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

The International Monetary Fund (IMF) has raised its global growth forecast for 2026 to 3.1 percent, down from the 3.5 percent growth predicted for 2025. The IMF attributes this increase to the resilience of advanced economies despite the war-fuelled energy price surge, primarily due to heightened investment in artificial intelligence (AI) technology. However, the IMF warns that low-income countries remain vulnerable to these supply shocks.

While many advanced economies are buoyed by rising AI investment, poorer nations not benefiting from this boom face significant challenges as they grapple with high energy prices due to the US-led war on Iran. The global economy, though resilient, is under strain with risks to growth tilting to the downside, according to Silvana Tenreyro, the IMF's chief economist.

The US war in Iran, launched in February, has caused violence and soaring global energy prices, with refined petroleum products remaining between 70% and 95% above pre-war levels. Many countries rely on energy imports for economic activity, making them particularly vulnerable to these price increases. Tenreyro warns that a prolonged conflict in the Middle East could exacerbate inflation and hinder growth.

The IMF's report highlights the "bifurcated" nature of the global economy, with the Middle East and Central Asia region directly exposed to the Iran war experiencing an economic contraction of 0.3% in 2026. This includes countries like Saudi Arabia, which faces a projected growth contraction of 3.3%, a decrease of 5.0 percentage points from previous forecasts. Conversely, advanced economies such as Taiwan and South Korea, which benefit from the AI boom, are expected to maintain strong growth.

China, the world's second-largest economy, is forecast to see its growth slow by 0.5 percentage points to 4.5% this year, primarily due to weak domestic demand. Global inflation is expected to accelerate to 4.7% in 2026, driven by the Iran war and the AI boom, impacting both advanced and developing economies.

IMF Chief Economist Tenreyro stresses the need for urgent action from all countries in the face of these downside risks. She recommends that governments employ temporary and targeted measures to alleviate the burden of high energy and other costs. Monetary policy should focus on maintaining price stability, with interest rate hikes warranted to curb high inflation, according to Tenreyro.

The IMF warns that while the economy has shown resilience, this resilience is nearing its limits, urging a transition from coping to rebuilding, restoring fiscal space, and enhancing supply-side resilience.