IMF Warns Europe’s Growth Will Slow as Russia’s War, Middle East Crisis Drive Up Energy Costs

Economic growth in the eurozone is expected to slow to just 1.1% in 2026 as Russia’s ongoing war against Ukraine and escalating conflict in the Middle East push energy prices higher, the International Monetary Fund (IMF) warned in its latest World Economic Outlook.

The forecast, released Tuesday, Oct. 13, represents a modest 0.2-percentage-point upgrade from July but remains below the 1.2% growth recorded in 2025.

The IMF expects the eurozone economy to expand by only 1.2% in 2027, with persistently high energy costs, weak consumer confidence and inflation continuing to constrain economic activity.

The Fund forecasts eurozone inflation at 3.1% this year and 2.8% next year – both significantly above the European Central Bank’s 2% target.

The figures underscore Europe’s vulnerability to energy disruptions as Russia continues its invasion of Ukraine and instability across the Middle East threatens global oil and natural gas supplies.

Russia’s war and Middle East crisis expose Europe’s energy vulnerability

The IMF warned that elevated energy costs could continue weighing on European households and businesses through next year.

Europe remains particularly vulnerable because many of its economies depend heavily on imported oil and natural gas.

The Fund warned that gas storage levels in parts of Europe remain below normal seasonal levels, potentially exposing consumers to further price increases during the winter heating season.

The combination of higher energy costs and persistent inflation could force the European Central Bank to maintain restrictive interest rates, limiting household spending and business investment.

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The IMF expects underlying inflation to return to the ECB’s 2% target only around mid-2028, suggesting that price pressures could persist even if economic growth remains weak.

The latest projections also follow a volatile period for the eurozone economy, which recorded no growth in the first quarter of 2026 before rebounding by 2.6% in the second quarter.

Germany outperforms France as UK faces slower growth

The IMF projects significant differences among Europe’s largest economies.

Germany, the EU’s biggest economy, is expected to grow by 1.3% in 2026, while Spain is forecast to maintain stronger expansion of 2.5%.

France faces a much weaker outlook, with growth projected at just 0.4%, compared with 0.9% in 2025.

French unemployment is expected to rise to 8.4%, up from 7.7% last year.

For Britain, the IMF raised its 2026 growth forecast to 1.3%, an increase of 0.3 percentage points from July.

However, UK growth is expected to slow to 1.2% in 2027 as higher energy prices and borrowing costs weigh on consumption and investment.

The diverging forecasts reflect the uneven economic consequences of energy shocks and financial pressures across Europe.

IMF warns Middle East oil exporters face sharp contraction

During the World Economic Outlook press briefing, IMF officials said the economic consequences of the Middle East conflict differ sharply between oil-producing and oil-importing countries.

An IMF official said the Fund had revised its forecasts shortly before publication to account for higher oil prices, while warning that further escalation could worsen the outlook.

“We actually revised in the last minute almost our forecast to incorporate the higher oil prices,” the official said.

For Gulf oil exporters, the IMF forecasts a sharp contraction in production and exports, followed by a strong rebound in 2027, assuming conditions develop as projected.

Some of these economies are also experiencing slower growth in non-oil sectors.

Oil-importing countries, however, received modest forecast upgrades in several cases, supported by domestic demand, remittances and tourism.

Egypt was among the countries benefiting from upward revisions for both 2026 and 2027, partly because of a recovery in Suez Canal activity and petroleum-related industries.

But officials warned that renewed Houthi attacks and disruptions around the Bab al-Mandab Strait could jeopardize regional trade, shipping and economic activity.

AI boom shields global trade – but raises new economic risks

The IMF also highlighted the growing importance of artificial intelligence in sustaining international trade despite geopolitical instability.

Responding to questions from Bloomberg and Reuters about whether the global economy could face a recession if the AI investment boom collapsed, an IMF official said demand for AI-related products had made a substantial contribution to trade growth.

Global trade expanded by a cumulative 8.3% between 2023 and 2025, while trade in AI-related goods increased by 29%.

Without AI-related products, overall trade growth would have reached just 4.6%, according to the Fund’s calculations.

The IMF outlined several possible scenarios for the technology boom.

In the most favorable case, continued investment in AI would generate genuine productivity improvements, strengthening economic activity without adding to inflation.

A less favorable scenario would see investment and demand remain strong without corresponding productivity gains, producing weaker growth benefits and greater inflationary pressure.

The Fund is also examining the consequences of investors reassessing expected profits from AI, potentially triggering a correction in asset prices.

The IMF’s latest assessment suggests that the technology sector has become an increasingly important source of global economic resilience, even as its future contribution remains uncertain.