The global economy has withstood the Middle East war and the energy shock better than feared, but oil inventories are dwindling and government budgets are stretched, leaving the world with little room to absorb another big shock.
The International Monetary Fund (IMF) said in its October 2026 World Economic Outlook, released on Tuesday, that "the margins of adjustment are narrowing" as inventories deplete and debt and borrowing costs rise, leaving little room for error if another shock hits.
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It said the fragmented outlook leaves the global economy "vulnerable to setbacks from both directions", with a prolonged war on one side and an abrupt reassessment of AI profits on the other.
The Fund edged up its 2026 global growth forecast by 0.1 percentage point from its July update, to 3.1 per cent. The forecast is unchanged from April. Global growth was 3.5 per cent in 2025. For 2027, the IMF kept its projection at 3.4 per cent, 0.2 percentage point higher than in April.
A split view of the global economy
The report said geopolitics and technology are reshaping the world economy and pulling in different directions. Growth is being "reallocated across countries" according to their exposure to the war-induced energy shock and their ability to gain from AI-related demand.
The steady headline number hides large offsetting moves. Thirty-two economies now account for 95 per cent of global growth, compared with 54 in April, and about 47 per cent of economies have seen forecasts cut.
Countries with limited exposure to the energy shock and a strong role in the technology supply chain are seeing activity hold up or strengthen, the IMF said. Energy exporters outside the conflict zone are cushioned by better terms of trade.
Energy importers with little link to the technology chain face higher import bills, currency pressure and weaker real incomes. Many low-income countries fall in this group, which threatens to widen the gap between richer and poorer economies.
Advanced economies are projected to grow 2.1 per cent in 2026 and 1.8 per cent in 2027. The US forecast for 2026 is unchanged at 2.3 per cent, and the 2027 projection has been lifted to 2.3 per cent. The euro area is projected at 1.1 per cent this year, and the UK at 1.3 per cent, a 0.5 percentage point upgrade from April. Emerging market and developing economies are projected to slow from 4.5 per cent in 2025 to 3.7 per cent in 2026 before recovering to 4.4 per cent in 2027.
Oil shock absorbed, but buffers are depleted
The war began on February 27, 2026. The closure of the Strait of Hormuz disrupted a route through which about 20 million barrels of oil a day, roughly a quarter of the world's maritime oil trade, flowed before the conflict. Oil prices almost doubled in the early months, peaking at $126 a barrel in late March, before settling 20 per cent to 40 per cent above prewar levels, the IMF said.
Flexible supply limited the damage. Gulf producers rerouted exports, output outside the Gulf rose by 2 million barrels a day and inventories released another 4 million barrels. China, the largest oil importer, cut crude imports by 23 per cent between March and June from a year earlier.
IMF estimates show oil would have averaged about $110 a barrel this year without these cushions, cutting global growth by 0.9 percentage point. With them, prices are estimated to average $85 and the net hit is about 0.3 percentage point.
But the Fund said these cushions are running out. Global inventories are drawing down by about 2.7 million barrels a day and nearing stress levels that could trigger sharp price jumps. The IMF also flagged escalations in the Red Sea and the Black Sea, and gas stocks in parts of Europe below seasonal norms ahead of winter.
The baseline assumes Hormuz reopens in March 2027, with a return to prewar conditions by October 2027. Oil is projected to average about $96 a barrel in 2026, 41 per cent higher than in 2025.
AI boom offsets the war drag but adds risk
The IMF called the AI-driven technology upswing an important offset to the geopolitical drag, lifting investment, exports and asset prices in economies linked to the supply chain.
The gains are highly concentrated. Taiwan Province of China and Korea account for 62 per cent of net trade in AI computing hardware, while China and the US account for more than 75 per cent of net imports and 57 per cent of data centres built since 2024.
The Fund cautioned that the boom is also feeding inflationary pressure and financial fragility, as spending on chips, data centres and power pushes up demand before broad productivity gains show up.
A market correction, with AI productivity gains failing to materialise, would cut global output by 1.1 per cent by 2028, it said. A stronger AI build-out could add 0.6 per cent to world GDP by 2029.
Inflation, debt and trade
Global headline inflation is projected to rise from 4.1 per cent in 2025 to 4.7 per cent in 2026 before easing to 4.1 per cent in 2027. Core inflation is expected to return to 2 per cent only by the end of 2027 in Japan and the UK, and by mid-2028 in the euro area and the US.
Public debt is high and rising. Debt in advanced economies is projected to climb from 108 per cent of GDP in 2025 to 115 per cent in 2031, and in emerging and developing economies from 74 per cent to 84 per cent. Benchmark rates in advanced economies are at multidecade highs, pushing up borrowing costs for emerging markets.
World trade volume growth is projected at 4.6 per cent in 2026 and 4.7 per cent in 2027, helped by brisk technology-related trade. The IMF said trade has proved resilient to the US tariffs introduced in April 2025, as exporters redirected goods to other markets.
Risks tilted to the downside
The IMF put the probability of global growth falling below 2 per cent in 2027 at about 10 per cent, down from 20 per cent in April. The chance of global inflation exceeding 5 per cent in 2027 is about 35 per cent, up from 30 per cent.
If the war lasts until end-June 2027 and oil climbs to $130 a barrel, global growth would be 0.5 percentage point lower in 2027 and inflation 1.1 percentage points higher.
Over the medium term, the IMF expects growth to average 3.2 per cent in 2028-31, well below the 3.7 per cent average of 2000-19.
What the IMF wants governments to do
The report urged policymakers to contain near-term risks from inflation, debt and financial fragility while building infrastructure and skills to spread the gains from new technology. It called for a "renewed focus on rebuilding fiscal space".
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Support for households should be temporary and tightly targeted, ideally through cash transfers, and broad fuel subsidies and price controls should be avoided, the Fund said. Windfalls for commodity exporters should be saved. Central banks can look through temporary price spikes only if inflation expectations stay anchored, and the case for tightening is stronger where inflation is already above target. "With economic conditions in flux, agility is at a premium," the report said.
India among the bright spots
India is projected to grow 7.0 per cent in both 2026 and 2027 on a fiscal-year basis, or 7.4 per cent and 7.0 per cent on a calendar-year basis. The 2026 forecast is 0.6 percentage point higher than in July and 0.5 percentage point higher than in April.
The IMF said growth remains robust, backed by domestic demand and services despite higher oil prices, and that India stands out in the medium-term outlook with upward revisions.
It added that India is an exception among major economies in not needing more fiscal consolidation than currently planned to stabilise its debt ratio.