IMF cuts outlook, warns of potential global recession

The International Monetary Fund has lowered its growth outlook due to increases in energy prices and supply disruptions caused by the war in Iran and warned that the global economy could be on the brink of recession if the conflict worsens and oil remains above US$100 per barrel by 2027.

As financial officials gathered in Washington, D.C., for the spring meetings of the IMF and the World Bank in the northern hemisphere, reeling from great uncertainty about the Middle East conflict, the IMF presented three growth scenarios: weaker, worse and severe, depending on how the war develops.

The World Economic Outlook’s most optimistic “reference scenario” assumes a short-lived Iran war and projects real GDP growth of 3.1 percent for 2026, down 0.2 percentage points from the previous forecast in January.

Under this scenario, oil prices average $82 per barrel for all of 2026, a decline from the recent high of around $100 for the Brent benchmark futures price.

Without the conflict in the Middle East, the IMF said it would raise its growth outlook by 0.1 percentage point to 3.4 percent due to the ongoing tech investment boom, lower interest rates, lighter U.S. tariffs and fiscal support in some countries.

But the war poses a much greater risk to the global economy than U.S. President Donald Trump’s first wave of higher taxes a year ago, IMF chief economist Pierre-Olivier Gourinchas said in an interview with Reuters.

“What’s happening in the Gulf is potentially much, much bigger, and our scenarios document that,” he said.

Under a “negative scenario” of a longer conflict in which oil prices remain at around US$100 per barrel this year and US$75 per barrel in 2027, the IMF predicts global GDP growth will fall to 2.5 percent this year.

The IMF predicted in January that oil would fall to around US$62 in 2026.

And the IMF’s worst-case “severe scenario” assumes a widening and deepening conflict and that much higher oil prices will lead to major volatility in financial markets and tighter financial conditions will reduce global growth to 2 percent.

“This represents a close call for a global recession,” the IMF said, adding that growth has fallen below that level only four times since 1980; The last two serious recessions were in 2009, following the financial crisis, and in 2020, as the Covid-19 pandemic raged.

Gourinchas said that under this scenario, many countries would go directly into recession, and oil prices would average $110 per barrel in 2026 and $125 in 2027.

If prices remain at this level for a long time, it will also increase expectations that “inflation is here to stay” and lead to wider price increases and demands for wage increases.

“This change in inflation expectations will require central banks to put on the brakes and try to bring inflation down again,” he said, adding that this could require more pain than in 2022.

However, the IMF said central banks could “discard” a short-term energy price increase and keep interest rates steady in a weak operating environment, which would be de facto monetary easing, but only if inflation expectations remain constant.

Global inflation for 2026 will rise above 6 percent in the severe scenario, compared to 4.4 percent in the most optimistic reference scenario assumed by the IMF. country and regional growth forecasts.

The IMF said governments would be tempted to implement fiscal measures, including price caps, fuel subsidies or tax cuts, to ease the pain of high energy prices, but warned against those impulses due to still-high budget deficits and rising public debt.

Gourinchas said it was “perfectly legitimate” to want to protect the most vulnerable, but subsidies in one country could lead to fuel shortages in other countries that could not afford them.

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