The International Monetary Fund on Wednesday cut its forecast for global economic growth in 2026 to 3.0 per cent, down from 3.1 per cent in April, and raised its inflation projection to 4.7 per cent, as the war in the Middle East drives energy prices higher and disrupts trade. The update, locked in on 10 June, assumes the Strait of Hormuz will begin to reopen in mid-July and that shipping conditions will return to pre-war levels by March 2027. The global lender now expects a V-shaped recovery, with growth rebounding to 3.4 per cent in 2027, though that remains below the 3.5 per cent average of the previous two years.

The conflict, which began with US and Israeli strikes on Iran on 28 February and led Tehran to effectively block the Strait of Hormuz, has pushed oil prices about 25 per cent above pre-war levels. The IMF’s baseline assumes an average oil price of $89 per barrel this year. The release of strategic petroleum reserves, increased production outside the Gulf, and rapid private-sector adaptation to alternative supply routes have so far limited the economic damage. At the same time, demand-driven momentum in artificial intelligence and related technologies has provided a countervailing force, boosting investment and exports in economies integrated into the global tech supply chain.

The impact is highly uneven. Energy exporters outside the conflict zone, such as Brazil, have benefited from improved terms of trade; the IMF raised Brazil’s 2026 growth forecast by 0.5 percentage points to 2.4 per cent. The United States, a net energy exporter and a hub for AI investment, saw its forecast unchanged at 2.3 per cent. In contrast, the euro area’s projection was cut to 0.9 per cent, reflecting weak consumer confidence and higher energy costs, while Mexico’s was lowered to 1.2 per cent amid uncertainty. China’s outlook was revised up slightly to 4.6 per cent, supported by high-tech manufacturing, though the IMF warned that rising oil prices and structural headwinds will weigh on activity. The Middle East and Central Asia region is the hardest hit, with growth downgraded by 1.2 percentage points to just 0.7 per cent.

Risks remain tilted to the downside. The ceasefire between the US and Iran, signed on 17 June, has already been declared “over” by President Trump, and fresh strikes have occurred. IMF officials cautioned that a renewed escalation would find the global economy in a weaker position, as many countries have depleted their strategic reserves and have less room to manoeuvre. A simultaneous push to rebuild inventories could itself trigger a price spike. The next factual milestone is the assumed mid-July reopening of the Strait of Hormuz; any deviation from that timeline would force a reassessment of the Fund’s baseline.