IMF raises 2026 global growth forecast to 3.1%, warns of rising risks from war and debt

The global economy is expected to grow 3.1% in 2026, with strong investment in artificial intelligence (AI) infrastructure helping offset the impact of the prolonged war in the Middle East and elevated energy prices, the International Monetary Fund (IMF) said on Tuesday. However, the multilateral lender warned that downside risks are mounting, with rising debt burdens and an increasingly uneven distribution of growth threatening the global outlook.

In its latest World Economic Outlook, released as global economic and financial leaders gather in Bangkok for the IMF and World Bank annual meetings, the IMF raised its 2026 global growth forecast marginally from the 3.0% projected in July. The new estimate is below the 3.5% expansion recorded in 2025 but broadly in line with the fund's most optimistic scenario outlined in April.

Global growth is projected to reach 3.4% in 2027, unchanged from the July forecast but 0.2 percentage points higher than the April projection.


According to Reuters, the modest improvement largely reflects sustained investment in AI infrastructure, which has supported growth in major advanced economies developing AI platforms and in countries supplying related hardware. These include South Korea, Malaysia, Mexico and Thailand, the host of this week's meetings.

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The IMF cautioned that the global economy's resilience is approaching its limits as the energy shock persists. The fund's deputy research director, Petya Koeva Brooks, told Reuters that countries and companies had initially mitigated the oil price shock by drawing on reserves, diversifying suppliers and energy sources, and reducing consumption. Without these measures, global growth could have fallen to 2.5% this year, she said, adding that their effectiveness was diminishing as the conflict continued.

AI investment widens global growth divide
The IMF highlighted an increasingly uneven recovery, with economies benefiting from AI investment and technology supply chains outperforming countries that remain largely disconnected from these developments.

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Only 32 countries are now expected to account for 95% of global growth, compared with 54 countries in April, the fund said. Growth forecasts for 47% of economies have been downgraded since the April projections, including several energy-importing countries outside AI supply chains.

The Gulf region has suffered some of the sharpest downward revisions because of the US-Israeli war against Iran and its impact on energy production and economic activity.

Saudi Arabia's economy is now projected to contract 3.3% in 2026, compared with the 1.7% growth forecast in July. Iran's economy is expected to shrink 7.6%, while Iraq, Kuwait and Qatar are projected to contract 16%, 16.7% and 15.6%, respectively. The United Arab Emirates is forecast to contract by 3.9%.

The IMF warned that a prolonged or intensified conflict could further disrupt energy supplies, increase inflationary pressures and undermine economic activity across the region and beyond.

US growth steady, Europe improves; India leads major economies
Among major economies, the IMF maintained its US growth forecast at 2.3% for 2026 and raised its 2027 projection by 0.1 percentage point. Robust private consumption, tax cuts and investment in AI are expected to support the US economy, although the high import content of AI-related investment could limit its contribution to domestic output.

The eurozone's 2026 growth forecast was raised to 1.1% from 0.9% in July, reflecting stronger AI-related investment, participation in technology supply chains and increased defence spending across European Union countries.

Britain's growth forecast was also upgraded by 0.3 percentage points to 1.3% for 2026, supported by higher expected investment in AI.

China's economy is projected to grow 4.5% in 2026 and 4.0% in 2027, both 0.1 percentage point lower than the July estimates. Higher oil prices are expected to compound weak domestic demand, although strong exports continue to provide support, Reuters reported.

India remains the fastest-growing major economy, with the IMF forecasting growth of 7.0% in both 2026 and 2027. The projections represent increases of 0.6 percentage points for 2026 and 0.3 percentage points for 2027 compared with the July estimates.

Robust domestic demand, strong services activity and AI-related investment are expected to underpin India's growth momentum despite an uncertain global environment.

Inflation and energy prices pose fresh challenges
The IMF projected global headline consumer price inflation at 4.7% in 2026 before easing to 4.1% in 2027. However, the fund warned that persistent energy price pressures and sustained investment demand could complicate disinflation.

Its baseline projections assume that the Strait of Hormuz will reopen in March 2027, with a broad return to pre-war shipping conditions by October 2027. The IMF's oil price assumptions stand at an average of $96 per barrel in 2026 and $87 in 2027, Reuters reported.

Under a more adverse scenario in which the conflict intensifies and oil prices rise to $130 per barrel through the first quarter of 2027, global growth would be 0.2 percentage points lower in 2026 and 0.5 percentage points lower in 2027.

Inflation in 2027 would rise by an additional 1.1 percentage point to 5.2%, increasing pressure on central banks and potentially delaying interest-rate cuts.

AI boom could boost growth, but a reversal threatens markets
The IMF identified AI as both a significant source of potential economic gains and a major downside risk. Faster adoption and accelerated investment could lift global GDP by a further 0.6% by 2029, with the United States and China expected to capture most of the benefits.

However, a reassessment of AI profitability and a failure to deliver expected productivity gains could trigger a sharp reduction in investment, asset prices and consumption.

Under this adverse scenario, US GDP could fall by 0.8% directly, while spillovers to Asian technology exporters could reduce their combined output by as much as 0.4% by 2028.

The resulting decline in asset prices and tighter financial conditions could further weaken consumption, particularly in the United States. Higher global bond yields would add to the pressure, with the combined impact potentially reducing global output by 1.1% by 2028 and US output by 1.8%, the IMF said.

Rising public debt threatens economic stability
The fund also warned that elevated public debt, particularly in advanced economies, leaves governments increasingly vulnerable to sharp increases in borrowing costs. Higher yields could raise debt-servicing expenses, restrict fiscal flexibility and weigh on economic growth.

The IMF urged governments to rebuild fiscal buffers and establish credible medium-term plans to bring public debt back to sustainable levels, rather than postponing difficult policy decisions.

These concerns are expected to feature prominently at the IMF and World Bank meetings in Bangkok, where policymakers will assess how to strengthen economic resilience amid geopolitical uncertainty, energy market disruptions and financial risks.

While AI investment and domestic demand are providing important support to global activity, the IMF's latest projections underscore the fragile nature of the recovery. A prolonged energy shock, an abrupt correction in AI-related investment, or a renewed surge in borrowing costs could quickly weaken the global economic outlook.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)