IMF cuts growth outlook, warns of potential global recession if Iran war worsens

INFLATION PRESSURES

Gourinchas said that a number of countries would be in outright recessions under this scenario, with oil prices averaging US$110 per barrel in 2026 and US$125 in 2027. Prices at this level for an extended time would also increase expectations “that inflation is here to stay,” prompting wider price increases and wage hike demands.

“That change in inflation expectations is going to require central banks to step on the brakes and try to bring inflation back down,” he said, adding that this may require more pain than in 2022.

The IMF said, however, that central banks may be able to “look through” a short-lived energy price surge and hold rates steady amid weaker activity, which would be a de facto monetary easing, but only if inflation expectations remain anchored.

Global inflation for 2026 would top 6 per cent in the severe scenario, compared to 4.4 per cent in the most optimistic reference scenario, which is the assumption for the IMF’s country and regional growth forecasts.

MAJOR ECONOMY OUTLOOKS

The IMF shaved its US growth outlook for this year to 2.3 per cent, down just a tenth of a percentage point from January, reflecting the positive effect of tax cuts, the lagged effect of interest rate cuts and continued AI data centre investment partly offsetting the higher energy costs. These effects are expected to continue in 2027, with growth now forecast at 2.1 per cent, up a tenth of a point from January.

The euro zone, still struggling with higher energy prices caused by Russia’s 2022 invasion of Ukraine, takes a bigger hit from the Middle East conflict, with its growth outlook falling 0.2 percentage points in both years to 1.1 per cent in 2026 and 1.2 per cent for 2027.

Japan’s growth is largely unchanged under the most benign scenario at a weak 0.7 per cent for 2026 and 0.6 per cent for 2027, but the IMF said that it expects the Bank of Japan to hike rates at a slightly faster pace than anticipated six months ago.

The IMF forecast China’s growth for 2026 at 4.4 per cent, down a tenth of a point from January as the higher energy and commodity costs are partly offset by lower US tariff rates and government stimulus measures. But the IMF said headwinds from a depressed housing sector, a declining labour force, lower returns on investment and slower productivity growth will cut China’s 2027 growth to 4.0 per cent, a forecast unchanged from January.