The International Monetary Fund (IMF) cut its baseline global growth projection for 2026 from 3.3% in January to 3.1%, while global headline inflation is still expected to rise by 4.4% this year before cooling to 3.7% next year.
The IMF said the global growth outlook would have been upwardly revised had it not been for the Middle East war that broke out in late February, as previous projections were supported by strong tech investments and resilient financial conditions, according to the agency’s World Economic Outlook (WEO) report released on Tuesday.
The US and Israel’s war in Iran and Tehran’s subsequent retaliations escalating into an all-out war in the region created a massive economic counterforce, bringing about a highly volatile situation, prompting the IMF to abandon its traditional baseline scenario for a reference forecast.
The reference forecast model assumes that the war and its scope will be strictly limited, while expecting supply chain disruptions to subside by mid-2026.
The IMF warned that downside risks will continue to dominate the global outlook, and in the event that energy infrastructure in the Middle East suffers further damage if the conflict expands, global growth could be as low as 2% this year, while inflation could rise above 6% by 2027.
The report showed that the economic toll of the conflict will be felt at varying degrees, with downward growth revisions mostly concentrated in emerging market and developing economies, whose forecasts for this year decreased by 0.3 percentage points.
Advanced economies’ forecasts remained broadly unchanged, but if the conflict becomes more severe, the economic toll on developing countries could be almost twice as severe as the impact advanced economies suffer.
Regional economies face sharp growth downgrades
The economic toll is highly concentrated in the Middle East, especially in Iran, whose economy is projected to contract by 6.1% this year, while neighboring oil exporters such as Qatar and Iraq are expected to face significant collateral damage, with their economies shrinking 8.6% and 6.8%, respectively.
Kuwait and Bahrain’s growth estimates show that the two countries’ economies will contract by 0.6% and 0.5% this year while growing 2.8% and 11.3% in 2027, respectively.
The impact isn’t limited to Middle Eastern countries. Western economies are also expected to feel the shockwaves, with the IMF lowering its 2026 growth forecast for the US to 2.3% and the eurozone’s figure from 1.3% to 1.1% this year and from 1.4% to 1.2% for 2027, mostly driven by lowered growth expectations for Germany, France, Italy and Spain.
Germany’s growth estimate was lowered from 1.1% to 0.8% in 2026 and from 1.5% to 1.2% for 2027. France’s growth projections were decreased from 1% to 0.9% for this year and from 1.2% to 0.9% for next year.
Italy’s figures were revised downward from 0.7% to 0.5% for both this year and the next, while Spain’s economic growth forecast was lowered from 2.3% to 2.1% for this year and from 1.9% to 1.8% for 2027.
Meanwhile, China’s growth estimate was lowered from 4.5% to 4.4% for this year while maintaining 4% for next year, while India and Russia’s growth forecasts were revised upward from 6.4% to 6.5% and from 0.8% to 1.1% for this year, respectively.
India’s 2027 projection remained unchanged, while the Russian economy is expected to grow 1.1% in 2027 versus the previous estimate of 1%, the data showed.
As for Türkiye, the macroeconomic outlook cooled but the IMF still projects the country’s economy to grow 3.4% in 2025 and 3.5% in 2027, representing a decline from the 4.2% growth it forecast for the country three months ago.
The report showed Türkiye is expected to see a stubborn year-end inflation rate of 28.6% in 2026 and 21.4% in 2027, as well as an 8.3% unemployment rate this year and 8.7% next year amid ongoing turbulence in the Middle East.
The IMF warned that beyond war-related geopolitical risks there also remains rising protectionism in trade, saying that new trade disputes could come to the fore in the current climate, especially amid the rise of rare earth elements (REEs) in global supply chains, which the agency says represents a volatile friction point.
Amid heating geopolitical tensions, governments around the world are spending more on defense budgets.
“Scaling up of defense spending, prompted by a rise in geopolitical tensions, could boost economic activity in the short term but also bring about inflationary pressures, weaken fiscal and external sustainability, and risk crowding out social spending, which could in turn ignite discontent and social unrest,” the IMF warned.
The report also touched on a potential reevaluation of artificial intelligence (AI) profit estimates, saying that the unpredictable rise in the technology and its accelerated widespread adoption could yield significant productivity gains, but the potential of an AI bubble still remains.
The IMF warned that if the AI market rapidly revalues rising AI profit expectations, a sharp decline in investment and a massive correction across global financial markets could follow.
