The global economy may avoid a sharper slowdown in 2026, but the recovery remains uneven. The International Monetary Fund (IMF) has raised its growth forecast slightly, citing the resilience of advanced economies despite war-driven energy costs. However, millions of people in vulnerable economies face growing pressure as inflation, geopolitical tensions, and supply disruptions threaten economic stability.
In its latest World Economic Outlook (WEO), released during the IMF and World Bank Annual Meetings in Bangkok, the Fund raised its 2026 global growth projection by 0.1 percentage points to 3.1%. Nevertheless, this remains below the 3.5% growth recorded in 2025.
The IMF also warned that the artificial intelligence (AI) investment boom could create new financial risks. Consequently, the global economy faces a divided outlook, with technology-driven economies benefiting while energy-dependent countries struggle.
Why the IMF Sees a Divided Global Economy
The IMF attributed much of the global economy’s resilience to advanced economies and their growing investment in artificial intelligence. Meanwhile, lower-income countries face higher energy costs without necessarily benefiting from the technology boom.
“The global economy has been resilient, but that resilience is under strain, with risks to growth tilted to the downside,” said Silvana Tenreyro, the IMF’s chief economist.
The ongoing US war on Iran has intensified instability across the Middle East and pushed global energy prices higher. Tehran’s retaliatory actions have also disrupted energy supplies and increased pressure on importing countries.
Refined petroleum products remain between 70% and 95% above their pre-war levels. Therefore, countries that rely heavily on imported energy face rising production costs and additional inflationary pressure.
The IMF described this uneven economic outlook as a “bifurcated outlook”. In other words, countries benefiting from AI investment may continue expanding while vulnerable economies struggle with expensive energy and supply disruptions.
The Fund also warned that prolonged conflict could deepen the divide. “Headwinds from a prolonged war and persistent geopolitical tensions could revive inflationary pressures, strain fiscal and external positions, and hit energy-importing and low-income countries hardest,” its report said.
Middle East Faces Sharp Economic Reversal
The Middle East and Central Asia face some of the most severe consequences of the conflict. The IMF now projects the region’s economy will contract by 0.3% in 2026, compared with its earlier forecast of 1.9% growth.
This represents a significant deterioration in the regional outlook. The Fund cited prolonged disruption around the Strait of Hormuz, where shipping restrictions and attacks have affected energy production and transportation.
However, the IMF expects a substantial recovery in 2027 if the conflict ends and regional logistics return to normal. The timing remains uncertain, making the outlook highly dependent on developments in the war.
Countries with damaged oil infrastructure and disrupted exports face particularly severe challenges. Iraq, Kuwait, Qatar, and Bahrain are projected to experience double-digit economic contractions in 2026.
Nevertheless, the Fund expects these economies to record double-digit expansions in 2027 as production, exports, and logistics normalise. Such a recovery would depend on whether energy infrastructure and shipping routes can resume normal operations.
Saudi Arabia and the Gulf Face Contrasting Prospects
Saudi Arabia faces a sharp economic setback despite its position as the world’s largest crude exporter. The IMF expects the kingdom’s GDP to contract by 3.3% in 2026, marking a 5-percentage-point reduction in its growth forecast.
However, the Fund projects a strong rebound in 2027, with Saudi Arabia’s economy expanding by 7.9%. The forecast reflects the potential recovery of production and exports once regional disruptions ease.
The kingdom has some protection against shipping disruptions because it can use its East-West oil pipeline. This route allows crude to reach the Red Sea coast without passing through the Strait of Hormuz.
Nevertheless, the pipeline temporarily shut down in September after strikes blamed on Iran-backed groups in Iraq. Meanwhile, Houthi forces in Yemen have repeatedly targeted Saudi oil infrastructure and tankers in the Red Sea since their civil war reignited in July.
The IMF’s projections also predate a series of deadly attacks on Riyadh airport that began the previous week. These developments add uncertainty to an already difficult regional outlook.
The United Arab Emirates faces an expected economic contraction of 3.9% in 2026. Despite its access to both sides of the Strait of Hormuz, the country remains exposed to regional shipping and production disruptions.
Oman presents a different picture, with the IMF forecasting 2.4% growth in 2026. It is the only Gulf country expected to maintain positive economic growth this year.
Meanwhile, Iran’s economy faces a projected contraction of 7.6%, reflecting the combined effects of war, the blockade, and US sanctions. Other Arab economies are expected to remain “relatively resilient” against energy and food price shocks.
AI Investment Supports Growth but Could Trigger a Market Correction
While the Middle East struggles with conflict-related disruption, AI investment continues to support growth in several advanced economies. The IMF expects advanced economies to expand by 2.1% in 2026.
Countries closely connected to the AI supply chain, including Taiwan and South Korea, are expected to post significantly stronger growth. However, the Fund warned that the technology boom could reverse if expectations become unrealistic.
The IMF’s latest Global Financial Stability Report highlighted “elevated” risks to the global financial system. These include a possible AI-related market correction, cyberattacks, and rising government bond yields.
The report warned that “These risks are plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil.”
Investment in AI infrastructure, semiconductor manufacturing, and data centres has helped support economic activity despite geopolitical uncertainty. However, the returns may not always justify the scale of investment.
“growing evidence suggests that AI capabilities can be delivered at lower investment levels… or that potential economic gains may not be as large as expected,” the IMF warned.
The Fund added: “Weaker or less durable AI investments and profitability could be a shock that triggers a market correction.”
Consequently, a reassessment of AI valuations could weaken investment and tighten financial conditions. Such a correction could affect markets beyond the technology sector, particularly if investors rapidly withdraw capital.
Cyberattacks Could Threaten Financial Stability
The IMF also warned that growing reliance on digital systems has increased the financial sector’s exposure to cyber threats. A serious attack on major financial institutions or critical market infrastructure could disrupt operations and undermine investor confidence.
“Severe cyber incidents could undermine market confidence and disrupt critical financial market infrastructure and operations,” the report said.
The Fund noted that the risk of successful attacks against “critical financial institutions or market infrastructure” is getting “worse”. It also warned that the potential impact could be severe as financial services become increasingly digitised.
Although advanced AI models could help attackers develop sophisticated cyber operations, the technology could also strengthen cyber defence. Therefore, the IMF sees artificial intelligence as both a potential source of financial vulnerability and a tool for managing risk.
The report also highlighted the possibility of rising government bond yields. Higher yields could create wider financial shocks because sovereign bond markets underpin borrowing and investment across the global economy.
“Bond markets are susceptible to further rises in energy prices reigniting inflation and forcing the tightening of monetary policy.”
IMF Calls for Urgent Action to Protect Economies
Against this backdrop, the IMF has urged governments and central banks to prepare for further economic pressure. Tenreyro warned that “urgent action” was required as downside risks continue to grow.
On the fiscal side, she recommended temporary and targeted support to help households manage higher energy and other costs. Such measures could provide relief without creating excessive long-term pressure on public finances.
Meanwhile, the IMF stressed the importance of controlling inflation. “monetary policy should remain firmly focused on price stability,” Tenreyro added, indicating that interest rate increases could be appropriate when inflation remains high.
China’s economy is expected to grow by 4.5% in 2026, representing a slowdown of 0.5 percentage points. The IMF attributed the weaker outlook mainly to subdued domestic demand.
At the same time, global inflation is projected to accelerate to 4.7% in 2026. The Iran war and AI-related economic pressures are expected to contribute to inflation across advanced and developing economies.
“The economy has been resilient, but that resilience is reaching its limits,” Tenreyro said. “The task ahead is to move from coping to rebuilding, restoring fiscal space, and rebuilding supply-side resilience.”
Ultimately, the IMF’s latest outlook highlights a global economy facing two competing forces. AI investment is supporting growth in some countries, while conflict and energy disruptions are pushing others towards contraction. The balance between these forces will depend heavily on geopolitical developments, inflation trends, and the sustainability of technology investment.
For the latest updates, visit and follow The Truth International website (www.thetruthinternational.com) and subscribe to the YouTube Channel.
