The International Monetary Fund (IMF) has revised its global economic growth projection for 2026 down to 3.1%, cautioning that an escalation of Middle East hostilities and severe damage to energy infrastructure could push global growth below 2%, nearing the threshold the IMF defines as a global recession.

In its latest World Economic Outlook report released on Tuesday, the IMF lowered its 2026 global GDP growth forecast by 0.2 percentage points to 3.1%, from the 3.3% projected in January. The report indicates that since the joint US-Israeli military action against Iran began on February 28, which has effectively blocked the Strait of Hormuz, oil prices have surged significantly, abruptly reversing a previously optimistic global growth outlook. IMF Chief Economist Pierre-Olivier Gourinchas stated:

"The Middle East conflict has abruptly halted growth momentum. The ultimate scale of the impact will depend on the conflict's duration and intensity, as well as the speed at which energy production and transport normalize after hostilities cease."

This downward revision is particularly significant for emerging markets. The growth forecast for emerging market economies in 2026 was reduced from 4.2% to 3.9%, while their inflation forecast was raised by 0.7 percentage points to 5.5%. The IMF also warned that the Middle East war has heightened uncertainty surrounding the economic outlook for emerging markets, with risks skewed toward a deeper downturn. The report was released in Washington during the IMF and World Bank Spring Meetings, becoming a central topic for attending finance ministers and central bank governors.

Three Scenarios: From Moderate Slowdown to Near-Recession The IMF outlined three scenario forecasts based on different potential developments in the US-Iran conflict, showing significant variations in growth and inflation paths.

Under the baseline scenario, the conflict is relatively short-lived, energy commodity prices rise by approximately 19% this year, global economic growth is 3.1%, and global inflation increases from 4.1% in 2025 to 4.4%, with growth holding steady at 3.2% in 2027.

If the blockade of the Strait of Hormuz is prolonged and damage to drilling and refining facilities intensifies, the IMF projects global growth would slow to 2.5%, with inflation climbing to 5.4%.

In the most severe scenario, where energy supply disruptions extend into next year, inflation expectations become significantly unanchored, and financial conditions tighten substantially, with the average annual oil price reaching $110 per barrel, global economic growth would fall below 2%. This level has only been seen four times since 1980, most recently during the 2008 global financial crisis and the COVID-19 pandemic. Under this scenario, global inflation would reach 5.8% in 2026, rising further to 6.1% in 2027.

Europe and Emerging Markets Bear the Brunt The impact of this shock is unevenly distributed across economies, with those highly dependent on energy imports facing the greatest pressure.

Among major advanced economies, Europe is the most significantly impacted. Germany's growth forecast for this year is just 0.8%, down 0.3 percentage points from the January projection; the UK is also projected to grow by only 0.8%, a reduction of 0.5 percentage points. The United States, being a net energy exporter, is relatively less affected, with a 2026 growth forecast of 2.3%, a modest 0.1 percentage point下调 from the January forecast.

Emerging markets are hit harder. In the most severe scenario, the impact on emerging market and developing economies is almost double that on advanced economies. Growth in the Middle East and Central Asia region is projected to slow sharply from 3.6% in 2025 to 1.9%, with Bahrain, Iraq, Kuwait, and Qatar all facing economic contraction. Iran's economy is the most severely affected, with its GDP expected to contract by 6.1% in 2026—a dramatic 7.2 percentage point swing from the 1.1% growth projected in January. The IMF forecasts a 3.2% recovery in Iran's output for 2027.

Many economies highly dependent on energy and chemical imports from the Gulf region, particularly in emerging Asia, have already implemented intervention measures such as price controls and subsidies to address supply shortages. However, IMF economists warned that such measures are often poorly designed, costly, can lead to rationing effects, and spill over to other countries. They recommended that countries adopt more targeted, temporary support methods, prioritizing direct transfer payments to the most vulnerable households.

Resurgent Inflation Puts Central Banks in a Dilemma Simultaneous with the growth slowdown, a resurgence of inflationary pressures is further constraining monetary policy space.

The IMF noted that the recent disinflation trend will be interrupted by this shock, with rising energy and food prices being the primary drivers. Even if the conflict ends quickly, inflationary pressures are unlikely to dissipate rapidly. IMF economists warned that introducing fiscal stimulus against a backdrop of rising inflation would put central banks under greater pressure to balance inflation control and growth support.

The report also highlighted that consumers are still bearing the psychological scars from the inflationary shocks of the past two crises—the COVID-19 pandemic and the Russia-Ukraine conflict—making them significantly more sensitive to any new round of price increases compared to the past. Unlike the onset of the Russia-Ukraine conflict in 2022, labor markets have already weakened somewhat, and central banks have begun normalizing their balance sheets. If the scale of the shock is limited, inflation might be relatively manageable, but this assessment carries substantial uncertainty.

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