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WASHINGTON: The International Monetary Fund on Wednesday modestly downgraded its outlook for the world economy this year, citing the energy shock caused by the Iran war. But the fallout from the conflict is being partially offset by booming investment in artificial intelligence and other technologies.
The IMF now expects the global economy to expand by a sluggish 3% in 2026, down from 3.5% last year and from the 3.1% it had forecast for this year back in April. The fund expects worldwide growth to rebound to 3.4% next year.
Iran responded to US and Israeli attacks Feb. 28 by shutting down the Strait of Hormuz, through which a fifth of the world’s crude oil and natural gas passes. Energy prices soared, squeezing businesses and consumers. The IMF now expects oil prices to be up nearly 32% this year and for global consumer prices overall to increase 4.7% in 2026. That would be up from 4.1% in 2025 and would mean that two years of progress against inflation has stalled.
The IMF forecasts assume that the Strait of Hormuz reopens later this month – even though U.S. strikes on Iran resumed and President Donald Trump declared Wednesday that a ceasefire with Iran was over. They also assume that commerce through the strait returns to normal by next March.
“The world economy has weathered the shock from the war better than feared,″ Petya Koeva Brooks, deputy director of the IMF’s research department, told reporters Wednesday. The economic damage from the energy shock has been limited partly because countries could draw on existing oil stockpiles and because oil-exporting countries outside the Gulf stepped up production.
Countries that produce and export their own energy and that benefit from AI investment are insulated from the war’s economic damage. Among them is the United States. The IMF expects the US economy – the world’s largest – to grow a solid 2.3% this year, up from 2.1% in 2025 and unchanged from the April forecast. President Donald Trump’s 2025 tax cuts, big gains in productivity and a strong stock market are also giving the American economy a lift.
The 21 European countries that share the euro currency, hit hard by higher energy prices, are collectively forecast to grow just 0.9% this year, down from 1.4% in 2025.
China, the world’s No. 2 economy, is expected to expand 4.6% this year, down from 5% in 2026 but a bit faster than the IMF had expected in April. Weighed down by higher energy prices and a property market collapse, the Chinese economy is getting offsetting help from public works spending, a surge in high-tech manufacturing and booming exports.
India is once again forecast to be the world’s fastest-growing major economy, advancing at a 6.4% clip (down from a sizzling 7.7% last year) on strong consumer spending.
The IMF is a 191-nation lending organization that works to promote economic growth and financial stability and to reduce global poverty.
Separately, the International Monetary Fund and Zimbabwean authorities have reached a staff-level agreement on the first review of the 10-month staff-monitored program approved in March 2026, the IMF said on Tuesday.
Implementation through end-March was broadly satisfactory, with all quantitative targets and structural benchmarks met and most indicative targets observed, the IMF said.
Meanwhile, the International Monetary Fund on Tuesday named Silvana Tenreyro as its next chief economist, replacing Pierre-Olivier Gourinchas, who has returned to academia, IMF Managing Director Kristalina Georgieva said in a statement. Tenreyro, a citizen of Argentina, Italy and Britain and longtime professor of economics at the London School of Economics, will take over as the IMF’s economic counselor and director of the research department on August 10, the IMF said.
Widely published, Tenreyro also served as an external member of the Bank of England’s Monetary Policy Committee from 2017 to 2023. Earlier in her career, she worked as an economist at the Federal Reserve Bank of Boston and was a member of the Monetary Policy Committee of the Bank of Mauritius.
She is currently part of Georgieva’s external advisory group and counsels leading public and private institutions on economic and financial issues, the IMF said. “At a time of profound transformation and heightened uncertainty in the global economy, Silvana’s mix of intellectual leadership and policy experience will help ensure that the Fund’s analytical work and multilateral surveillance and policy advice will remain at the cutting edge in support of our membership,” Georgieva said. The IMF chief economist oversees the preparation of the IMF’s regular economic updates, and serves as one of the fund’s principal voices on the global economic outlook, a job that has been complicated in recent years by challenges such as the COVID pandemic, US tariff changes and the war in the Middle East. Tenreyro earned her Ph.D. and Master of Arts in economics from Harvard University after earning an undergraduate degree in Argentina. She is married to economist Francesco Caselli, who heads the academic board at the London School of Economics. Moritz Schularick, president of the Kiel Institute, praised Tenreyro for her pioneering work on economic volatility, monetary policy transmission and currency unions when she won the institute’s Bernhard Harms Prize last year. “Her work has considerably advanced our understanding of how diversification and the nature of shocks shape growth and welfare in both emerging and advanced economies,” Schularick said.
Agencies
