IMF upgrades 2026 growth forecast but warns of 'split' outlook

The International Monetary Fund announced on Tuesday that it has raised its global growth forecast for 2026 to 3.1 per cent, down from the previous 3.5 per cent estimate. The IMF attributed the improvement to the resilience of advanced economies in the face of soaring energy prices resulting from the US war on Iran, while warning that low-income countries remain vulnerable to the supply shock.

The IMF's chief economist, Silvana Tenreyro, highlighted the bifurcated outlook of the global economy, stating that while advanced economies have benefited from rising investment in artificial intelligence (AI) technology, poorer countries are facing challenges in the high energy prices due to the conflict. Prices of refined petroleum products have remained between 70 and 95 per cent above pre-war levels, putting pressure on energy-importing countries.

The IMF warned that a prolonged conflict in the Middle East could exacerbate inflation and slow down growth. Energy-importing countries not exposed to the AI boom are the most vulnerable, creating a fragmented world economy. The Middle East and Central Asia region, directly affected by the Iran war, are projected to experience economic contraction of 0.3 per cent in 2026, with Saudi Arabia facing a sharp decline in growth forecast of 3.3 per cent.

Advanced economies, on the other hand, are expected to continue growing at a strong pace, with the Middle East and Central Asia region seeing economic contraction and China's growth slowing due to weak domestic demand. Global inflation is projected to accelerate to 4.7 per cent in 2026, driven by the Iran war and the AI boom, affecting both advanced and developing economies.

IMF Chief Economist Tenreyro emphasized the need for urgent action by all countries to address downside risks. She called for temporary and targeted fiscal measures to ease the burden on the public of high energy and other costs, while monetary policy should focus on price stability with appropriate interest rate hikes to curb high inflation.

Tenreyro warned that while the economy has been resilient, its resilience is reaching its limits, and the task ahead is to shift from coping to rebuilding, restoring fiscal space, and rebuilding supply-side resilience.