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WASHINGTON – The International Monetary Fund cut its growth outlook on April 14 due to Middle East war-driven energy price spikes but said the world was already drifting toward a more adverse scenario with much-weaker growth as Strait of Hormuz shipping disruptions continue.
With massive uncertainty over the Middle East conflict gripping finance officials gathered for IMF and World Bank spring meetings in Washington, the IMF presented three growth scenarios: weaker, worse and severe, depending on how the war unfolds.
Under the IMF’s worst-case outlook, the global economy teeters on the brink of recession, with oil prices averaging US$110 a barrel in 2026 and US$125 in 2027.
The IMF chose the most benign scenario for its World Economic Outlook “reference forecast,” which assumes a short-lived conflict and oil prices normalising in the second half of 2026, with an US$82 per-barrel average for the year – well below the benchmark Brent crude price of around US$96 on April 14
Just minutes after releasing the outlook, IMF chief economist Pierre-Olivier Gourinchas said it may be already outdated. He told reporters that with continued energy disruptions and no clear path to end the conflict, the IMF’s “adverse scenario” looks increasingly likely.
That middle path envisions a longer conflict that keeps oil prices around US$100 per barrel in 2026 and US$75 in 2027, with global growth falling to 2.5 per cent this year from 3.4 per cent in 2025.
“I would say that we are somewhere in between the reference scenario and the adverse scenario,” Mr Gourinchas said. “And of course, every day that passes and every day that we have more disruption in energy, we are drifting closer towards the adverse scenario.”
Absent the Middle East conflict, the IMF said it would have upgraded its growth outlook by 0.1 percentage point to 3.4 per cent, due to a continued technology investment boom, lower interest rates, less-severe US tariffs and fiscal support in some countries.
The IMF in January had forecast that oil would decline to about US$62 in 2026.
The IMF’s worst-case “severe scenario” assumes an extended and deepening conflict and much higher oil prices that prompt major financial market dislocations and tighter financial conditions, slashing global growth to 2 per cent.
“This would mean a close call for a global recession,” the IMF said, adding that growth has been below that level only four times since 1980 – with the last two severe recessions in 2009, following the financial crisis, and in 2020 as the Covid-19 pandemic raged.
Mr 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.
The IMF shaved its US growth outlook for 2026 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 per cent, a forecast unchanged from January.
Overall, emerging market and developing economies, where GDP tends to be more dependent on oil inputs, take a bigger hit from the Middle East conflict than advanced economies.
Nowhere is this more pronounced than at the epicentre of the conflict in the Middle East and Central Asia region, which will see its 2026 GDP growth fall by two full percentage points to 1.9 per cent amid widespread infrastructure damage and sharply curtailed energy and commodity exports.
But under the assumption of a short-lived conflict, the region bounces back quickly, with 2027 GDP growth rebounding to 4.6 per cent, a jump of 0.6 percentage point from the January forecasts.
The one bright spot amid emerging markets is India, which saw growth upgrades of about a tenth of a percentage point to 6.5 per cent for both 2026 and 2027, due in part to momentum from strong growth at the end of 2025r and a deal to lower the US tariff rate on Indian imports.
The IMF said that governments will be tempted to implement fiscal measures to ease the pain of higher energy prices, including price caps, fuel subsidies or tax cuts, but cautioned against these urges amid still-elevated budget deficits and rising public debt.
Mr Gourinchas said it was “perfectly legitimate” to want to protect the most vulnerable, but subsidies in one country could lead to fuel shortages in others that can’t afford them.
“You have to do it in a very targeted, very temporary way that doesn’t really mess up the fiscal framework” needed by most countries to rebuild their fiscal buffers, he said. REUTERS
