IMF Sees Global Growth Holding Steady Despite Middle East War Shock

ASTANA – The global economy is proving more resilient than expected despite the fallout from the war in the Middle East, with growth projections holding broadly steady as a technology investment boom driven by AI offsets part of the energy shock, according to the International Monetary Fund’s (IMF) latest World Economic Outlook (WEO) update released on July 7. IMF Deputy Director of the Research Department Petya Koeva Brooks during a July 7 press briefing. The IMF projects global growth at 3% in 2026 and 3.4% in 2027, broadly unchanged from its April forecast on a cumulative basis. However, the institution warned that the outlook remains uneven across regions and that inflationary pressures persist. “The global outlook is being shaped by two powerful forces pulling in opposite directions: the lingering effects of the energy shock from the war in the Middle East, and a technology-driven investment boom,” said IMF Deputy Director of the Research Department Petya Koeva Brooks during a July 7 press briefing. “The net effect varies significantly across countries, depending on their exposure to the war and their position in the technology value chain,” she added. Inflation remains a concern While growth forecasts remain relatively stable, the IMF revised its global headline inflation forecast upward to 4.7% in 2026. Core inflation projections were left broadly unchanged. “Put simply, the disinflation trend that has been in place since early 2024 has stalled,” Brooks said. The IMF noted that the world economy has weathered the conflict better than initially feared. A larger oil price spike was avoided through inventory drawdowns, increased production outside the Gulf region, and measures that helped soften energy demand. The growing share of renewable energy and declining energy intensity across many economies have also strengthened resilience. Financial conditions, which tightened sharply following the outbreak of the conflict, have since eased and remain supportive by historical standards, according to the report. The Middle East and Central Asia region is expected to experience one of the most dramatic swings in growth. Regional growth is projected to slow sharply to 0.7% in 2026 before rebounding to 6.5% in 2027, reflecting the economic impact of disruptions linked to the conflict and shipping constraints through the Strait of Hormuz. The IMF’s baseline scenario assumes the strait begins to reopen in mid-July and that conditions gradually normalize by March 2027. Among the region’s major oil exporters, Iraq, Kuwait and Qatar are projected to see significant economic contractions this year as disruptions affect energy production and transport, followed by double-digit growth rebounds in 2027. Saudi Arabia is expected to fare better due to its more diversified export routes, with growth projected at 1.7% in 2026 and 5.5% in 2027. Iran’s economy is forecast to contract by 5.4% in 2026, though this represents a modest improvement from the IMF’s April projections following stronger-than-expected oil export performance earlier this year. Central Asia remains resilient In contrast, countries in the Caucasus and Central Asia are expected to maintain positive momentum despite higher energy and food prices. The IMF said economies in the region continue to benefit from favorable growth tailwinds, even as global uncertainty remains elevated. For energy-exporting countries in Central Asia, relatively high commodity prices continue to support economic activity. At the same time, expanding trade corridors, infrastructure investment and growing integration into regional supply chains are helping sustain growth. The region’s outlook contrasts with that of many low-income energy-importing economies globally, which face weaker growth due to higher import costs and limited participation in the AI-driven technology cycle. Risks remain tilted downward Although risks have become more balanced since April, the IMF cautioned that they remain tilted to the downside. A renewed escalation of the conflict in the Middle East could trigger another round of commodity price volatility, tighten global financial conditions and worsen food insecurity in vulnerable countries. “A renewed escalation in the conflict could reignite commodity price volatility, tighten financial conditions, strain policy buffers, and worsen food insecurity in low-income countries,” Brooks said. Another major risk stems from financial markets. The IMF warned that a reassessment of expectations about AI profitability could trigger a correction in technology-related investments, which have become a key driver of global growth. On the upside, faster adoption of AI technologies and a quicker-than-expected normalization of trade flows through the Strait of Hormuz could provide additional support to the global economy. Policy priorities The IMF urged policymakers to remain focused on price stability while rebuilding fiscal buffers that were used to cushion the impact of the conflict. Central banks should continue to tailor their responses to domestic conditions, particularly the interaction among commodity prices, technology-driven demand, and inflation expectations. Governments that introduced energy-related support measures should gradually phase them out as market conditions stabilize, the IMF said, while pursuing structural reforms to strengthen energy security, accelerate the energy transition and improve readiness for the AI-driven economy. “Rebuilding fiscal space remains essential given elevated debt. Advancing structural reforms, including the energy transition, and addressing domestic imbalances will be critical to strengthen resilience and sustain balanced growth,” Brooks said. The report concludes that while the global economy has so far avoided the worst-case consequences of the Middle East conflict, growth prospects remain increasingly tied to geopolitical developments and the pace of technological transformation.