IMF upgrades 2026 growth forecast but warns of ‘split’ outlook

IMF chief economist Silvana Tenreyro listens to questions during a World Economic Outlook press briefing at the IMF and World Bank annual meetings in Bangkok. (AFP pic) BANGKOK: The International Monetary Fund 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 US' 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% 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% -- 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% 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% this year, the IMF said, mainly due to weak domestic demand.

Global inflation remained set to accelerate to 4.7% 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."