IMF Warns: Prolonged War Effects to Cast Gloom Over Global Economy

The International Monetary Fund (IMF) is projecting global growth of 3% in 2026, down from an average of 3.5% in 2024-2025, in its July 2026 World Economic Outlook (WEO) report. The IMF assesses the economic slowdown as a result of the sustained effects of the war in the Middle East. “This moderate slowdown reflects the impact of the war in the Middle East,” the IMF stated in its latest report on Thursday (9/7/2026). The IMF sees risks to the outlook as more balanced than in April but still tilted to the downside. The possibility of a renewed Middle East conflict looms and could prolong commodity price volatility, further threaten supply chains, raise prices, and burden financial conditions. “Trade fragmentation could increase, potentially harming output and raising prices,” the IMF explained. The IMF assessed that the current policy priority is to restore price stability, supported by clear communication, central bank independence, and strong financial supervision, while rebuilding fiscal buffers and using fiscal instruments sparingly through temporary, targeted support that preserves price signals. “Structural reforms are needed to promote energy security, AI readiness, and domestic rebalancing, and international cooperation must be strengthened to reduce pressures from ongoing tensions.” On the other hand, the IMF sees a risk that global inflation could heat up further in 2026. Hotter inflation could pose a challenge to countries’ economic growth. “On inflation, the picture is somewhat less encouraging. Global headline inflation has been revised up to 4.7% this year, while our core inflation forecast is broadly unchanged. Simply put, the disinflation trend that has been in place since early 2024 has stalled,” the IMF said. Nevertheless, the IMF noted that the world economy has so far weathered the shocks from the war better than feared. A larger oil price spike was avoided thanks to inventory drawdowns, increased production outside the Gulf, and measures to help curb oil demand. Moreover, although financial conditions tightened sharply in April, they have eased and remain supportive by historical standards. “Our forecast now assumes that the Strait of Hormuz begins to reopen in mid-July, with conditions returning to pre-war normal by March 2027. Commodity price assumptions are based on market prices as of 10 June, implying an average oil price of $89 per barrel for 2026,” according to the IMF outlook. “At the core, we expect a V-shaped recovery, weaker growth this year compared to our pre-war forecast, followed by a recovery next year,” it continued. The economic growth weakening did not fall deeper because it was supported by global technological developments. There is accelerating momentum driven by demand within the global technology cycle thanks to advances in artificial intelligence (AI) and its adoption. “The impact varies greatly depending on countries’ exposure to the war and their position in technology value chains. Energy exporters outside the conflict zone benefit from favourable terms of trade, while economies connected to the technology-led upswing experience stronger activity even though they are energy importers,” according to the IMF.