IMF lowers global growth forecast for 2026 to 3.1%: warns that if US-Iran war escalates, the world economy may fall into recession

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The International Monetary Fund (IMF) has lowered its global economic growth forecast for 2026 to 3.1%, warning that if conflict in the Middle East continues and energy infrastructure suffers severe damage, global economic growth could fall below 2%, approaching the recession threshold defined by the IMF.

On Tuesday, the IMF released the latest "World Economic Outlook" report, lowering this year's global GDP growth forecast by 0.2 percentage points from January's 3.3% to 3.1%. The report noted that since the joint US-Israeli military action against Iran erupted on February 28, the Strait of Hormuz has been effectively blocked, leading to a sharp rise in oil prices and a sudden downturn in previously optimistic global growth prospects. IMF Chief Economist Pierre-Olivier Gourinchas stated:

"The Middle East conflict has brought growth momentum to an abrupt halt. The ultimate scale of the impact will depend on the duration and intensity of the conflict, as well as the speed at which energy production and transport return to normal after hostilities end."

This downgrade has a particularly significant impact on emerging markets; this year's growth forecast for emerging economies was reduced from 4.2% to 3.9%, while inflation expectations increased by 0.7 percentage points to 5.5%. The IMF also warned that the Middle East war has heightened uncertainty regarding the economic outlook for emerging markets, with risks skewed toward deeper recession. The report was released in Washington during the IMF and World Bank Spring Meetings and became a central topic for finance ministers and central bank governors from participating countries.

Three Scenarios: From Mild Slowdown to Near Recession

The IMF outlined three scenario forecasts regarding potential developments in the US-Iran conflict, with significant differences in growth and inflation trajectories.

In the baseline (reference) scenario, the conflict is relatively brief, energy commodity prices rise by about 19% this year, global economic growth is 3.1%, global inflation climbs from 4.1% in 2025 to 4.4%, and growth remains steady at 3.2% in 2027.

If the blockade of the Strait of Hormuz is prolonged and drilling/refining facilities sustain greater damage, the IMF expects global growth to fall to 2.5% and inflation to rise to 5.4%.

In the most severe scenario, energy supply disruptions continue into next year, inflation expectations become clearly unanchored, financial conditions tighten considerably, oil averages $110 per barrel for the year, and global economic growth drops below 2%—a level reached only four times since 1980, with the most recent cases during the 2008 global financial crisis and the COVID-19 pandemic. In this scenario, global inflation will hit 5.8% in 2026 and further rise to 6.1% in 2027.

Europe and Emerging Markets Bear the Brunt

The impact of this shock is unevenly distributed among economies, with those highly dependent on energy imports under the greatest pressure.

Among major developed economies, Europe is hit hardest. Germany's growth forecast for this year is just 0.8%, down by 0.3 percentage points from January; the UK is also expected to grow by only 0.8%, a drop of 0.5 percentage points. The US, as a net exporter of energy, is relatively less affected, with a growth forecast of 2.3% for this year, down slightly by 0.1 percentage points from January.

Emerging markets face an even harsher impact. In the most severe scenario, shocks to emerging and developing economies are nearly twice as strong as those to developed economies. The Middle East and Central Asia are expected to see growth slow sharply from 3.6% in 2025 to 1.9%; Bahrain, Iraq, Kuwait, and Qatar all face economic contraction. Iran is hit hardest, with its GDP expected to contract by 6.1% in 2026, dropping 7.2 percentage points from the 1.1% growth projected in January; The IMF estimates Iran’s output will rebound by 3.2% in 2027.

Many economies highly dependent on energy and chemical imports from the Gulf region, especially emerging markets in Asia, have launched price controls, subsidies, and other interventions to address supply shortages. IMF economists warn that such measures are often poorly designed and expensive, may cause rationing effects, and could spill over to other countries. They recommend more targeted, temporary support, prioritizing direct transfers to the most vulnerable households.

Inflation Rebound Puts Central Banks in a Dilemma

As growth slows, revived inflationary pressures further constrain monetary policy options.

The IMF notes that the recent trend toward disinflation will be interrupted by this shock, with rising energy and food prices as the main drivers. Even if the conflict ends quickly, inflation pressures won’t dissipate rapidly. IMF economists warn that introducing fiscal stimulus amid rising inflation will put central banks under greater strain as they try to balance inflation and growth.

The report specifically highlights that consumers are still suffering the psychological trauma from the inflation shocks caused by the last two crises—the COVID-19 pandemic and the Russia-Ukraine conflict—and are now more sensitive to any new round of price increases than before. Compared to the outbreak of the Russia-Ukraine conflict in 2022, the energy shock is happening while labor markets have weakened and central banks have already started to normalize balance sheets. If the shock remains limited, inflation might be relatively controllable, but this judgment is highly uncertain.

Pierre-Olivier Gourinchas calls on policymakers to seek "the right policies and stronger global cooperation" to contain the spread of the shock.

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