IMF upgrades outlook modestly despite war risks

The global economy is holding up better than the IMF expected despite an oil supply shock triggered by the war in the Middle East, but that growth outlook could erode if the conflicts in Iran or Ukraine drag on or further escalate.

The IMF's latest World Economic Outlook forecasts the global economy will grow by 3.1pc in 2026, up by 0.1 percentage point from an update in July, with some of those gains driven by an economic rebound in Europe and robust trade flows from parts of Asia. Global growth is on track to increase to 3.4pc in 2027, unchanged from the last update, IMF said.

Rerouting energy commodity flows from the Mideast Gulf, releasing oil from strategic reserves and increasing oil production elsewhere has helped blunt disruptions from the closure of the strait of Hormuz. Overall, the disruptions in the strait have prompted the IMF to shave only 0.3 percentage points off anticipated global growth for 2026.

If not for the cushion provided by the flexibility of oil supply and a 20pc reduction in global oil intensity over the last decade, the IMF said the war in the Middle East could have cut global growth this year by three times that.

Higher oil prices contributed to China's economic growth slowing to 4.5pc this year, down from 5pc in 2025. The US economy is expected to grow by 2.3pc, bolstered by technology-related investments in data centers. Saudi Aribia's economy is projected to shrink by 3.3pc this year because of disruptions from the Middle East war, the IMF said, whereas the comparatively less diversified economies of Bahran, Iraq, Kuwait and Qatar are on track for "double digit" economic contractions.

But some of the buffers that have mitigated the economic damage from war are running out, and energy markets are "highly sensitive" to any additional disruptions, such as an escalation in attacks on refineries or infrastructure.

"Without shoring up supply capacity and replenishing policy buffers, the global economy could soon test the limits of resilience," IMF's chief economist Silvana Tenreyro wrote in a blog post. "Dwindling energy inventories could allow geopolitical shocks to transit even more forcefully to energy prices."

Among the energy-related risks are below-average natural gas inventories in Europe that leave the continent vulnerable to extreme winter weather. Continued global depletion of energy supplies are also pushing inventories closer to "stress levels that could lead to nonlinear price adjustments", the IMF said. A prolonged stalemate or escalation in the wars in the Middle East or Ukraine could exacerbate pressure from inflation, which is on track to average 4.7pc this year, up from 4.1pc in 2025, the IMF said. The outlook anticipates global inflation in 2027 will decline to 4.1pc, although that is still 0.2 percentage points higher than the forecast from July.

Global investments into artificial intelligence (AI) have been an "offsetting force" to geopolitical headwinds, the IMF said, although that growth has been concentrated in a handful of countries that produce advanced microchips, such as Taiwan and South Korea, or that are building out data centers, such as China and the US. That investment boom is contributing to near-term inflationary pressures, the IMF said, and any future re-reassessment of AI-related profitability could sharply curtail investment and tighten financial conditions.

Global growth in 2027 could end up being "materially lower", and inflation "significantly higher", under a risk scenario the IMF developed under which higher commodity prices and concerns over government debt causes a reassessment of borrowing risks, Tenreyro said. Keeping publicly held debt on a "sustainable path" could prevent that scenario, she said.

By Chris Knight