Global economy 'drifting' to adverse scenario: IMF

International Monetary Fund (IMF) director of research Pierre-Olivier Gourinchas said with each passing day that disruption continues in the Middle East, the global economy is drifting closer to the adverse scenario of its projections.

The IMF has downgraded its growth projections for 2026, expecting the global economy to slow down to 3.1% in the year from 3.4% in 2024-25.

This projection is a "reference forecast" and assumes the Middle East conflict will have limited duration, intensity, and scope, such that the disruptions will fade by mid-2026.

Under an adverse scenario with larger and more persistent increases in energy prices, global growth would slow further to 2.5% in 2026 and inflation would reach 5.4%, IMF said.

An even more severe scenario with further damage to energy infrastructure in conflict regions can mean global growth would be cut to a mere 2% in 2026, while inflation could jump to 6% by 2027.

Absent of the war, the IMF said global growth would have been revised upward.

"The downward revision for 2026 largely reflects the disruptions from the conflict in the Middle East, partly offset by carryover from recent strong data and reduced tariff rates," the IMF said.

While the toll growth and inflation revisions seem relatively modest at the global level, the IMF predicts a more pronounced impact on commodity-importing emerging market and developing economies with preexisting fragilities.

The IMF has revised growth for advanced economies to 1.8% in 2026 from 1.9% in 2025. The revision is more steep for emerging market and developing economies which are projected to grow at 3.9% in 2026, compared to 4.4% in 2025.

"The impact on emerging market and developing economies would be almost twice that on advanced economies," IMF said.

Gourinchas said with the right policies, including swift cessation of hostility and reopening of the Strait of Hormuz, the damage can remain limited.

Considering the fluid environment of the conflict, Gourinchas said the IMF felt the need to supplement its reference forecast with more extreme scenarios in energy markets.

"Very clearly with every day that passes where we don't have a resolution and where the flow of gas is more limited through the Strait of Hormuz, we are moving away from the (reference) scenario," he said.

Gourinchas added the reference scenario of oil prices remaining at an average of $80 a barrel is still relevant.

"We could still have a normalisation if a solution is found that will bring down energy prices towards that scenario assumption. I would say we are somewhere "in between" the reference and the adverse scenario," he said.