The International Monetary Fund (IMF) reduced its 2026 world growth forecast on 14th April, as anticipated, cautioning that the world economy could be set back by war in the Middle East, which disrupted commodity markets and triggered higher prices.

The International Monetary Fund, in its World Economic Outlook report, which was released at its spring meetings in Washington, said the world economy will increase by 3.1 per cent this year.

This is lower than a 3.3% prediction in January when hostilities had not started since the U.S.-Israeli attacks on Iran began on Feb. 28, and Tehran responded, and this led to the emergence of a wider conflict in the region.

IMF chief economist Pierre-Olivier Gourinchas informed Agence France-Presse (AFP) that they had planned to upgrade growth to 3.4 per cent in 2026, had it not been the war.

The conflict has resulted in a surge in prices of oil, gas and fertilisers since Iran effectively blocked traffic along the Strait of Hormuz, which is a major shipping route. U.S. President Donald Trump has also issued a naval blockade of the Iranian ports.

Higher inflation

The fund forecasts an increase in inflation in the year 2011 to 4.4, 0.6 percentage points as compared to its January projection.

“Following this, the disinflation path that has been in existence over the last few years should come back,” Gourinchas said.

These forecasts, however, are based on a comparatively short-term crisis of energy market shocks.

“This could be a serious energy crisis,” he said, “and we must be very concerned about it.”

In even worse cases, where the energy prices will still be high throughout the year, the world growth may be as low as 2.5 or even 2.0.

“Since 1980, it has been a combination of four quarters where it has grown at two per cent or less,” according to Gourinchas.

They involved the global financial crisis in 2008 and the COVID-19 pandemic.

“This shock is less than one year after the change of U.S. trade policies, and the shift to a new international trade system is underway,” the IMF said.

Trump imposed blanket tariffs on U.S. trading partners a year ago, shaking financial markets and supply chains.

The Supreme Court has struck down a swath of these tariffs, but there remains doubt as Trump seeks to reimpose duties through other means.

Uneven impact

Though the total changes in the growth and inflation of the global economy are rather slight, the IMF warned that the war has left a greater mark on the Middle East and “weak economies” in other countries.

“The effect on emerging economies and developing ones would be nearly twice as much as on developed economies,” the fund said.

The increased energy and fertiliser prices may translate into increased food prices, primarily affecting the low-income energy importers, Gourinchas said.

The Middle East and Central Asia growth estimates for this year were slashed by approximately half to 1.9.

The largest economy in the Middle East, Saudi Arabia, will experience 3.1 per cent growth in 2012, which is 1.4 percentage points lower than the growth rate in January.

U.S. growth will continue to rise to 2.3 percent this year, making it one of the two largest economies in the world, but the growth rate has slightly decreased.

“The U.S. at the margin is enjoying increased energy prices,” Gourinchas said. “However, gasoline prices have also soared among consumers.”

The growth of China is expected to slow down to 4.4, slightly less than the January projection, as well.

The IMF sounded an alarm about a deeper underlying imbalance in both economies.

In China, domestic activity is less than that of exports, and in the United States, the good performance has been coupled with low employment growth.

The growth of the euro area has been forecasted to decline to 1.1 per cent in 2026, which is 0.2 per cent less than previously projected.

The U.K. growth experienced a larger shift by 0.5 percentage points, to 0.8% this year.

Although the IMF does not anticipate that the inflation expectations will go off-track, it is feared that they are not as well-anchored as in the past.

Previous inflationary memories are still very fresh in the minds of people, and companies could be keen to resume margins faster than usual.

“In such an event, you could have a lot more inflation persisting, which would be reflected in higher inflation expectations,” Gourinchas said.

Should this be the case, central banks may have to intervene and increase interest rates to tame the economy, even though there remains a negative supply shock.