The fallout from the Middle East conflict sparked by the war with Iran has “abruptly darkened” the worldwide economic outlook, the International Monetary Fund said Tuesday while warning of lower growth compared with 2025.
The IMF downgraded its forecast for global growth to three.1 per cent in 2026 from the three.3 per cent it had forecast in January. That’s also down from the three.4 per cent expansion seen last 12 months.
That modest 0.2 per cent downgrade is predicated on the belief of “a short-lived conflict,” IMF economic counsellor Pierre-Olivier Gourinchas wrote within the report.
“The worldwide outlook has abruptly darkened following the outbreak of war within the Middle East” greater than a month ago, he said, which “interrupted what had been a gentle growth trajectory” and upended a planned upgrade to the IMF forecast.
“The duration and scale of the conflict and the time it can take for energy production and transit to normalize after the tip of hostilities will determine the final word size of the shock to the worldwide economy,” Gourinchas added.
Although a fragile two-week ceasefire stays in effect, negotiations to finish the war haven’t yet yielded a peace agreement, raising fears attacks could resume.
U.S. and Israeli strikes on Iran — and Tehran’s closing of the Strait of Hormuz and retaliatory strikes on oil refineries and other energy infrastructure in neighbouring countries — have driven oil and gas prices sharply higher all over the world.
Because of this, the IMF marked up its expectation for global inflation this 12 months to 4.4 per cent from 4.1 per cent in 2025 and from the three.8 per cent it had forecast for this 12 months in January.
The souring outlook from the IMF comes lower than two weeks after Deloitte Canada also downgraded its growth forecast for the Canadian economy to 1.2 per cent for 2026 — down from the 1.5 per cent estimated in January, in addition to last 12 months’s 1.7 per cent gain.
The IMF forecast for Canada is more optimistic, predicting 1.5 per cent growth this 12 months, down just 0.1 percentage points from its January forecast. Each the January report and Tuesday’s update predict a 1.9 per cent expansion in 2027.
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The USA economy continues to be expected to grow by 2.3 per cent in 2026, which the IMF says is on account of fiscal policies and rate of interest cuts last 12 months.
That forecast can also be downgraded 0.1 percentage points from January, reflecting what the report calls a “small net negative effect” from the war with Iran, given the U.S. exports more oil and gas than it brings in from overseas markets in comparison with other nations.
Still, the IMF notes that inflation stays above the U.S. Federal Reserve’s goal of two per cent, sitting above three per cent in essentially the most recent data.
“I feel that they probably overreacted, but we’ll see,” U.S. Treasury Secretary Scott Bessent told reporters concerning the IMF report.
He said he was confident that the U.S. would cycle through higher prices in a short time, unlike countries that were implementing subsidies that would increase borrowings or lengthen the duration of inflationary impacts.
The IMF report was more pessimistic in downgrading its forecast for the emerging market and developing economies to three.9 per cent from its view of 4.2 per cent in January.
The report cited higher food and energy prices that can have a greater impact on those countries, which include much of Asia, Latin America and Africa, and even large economies like China and India.
One winner that’s emerging from the Middle East conflict is Russia, an energy exporter that stands to profit from higher prices. The IMF upgraded its forecast for the Russian economy, hard hit by sanctions following the invasion of Ukraine in 2022, to a still-modest 1.1 per cent from 0.8 per cent in January.
Gourinchas told a news conference Tuesday that the three.1 per cent global growth projection is a reference forecast that’s “not quite yet” irrelevant, but warned that would change if the Middle East war drags on.
“I might say that we’re somewhere in between the reference scenario and the hostile scenario” of weaker 2.5 per cent global growth in 2026, he said.
“And naturally, day by day that passes and day by day that we’ve got more disruption in energy, we’re drifting closer towards the hostile scenario.”
The IMF is a 191-nation lending organization that works to advertise economic growth and financial stability and to scale back global poverty.
Boosting defence spending poses medium-term economic costs, IMF says
One chapter of the IMF report, which was previewed last week, warned of medium-term economic costs for countries which can be boosting defence spending.
Canada and other NATO allies have increased their military budgets in response to growing global conflicts and pressure from U.S. President Donald Trump.
Ottawa injected an extra $9 billion into defence last 12 months, pushing its military spend to $63 billion and eventually meeting NATO’s two per cent GDP goal.
Canada has already committed to NATO’s latest goal of three.5 per cent on core defence by 2035, a part of a broader five per cent goal that just about all other allies have pledged to satisfy.
The IMF report studied past military buildups dating back to 1946 and located that on average, fiscal deficits worsened by about 2.6 percentage points of GDP inside three years after the beginning of a defence spending increase.
Public debt also increased by about seven percentage points during that very same timeframe.
The report said economic support may very well be present in prioritizing domestic suppliers for military contracts — a method Prime Minister Mark Carney is pursuing together with his defence industrial strategy — but additionally warned buildups should be closely coordinated with monetary policy.
About two-thirds of past military buildups the IMF studied were financed by higher deficits, which increased inflation and created medium-term challenges, while about one-quarter of those buildups saw reprioritized spending that usually result in a pointy decline in social program funding.
The Liberals’ federal budget tabled last fall, which was finally enshrined into law in March, predicted the deficit will rise to $78.3 billion for this fiscal 12 months.
— with files from The Associated Press and Reuters
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