IMF Reduces Global Growth Forecast to 3.1% in 2026 Due to War

Sada News Economy - The International Monetary Fund warned on Tuesday that the global economy is at risk of deviating from its path again due to the war in the Middle East, predicting a slowdown in global growth to 3.1% this year, and to 3.2% next year, compared to about 3.4% during 2024-2025, with inflation rising to 4.4% this year before decreasing to 3.7% in 2027.

The fund noted during the launch of the "World Economic Outlook" report that the conflict in the Middle East represents a major opposing force to the supportive factors that contributed to supporting the global economy last year, such as technology-related investments, easy financial conditions, a weak US dollar, in addition to the support of fiscal and monetary policies, through its direct impact on commodity markets, inflation expectations, and financial conditions.

The report indicated that the current forecasts are based on a "baseline assumption" that assumes the war is limited in duration, intensity, and scope, so that its effects fade away by mid-2026, in line with futures prices for commodities until March 10.

Nevertheless, it pointed out that the high level of uncertainty has led to the preparation of alternative scenarios in case the conflict continues for a longer period or expands, clarifying that the likelihood of these scenarios materializing increases as hostilities and related disruptions continue.

The fund explained that the growth forecast for 2026 has been reduced by 0.2 percentage points compared to the January 2026 update, while the 2027 forecasts remained unchanged.

It drew attention to the fact that if the war had not occurred, the forecasts would have been raised, as they would show a slight increase in growth for 2026 by 0.1 percentage points to reach 3.4%, indicating that the current downgrade essentially reflects the impact of the conflict in the Middle East, with a partial offset from recent strong economic data and a decrease in tariffs.

The report highlighted a significant divergence among countries, as the impact of adjustments on growth and inflation appears limited at the global level, but more acute in the conflict zone and among the most vulnerable economies, especially emerging and developing economies that import goods, indicating that growth forecasts for these economies have been reduced by 0.3 percentage points in 2026, while the forecasts for advanced economies remained largely unchanged.

If energy prices rise further and more persistently, the report anticipated that global growth could slow to 2.5% in 2026, with inflation rising to 5.4%.

In a more severe scenario involving greater damage to energy infrastructure in the conflict area, global growth could drop to around 2% in 2026, while inflation could exceed 6% by 2027, with the effect on emerging and developing economies being nearly double that on advanced economies.

The fund noted that downside risks remain prevalent, even after one of the primary risks, which is the escalation of geopolitical tensions, has materialized, warning of the possibility of these tensions worsening into a major energy crisis or the emergence of internal political pressures.

It added that these pressures could intersect with changes in trade and international policies, with the potential for escalating trade disputes, while rare earth elements represent a key friction point in global supply chains.

The report indicated that a reassessment of AI profit forecasts or a decline in profit margins due to competition could lead to decreased investment and a sudden correction in financial markets.

Conversely, it pointed out that investment in artificial intelligence could support economic activity and lead it toward sustainable growth if accompanied by strong productivity gains and increased business dynamism, alongside the role of structural reforms and easing trade tensions in supporting activity.

The fund warned that rising fiscal deficits and increasing public debt, amid eroding fiscal margins, could pressure long-term interest rates and financial conditions in general.

It also noted that conflicts leave long-lasting economic effects that extend beyond the direct shock period of the war, calling for the adoption of a comprehensive policy package that combines national measures and international cooperation to enhance economic resilience.

The fund emphasized the necessity of maintaining price stability and financial sector stability, protecting fiscal sustainability, and accelerating the implementation of structural reforms.

It confirmed the need for central banks to remain vigilant and ready to take decisive action within their mandates, while preventing supply shocks from destabilizing inflation expectations and maintaining transparent communication and the independence of central banks.

The report clarified that if financial support is provided to protect the most vulnerable groups from external shocks, this support must be targeted, temporary, and timely, and financed within current budgets through reordering spending priorities, or with a clear path to restoring fiscal balance.