IMF cuts 2026 growth forecast to 3.0% as AI offsets war impact

The global economy will expand 3.0 percent this year, the International Monetary Fund said Wednesday, as an artificial intelligence-driven boom partially offsets the fallout from war in the Middle East.

The IMF cut its 2026 global growth projection to 3.0 percent from 3.1 percent in April, while raising its 2027 forecast to 3.4 percent, as AI demand cushions energy supply disruptions caused by the Middle East conflict.

"The global picture blurs glaring differences across countries," Deniz Igan, division chief at the IMF's research department, said in a briefing. Energy exporters and technology-linked economies are outperforming, while commodity importers with limited AI exposure face weaker activity.

The fund raised China's 2026 growth estimate by 0.2 percentage point to 4.6 percent, citing faster-than-expected first-quarter performance, front-loaded infrastructure investment and strong high-tech manufacturing exports. South Korea posted annualized first-quarter growth of 7.5 percent — more than four times the IMF's April forecast of 1.8 percent — driven by AI-related hardware demand. The euro area saw its 2026 projection cut by 0.2 percentage point to 0.9 percent.

Global headline inflation is now seen at 4.7 percent this year, up 0.3 percentage point from the April forecast, as energy prices run about 25 percent above pre-conflict levels. The IMF warned that a renewed escalation in the Middle East — which became reality this week as US-Iran hostilities resumed — could extend commodity price volatility, further threaten supply chains and tighten financial conditions.

The projections assume shipping through the Strait of Hormuz will begin normalizing from mid-July, with conditions returning to pre-war levels by March 2027. Oil and gas shipments had resumed under a temporary US-Iran deal, but fresh Iranian attacks on vessels in the strait and subsequent US strikes have shattered the ceasefire.

The IMF's regional revisions highlight the asymmetric nature of the shock. The Middle East and Central Asia suffered the steepest downgrade, with 2026 growth slashed by 1.2 percentage points to 0.7 percent — consistent with a longer closure of the waterway. Saudi Arabia's forecast was cut by 1.4 percentage points to 1.7 percent, the largest single-country reduction. Yet the fund expects a sharp rebound to 6.5 percent in 2027.

AI Supply Chain Beneficiaries

Asia's technology exporters delivered what the IMF called a "positive surprise." The top four net exporters of AI-related hardware — Taiwan, South Korea, Thailand and Malaysia — posted resilient growth despite their exposure to disruptions from the war. Thailand's 2026 forecast was raised to 1.9 percent from 1.5 percent, supported by emergency fiscal measures and strong tech-related exports and investment. Malaysia benefited from a data-center construction boom.

"Energy exporters outside the conflict zone benefit from favorable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers," the IMF said in its report. "In contrast, activity weakens for energy importers with limited participation in the technology value chain."

Risks Remain Tilted to the Downside

The IMF cautioned that the possibility of a renewed Middle East conflict "looms large" and could extend commodity price volatility, further threaten supply chains and weigh on financial conditions. Trade fragmentation could accelerate, risking higher prices.

Igan warned that a renewed conflict would confront the global economy under far more difficult conditions than during the initial phase of the war, as many countries have already drawn heavily on their strategic petroleum reserves. A simultaneous effort by multiple countries to replenish depleted reserves could further fuel a surge in crude prices.

"If markets begin to believe the conflict will persist for longer, both the willingness and the ability of countries to draw on their reserves will diminish rapidly," Igan said.

Global trade growth is projected to slow sharply to 3.5 percent in 2026 from 5 percent in 2025, when trade was boosted by front-loading ahead of US tariffs. The fund expects a recovery to 4.3 percent in 2027.

This article is for informational purposes only and does not constitute investment advice.