WASHINGTON, USA – The International Monetary Fund (IMF) lowered its growth outlook on Tuesday, April 14, due to the war in the Middle East rising energy prices but he said that the world is already heading for worse and weaker growth as the Strait of Hormuz shipping disruption continues.
With great uncertainty about The Middle East Conflict trapped finance officials gathered for the spring IMF and World Bank meetings in Washington, the IMF presented three growth scenarios: weakest, worst, and strongest, depending on how the war is progressing.
Under the IMF’s worst outlook, the world economy is on the brink of recession, with oil prices averaging $110 a barrel in 2026 and $125 in 2027.
The IMF chose the most favorable scenario for the “reference forecast” of the World Economic Outlook, which assumes a short-term crisis and oil prices normalizing in the second half of 2026, with an average of $82 per barrel per year – below the Brent futures price level of around $96.
Minutes after giving that view, IMF chief economist Pierre-Olivier Gourinchas said it may already be too late. He told reporters that with continued energy outages and no clear way to end the crisis, the IMF’s “severe situation” seems more likely.
That middle ground points to a longer conflict that puts oil prices at around $100 a barrel this year and $75 in 2027, with global growth slowing to 2.5% this year from 3.4% in 2025.
“I would say that we are somewhere between a reference state and a critical state,” Gourinchas said. “And really, every day that goes by and every day we have more energy disruptions, we’re moving closer to the worst.”
Absent the Middle East crisis, the IMF said it would have upgraded its growth outlook by 0.1 percent to 3.4 percent, due to increased technology investment, lower interest rates, lower US tariffs, and financial support in some countries.
The IMF in January had forecast that oil would drop to 62 dollars in 2026.
The IMF’s worst-case “worst case scenario” assumes an extended and escalating crisis and high oil prices that lead to the disintegration of large financial markets and tight financial conditions, reducing global growth to 2%.
“This could mean an imminent call for a global recession,” the IMF said, adding that growth has been below that level only four times since 1980 – with two recessions in 2009, following the financial crisis, and in 2020 as the COVID-19 pandemic worsened.
Inflationary pressure
Gourinchas said that several countries would be in outright recession under this scenario, with oil prices averaging $110 a barrel in 2026 and $125 in 2027. Prices at this level for an extended period of time would also raise expectations “that inflation will continue,” leading to significant increases in prices and wages.
“That change in inflation expectations will require the central bank to step on the brakes and try to reduce inflation,” he said, adding that this may require more pain than in 2022.
The IMF said, however, that central banks may “watch out” for a short-term increase in energy prices and hold rates steady amid weak activity, which would be monetary easing, but only if inflation expectations remain in place.
Global inflation for 2026 would be 6% higher in the worst case scenario, compared to 4.4% in the most optimistic reference scenario, which is the assumption of the IMF’s country and regional growth forecasts.
Main economic perspectives
The IMF trimmed its US growth outlook for this year to 2.3%, down just ten percentage points from January, citing the positive impact of tax cuts, the delayed impact of interest rate cuts, and continued AI data center investment partly to offset higher energy costs. These effects are expected to continue in 2027, with growth forecast now at 2.1%, up ten points from January.
The euro zone, still struggling with high energy prices caused by Russia’s 2022 invasion of Ukraine, has taken a major hit from the Middle East conflict, with its growth outlook dropping by 0.2 percentage points in both years to 1.1% in 2026 and 1.2% in 2027.
Japan’s growth is largely unchanged under worst-case scenarios of a weak 0.7% for 2026 and 0.6% for 2027, but the IMF said it expects the Bank of Japan to raise rates faster than expected six months ago.
The IMF forecast China’s growth for 2026 at 4.4%, down ten points from January as higher energy and commodity costs are partially offset by lower US tariffs and government stimulus measures. But the IMF said headwinds from a slumping housing sector, a shrinking labor force, lower returns on investment, and slower productivity growth would reduce China’s 2027 growth to 4%, unchanged from its January forecast.
Emerging markets, the Middle East were hit hard
Overall, emerging market and developing economies, where gross domestic product (GDP) tends to be more dependent on oil inputs, have taken a bigger hit from the Middle East conflict than advanced economies, with 2026 growth seen to fall by 0.3% to 3.9%.
Nowhere is this more pronounced than in the epicenter of the conflict in the Middle East and Central Asia, which will see its 2026 GDP growth drop by a full two percentage points to 1.9% amid massive infrastructure damage and sharp cuts in energy and commodity exports.
The decline in GDP for 2026 is predicted to be 6.1% for Iran, 8.6% for Qatar, 6.8% for Iraq, 0.6% for Kuwait, and 0.5% for Bahrain.
But under the assumption of a short-term crisis, the region is quickly recovering, with 2027 GDP growth increasing to 4.6%, a jump of 0.6 percentage points from the January forecast.
One bright spot among the emerging markets is India, which saw an increase of about ten percentage points to 6.5% for 2026 and 2027, thanks to the acceleration of economic growth at the end of last year and the plan to reduce the level of US tariffs on Indian goods.
Financial assistance for the cost of fuel
The IMF said that governments will be tempted to implement fiscal measures to ease the pain of high energy prices, including price limits, fuel subsidyor tax cutsbut he warned against these demands amid the budget deficit that is still high and the increase in public debt.
Gourinchas said it was “absolutely legitimate” to want to protect them the most vulnerablebut subsidies in one country may cause fuel shortages in other countries that cannot afford it.
“You have to do it in a very targeted, temporary way that doesn’t disrupt the financial system” needed by many countries to rebuild their fiscal buffers, he said. – Rappler.com
