Bangkok (AFP) – The International Monetary Fund on Tuesday forecast global growth in 2026 would slow less than previously expected because of advanced economies’ “resilience” in the face of war-fuelled energy prices, but warned low-income countries remained vulnerable to the supply shock. In its World Economic Outlook (WEO) released at the organization’s Annual Meetings in Bangkok, the IMF raised its 2026 global growth forecast by 0.1 percentage points to 3.1 percent, compared with 3.5 percent growth in 2025.
It warned that while many advanced economies have been buoyed by rising investment in artificial intelligence (AI) technology, poorer countries that are not benefiting from that boom face stark choices as they deal with high energy prices caused by the Iran war. “The global economy has been resilient, but that resilience is under strain, with risks tilted to the downside,” Silvana Tenreyro, the IMF’s chief economist, told journalists in Bangkok.
With global debt-to-GDP ratios at sky-high levels, including in advanced economies, the IMF has called on governments to cut spending and manage borrowing — a difficult task for those in the developing world struggling with the Iran war shock. “What we are advocating for is for policymakers to balance the near-term needs of inflation, and that involves food security, that involves energy security… while also keeping in mind the medium-term stability,” said Deniz Igan, chief of the IMF’s World Economic Studies division.
**- ‘Bifurcated outlook’ -** The United States’ war on Iran, launched in February, has plunged the Middle East into violence and seen global energy prices skyrocket as a result of Tehran’s retaliation. Prices of refined petroleum products remain between 70 and 95 percent above pre-war levels, putting pressure on countries dependent on energy imports for economic activity. On Monday night, blasts resounded across Saudi Arabia’s capital as the war’s impact widens into that country, with Iran-backed Yemeni Houthi forces hitting oil facilities, tankers, and transport hubs.
“A more prolonged disruption of production and transport in the Middle East could lead to” higher inflation and a drag on growth, said Tenreyro. Energy-importing countries not exposed to the AI boom remain the most vulnerable, creating what the IMF termed a “bifurcated outlook” in its WEO report. The report detailed that the twin economic forces of the war in Iran and the AI technology boom had created a “fragmented” world economy. “Headwinds from a prolonged war and persistent geopolitical tensions could revive inflationary pressures, strain fiscal and external positions, and hit energy-importing and low-income countries hardest,” it said.
“At the same time, the current technology tailwind could stop abruptly if expectations about AI-related profits and productivity gains are reassessed, weakening investment and tightening financial conditions.” Responding to AFP, Tenreyro said AI had been a major factor driving the world economy, accounting for almost half of the increase in global trade from 2023 to 2025.
**- Contraction here, growth there -** The IMF’s split view of the world economy was evident in its specific projections. The Middle East and Central Asia region — exposed directly to the Iran war as Tehran targets Washington’s Gulf allies and the Houthi offensive against Saudi Arabia has picked up — is expected to suffer a 0.3 percent contraction in 2026. Saudi Arabia’s is one of the worst affected, with its economy projected to shrink 3.3 percent — representing a 5.0 percentage points cut in the Fund’s forecast.
The IMF said the region is expected to bounce back quickly once the war is over, but there remains high uncertainty as to when that will be. In advanced economies, growth fuelled by the AI boom and other factors remained strong. The world’s advanced economies were forecast to grow 2.1 percent in 2026, with those in the AI supply chain such as Taiwan and South Korea posting significantly higher figures. Growth in China, the world’s second-largest economy, was expected to slow, the IMF said, mainly because of weak domestic demand. Global inflation remained set to accelerate to 4.7 percent in 2026, with effects spread across advanced and developing economies.
**- Call for action -** Tenreyro warned that urgent action was required by all countries in the face of downside risks and called on governments to only use temporary, targeted measures to help ease the burden on the public of high energy and other costs. In lockstep, “monetary policy should remain firmly focused on price stability,” she added, indicating that interest rate hikes to curb high inflation were appropriate.
“The economy has been resilient, but that resilience is reaching its limits,” she said. “The task ahead is to move from coping to rebuilding, restoring fiscal space and supply-side resilience.”
© 2024 AFP
