Middle East war offsets AI gains as IMF sees slower global growth

The global economy is expected to slow in 2026 as the economic fallout from the war in the Middle East offsets part of the growth boost from rapid advances in artificial intelligence, the International Monetary Fund said in its latest World Economic Outlook update.

The IMF projected global economic growth at 3.0% in 2026, down from an average of 3.5% in 2024 and 2025, before recovering to 3.4% in 2027. The outlook is broadly unchanged from the fund's April 2026 forecast on a cumulative basis.

The IMF said the global economy is being shaped by two opposing forces: a negative supply shock caused by the conflict in the Middle East and a positive technology shock driven by accelerating AI adoption and a stronger global technology cycle.

The impact varies widely across countries. Energy exporters outside the conflict zone are benefiting from stronger terms of trade, while economies deeply integrated into the technology supply chain are experiencing stronger growth despite remaining net energy importers.

In contrast, energy-importing countries with limited exposure to the technology boom, including many low-income economies, are expected to face weaker economic activity.

Inflation to remain elevated

The IMF projected global headline inflation to rise from 4.1% in 2025 to 4.7% in 2026 before easing to 3.9% in 2027.

The latest forecast is slightly higher than the April outlook and suggests the global disinflation trend that began in early 2024 has stalled.

Risks remain tilted to the downside

The IMF said risks to the outlook are more balanced than they were in April but continue to be tilted to the downside.

A renewed escalation of conflict in the Middle East remains the biggest threat to the global economy, with the potential to increase commodity price volatility, disrupt supply chains, fuel inflation and tighten global financial conditions.

The fund also warned that growing trade fragmentation could reduce global output while pushing prices higher. It added that a correction in elevated technology-sector valuations and weakening fiscal buffers could amplify downside risks.

On the upside, faster normalization in energy markets, stronger-than-expected investment in AI and digital technologies, lower trade barriers through improved international cooperation and structural reforms could lift medium-term growth.

Policy recommendations

The IMF urged policymakers to restore price stability through credible monetary policy, central bank independence and strong financial supervision while rebuilding fiscal buffers.

It recommended that governments provide only temporary and targeted fiscal support that preserves market price signals.

The fund also called for structural reforms to strengthen energy security, improve readiness for AI-driven economic transformation, support domestic economic rebalancing and enhance international cooperation to reduce geopolitical tensions.

Economy withstands initial shock

According to the IMF, the global economy has so far weathered the economic shock from the Middle East conflict better than initially feared.

Commodity prices, inflation expectations and financial conditions have remained relatively contained, although the fund cautioned that the economic effects of the conflict are still unfolding.

Commercial and strategic inventories have temporarily softened the impact of reduced energy flows. However, forward-looking indicators, including supply chain pressure measures and manufacturing purchasing managers' indices, point to weaker momentum ahead, with some economies already experiencing greater strain.