On Tuesday, the International Monetary Fund (IMF) revised its global growth forecast downward, attributing the change to surging energy prices caused by ongoing conflicts in the Middle East. The organization expressed concerns that the world economy is heading towards a more challenging situation with significantly lower growth rates, particularly due to disruptions in shipping through the Strait of Hormuz.
As finance officials gathered in Washington, D.C. for the spring meetings of the IMF and World Bank, the IMF outlined three potential growth scenarios: weaker, worse, and severe, all contingent upon the progression of the conflict.
In its most pessimistic scenario, the IMF indicated that the global economy is on the verge of recession, with projected oil prices averaging $110 per barrel in 2026 and rising to $125 in 2027.
For its reference forecast in the World Economic Outlook, the IMF opted for a more optimistic scenario, which assumes the conflict will be brief and that oil prices will stabilize in the latter half of 2026, averaging $82 per barrel—significantly lower than the current Brent crude price of approximately $96.
Shortly after releasing this outlook, IMF chief economist Pierre-Olivier Gourinchas remarked that the projections may already be outdated. He highlighted that ongoing energy supply disruptions and the absence of a clear resolution to the conflict make the “adverse scenario” increasingly plausible.
This intermediate scenario anticipates a prolonged conflict that would maintain oil prices around $100 per barrel this year, decreasing to $75 by 2027, with global growth expected to decline from 3.4% in 2025 to 2.5% this year.
“We find ourselves somewhere between the reference and the adverse scenarios,” Gourinchas noted. He added that each passing day of energy disruption pushes the global economy closer to the adverse outlook.
If it were not for the turmoil in the Middle East, the IMF would have upgraded its growth forecast by 0.1 percentage points to 3.4%, driven by sustained technology investments, lower interest rates, reduced U.S. tariffs, and fiscal support in various countries.
Previously, the IMF had anticipated that oil prices would drop to around $62 by 2026.
In the severe scenario, which assumes a prolonged and escalating conflict, significantly higher oil prices would lead to major financial market disruptions and tighter monetary conditions, resulting in a drastic reduction of global growth to just 2.0%.
“This situation would represent a critical juncture for a global recession,” the IMF stated, noting that growth has dipped below this level only four times since 1980, with the last two significant recessions occurring in 2009 and 2020.
Gourinchas pointed out that several countries could face outright recessions in this severe scenario, with oil prices anticipated to average $110 per barrel in 2026 and $125 in 2027. Such prolonged high prices could lead to persistent inflation, triggering widespread price increases and demands for wage hikes.
“This shift in inflation expectations will compel central banks to tighten monetary policy to combat rising inflation,” he explained, warning that this could result in greater economic strain than what was experienced in 2022.
The IMF suggested that central banks might be able to overlook a temporary surge in energy prices and maintain steady interest rates amid weaker economic activity, which could be viewed as a form of monetary easing, provided that inflation expectations remain stable.
In the severe scenario, global inflation for 2026 could exceed 6%, compared to 4.4% in the more optimistic reference scenario that serves as the basis for the IMF’s country and regional growth projections.
The IMF has also adjusted its growth forecast for the United States for this year to 2.3%, a slight decrease of 0.1 percentage points from January. This change reflects the positive impact of tax cuts, the delayed effect of interest rate reductions, and ongoing investments in AI data centers, which are helping to offset the rising energy costs. Growth is projected to continue in 2027, now forecast at 2.1%, a 0.1 percentage point increase from earlier estimates.
In contrast, the eurozone, which is still grappling with high energy prices stemming from Russia’s invasion of Ukraine, has seen a more significant decline in its growth outlook due to the Middle East conflict, with a 0.2 percentage point drop anticipated for both years, bringing growth to 1.1% in 2026 and 1.2% in 2027.
Japan’s growth forecast remains largely unchanged in the most favorable scenario, with projected growth at 0.7% for 2026 and 0.6% for 2027. However, the IMF expects the Bank of Japan to increase interest rates at a slightly faster pace than previously anticipated.
China’s growth forecast for 2026 has been adjusted downward to 4.4%, a decrease of 0.1 percentage points from January. This decline is attributed to rising energy and commodity costs, although it is partially mitigated by lower U.S. tariff rates and government stimulus measures. Nevertheless, headwinds from a struggling housing market, a shrinking labor force, diminishing investment returns, and slower productivity growth are expected to reduce China’s growth to 4.0% in 2027, unchanged from earlier projections.
Emerging markets and developing economies, which generally have a greater dependency on oil, are anticipated to suffer more from the Middle East conflict compared to advanced economies, with 2026 growth expected to drop by 0.3 percentage points to 3.9%. This impact is particularly severe in the Middle East and Central Asia, where GDP growth is projected to decline by two full percentage points to 1.9% due to extensive infrastructure damage and sharply reduced energy and commodity exports.
Specific forecasts for GDP declines in 2026 include 6.1% for Iran, 8.6% for Qatar, 6.8% for Iraq, 0.6% for Kuwait, and 0.5% for Bahrain. However, assuming a brief conflict, the region may experience a robust recovery in 2027, with GDP growth rebounding to 4.6%, an increase of 0.6 percentage points from previous forecasts.
A notable exception among emerging markets is India, which has seen its growth outlook upgraded by approximately 0.1 percentage points to 6.5% for both 2026 and 2027, driven by strong momentum from robust growth at the end of the previous year and a new agreement to lower U.S. tariffs on Indian imports.
In response to rising energy costs, the IMF acknowledged that governments might feel compelled to introduce fiscal measures such as price caps, fuel subsidies, or tax reductions. However, it cautioned against these actions given the ongoing high budget deficits and increasing public debt levels.
Gourinchas emphasized that while it is “perfectly legitimate” to want to protect vulnerable populations, subsidies implemented in one nation could lead to shortages in others that lack the financial resources to afford them.
“Any measures should be carefully targeted and temporary, ensuring they do not disrupt the fiscal frameworks necessary for rebuilding national fiscal buffers,” he advised.
