuz strait, is projected to see its economy contract by 3.9 percent.

Oman is the only country in the Gulf that is expected to maintain positive growth this year, at 2.4 percent.

The IMF also projected a contraction of Iran’s outlook, with a 7.6 percent decline in GDP as a result of the war, the blockade and US sanctions.

Other Arab countries are expected to remain “relatively resilient” in the face of price shocks from energy and food, the lender said.

The IMF warned on Tuesday of “elevated” risks faced by the global financial system, with potential perils including an AI-related market correction and cyber threats that could have “severe” consequences.

The cautionary message was delivered by the International Monetary Fund’s latest Global Financial Stability Report, published on the second day of its annual gatherings with the World Bank, held this year in Thailand’s capital, Bangkok.

“These risks are plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil,” the report said.

The recent boom in artificial intelligence — and the related rush to manufacture semiconductors and build data centres — has provided a boost to global growth despite geopolitical pressures including the Middle East war.

However, “growing evidence suggests that AI capabilities can be delivered at lower investment levels… or that potential economic gains may not be as large as expected,” the IMF warned.

“Weaker or less durable AI investments and profitability could be a shock that triggers a market correction.”

And while AI is increasingly a source of economic vitality globally, it is also presenting unprecedented risks, said the Fund.

“Severe cyber incidents could undermine market confidence and disrupt critical financial market infrastructure and operations,” it said.

The report adds to growing worries about AI and its wide-ranging impact on labour markets, education and inequality.

In one widely covered incident in July, AI agents developed by US firm OpenAI hacked Hugging Face, an AI model and application library, as the autonomous software escaped its confined testing environment.

As AI capabilities continue to improve, the risk of successful cyberattacks on “critical financial institutions or market infrastructure” is getting “worse”, the IMF said.

The “impact could be severe as rapid digitization has increased the attack surface”.

While frontier AI models could be used to stage such attacks, they also have a role to play in cyber defence, the IMF said.

Another growing risk to the global financial system is a spike in bond yields, which could trigger severe shocks due to the “foundational importance of sovereign bond markets”, said the report.

“Bond markets are susceptible to further rises in energy prices reigniting inflation and forcing the tightening of monetary policy.”