IMF lowers 2026 global growth forecast as war threatens oil supply, inflation

Dubai: The International Monetary Fund has lowered its global growth forecast for 2026, warning that the war in the Middle East has disrupted what had been a stronger economic recovery and could cause more serious damage if energy supplies from the Gulf are hit harder.

In its latest World Economic Outlook, released at the Spring IMF Meetings, the Fund lowered its forecast for global growth this year to 3.1 per cent, down from its earlier January estimate, and said inflation is now expected to rise to 4.4 per cent.

The downgrade comes after conflict in the Middle East abruptly halted what had been a stronger-than-expected recovery path for the global economy.

“The global economy was on a steady growth trajectory, and we were looking to upgrade our projections,” said Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research of the IMF. “The war has stopped that momentum.”

The IMF says the greatest immediate economic danger lies in disruptions to Gulf energy routes, particularly if the Strait of Hormuz faces a prolonged closure or if damage to regional oil infrastructure worsens.

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The IMF’s main forecast is based on what it calls a “reference scenario”, which assumes the war remains limited in duration and scope and that commodity market disruptions begin to ease by mid-2026.

Even under that relatively contained assumption, the IMF says the conflict is already pushing up energy and food prices, feeding inflation, weakening purchasing power, and tightening financial conditions.

Before the conflict, the IMF said it would likely have upgraded its 2026 growth estimate to 3.4 per cent. Instead, the war has reversed that improvement.

What if oil disruption worsens

The IMF has stressed that the biggest risk lies in a longer or wider conflict, especially if oil production facilities are damaged further or the Strait of Hormuz faces prolonged disruption.

In its adverse scenario — assuming bigger and more persistent energy price increases — global growth would slow to 2.5 per cent in 2026, while inflation would rise to 5.4 per cent.

In its severe scenario, where energy market disruption extends into next year and inflation expectations become less anchored, global growth would drop to around 2 per cent in both 2026 and 2027, with inflation exceeding 6 per cent.

Middle East economies

The Middle East and North Africa region’s growth revisions for 2026 have been cut by nearly three percentage points.

Saudi Arabia and the UAE have both seen their 2026 growth forecasts revised down, although the IMF still expects each economy to expand by 3.1 per cent this year.

Growth is then projected to strengthen in 2027, rising to 4.5 per cent for Saudi Arabia and 5.3 per cent for the UAE. Oman is forecast to post steadier growth, with its economy expected to expand by 3.5 per cent in 2026 and 3.4 per cent in 2027.

Inflation challenge returns

The IMF says the war creates a classic supply shock: rising oil and gas prices lift production costs across transport, food, chemicals and manufacturing.

That risk becomes more dangerous if firms and workers begin raising prices and wages in anticipation of future inflation, creating a second-round inflation spiral.

Central banks, the IMF says, should remain cautious but not overreact unless inflation expectations begin drifting sharply upward.

“Central banks need to communicate clearly their readiness to act if needed,” Gourinchas said. If inflation expectations remain stable and the conflict is short-lived, policymakers can afford to wait before tightening further.

The IMF also warned governments against large untargeted fuel subsidies or price caps, arguing these are expensive and often ineffective.

Instead, any fiscal support should be temporary, tightly targeted at vulnerable households, and designed so it does not undermine inflation control.

Downside risks still dominate

Although a temporary ceasefire has eased immediate market fears, the IMF says risks remain firmly tilted to the downside.

A wider war, renewed trade tensions, deeper geopolitical fragmentation, or prolonged disruption of oil infrastructure could all further weaken growth.

At the same time, the Fund says a quicker end to hostilities, easing trade tensions, or faster productivity gains from artificial intelligence could improve the outlook.

Gourinchas wrote in a blog, "The world economy faces another difficult test. And while it may become more multipolar, it need not become more fragmented."

"We should keep strengthening global cooperation; with the right policies—including a swift cessation of hostilities and the reopening of the Strait of Hormuz—the damage can remain limited. International financial institutions such as the IMF were born out of a vision, forged in the aftermath of war and great destruction, to advance economic and financial cooperation and integration for the benefit of all. Today, those principles are more vital than ever to preserve global prosperity," he wrote.