The interplay between geopolitics and technology has produced a fractured global economy.

In its latest World Economic Outlook (WEO) update released on October 13, the International Monetary Fund (IMF) projected global economic growth of 3.1% in 2026 and 3.4% in 2027. Compared with the April WEO forecasts, the 2026 projection is unchanged, while the 2027 forecast was modestly upgraded. The IMF also expects headline global inflation to rise to 4.7% in 2026 before easing to 4.1% in 2027, a cumulative upward revision of 0.7 percentage points, with the temporary increase driven mainly by energy and food prices.

The IMF said the global economy has once again proven resilient, but that resilience is uneven, and the pace of adjustment is narrowing rapidly in the near term. Despite the prolonged conflict in the Middle East and persistent trade tensions, activity in the first half of 2026 was better than expected. Driven by strong investment in artificial intelligence (AI), the technology cycle has provided a demand impulse. The interaction of these forces — geopolitics and technology — has produced a fractured global economy: favorable terms of trade or technology-related exports and investment have provided a buffer for some countries, while others face higher import bills and weaker demand.

So far, buffers and adaptability have helped the global economy weather negative shocks. Flexible supply responses, rerouted shipping routes, inventory drawdowns, fiscal support measures and lower energy intensity than in previous decades have helped contain the economic impact of conflicts. Private firms continue to adapt to repeated shocks, including geopolitical risks and shifts in trade policy, while financial markets have maintained a benign view of these challenges, also fueled by the boom in the technology sector.

However, these adjustments are not unlimited. Inventories have already been reduced, commodity markets remain fragile, fragmentation could impose a greater drag on efficiency, prolonged uncertainty could eventually weigh more heavily on confidence, energy constraints could weaken AI-driven momentum, and financing conditions could shift suddenly for various reasons, including fiscal sustainability concerns.

In the IMF's view, risks to economic growth are tilted to the downside. A prolonged stalemate or further escalation in the Middle East would lead to sustained increases and volatility in energy and food prices, a resurgence of inflationary pressures, and further deterioration in fiscal and external balances, thereby weighing on growth. Further damage to energy infrastructure, cyberattacks or extreme weather events could amplify these effects. Price increases caused by physical supply disruptions have a larger and more persistent macroeconomic impact than those driven by geopolitical risk. A reassessment of AI-related profitability and productivity prospects could sharply reduce investment, trigger a stock market correction, tighten financial conditions and create spillovers for economies integrated into technology supply chains. Fiscal vulnerabilities and new trade tensions could further weaken growth.

Geopolitics and technology pull in opposite directions

The IMF analysis said geopolitics and technology, two transformative forces, are reshaping the global economy, with short-term effects gradually emerging while long-term implications remain largely unknown. "Geopolitics is most visible and most acute in the Middle East conflict, while tensions in other regions and international trade relations continue to cast a shadow over economic activity. The negative supply shocks from the conflict are working through the economy via higher and more volatile energy prices and their impact on inflation dynamics. So far, the private sector appears to have adapted well to the geopolitical shocks of direct conflict and trade disputes," the report said.

At the same time, technology is playing a positive demand-shock role, supported by investment in AI and related hardware and infrastructure. Trade flows reflect this. Whether this positive demand shock will translate into a positive supply shock through productivity growth over the longer term remains to be seen.

In addition, the IMF said other factors, especially fiscal policy and financial conditions, are equally important and are to some extent affected by these two shocks. Fiscal policies already implemented have helped ease the higher energy costs faced by households and businesses. Defense spending is increasing in response to changes in the geopolitical landscape. Earlier this year, despite repeated massive negative shocks and prolonged uncertainty, financial conditions tightened sharply, reflecting both concerns about conflict-induced inflation and public spending pressures and market enthusiasm and expectations for technology investment.

Specifically, the IMF expects global growth to slow from 3.5% in 2025 to 3.1% in 2026 and then recover to 3.4% in 2027. Compared with the April WEO, the 2026 forecast is flat, while the 2027 forecast was revised up by 0.2 percentage points. But the IMF stressed that stable aggregates mask a reality: 32 economies now account for 95% of global growth, compared with 54 economies in April, and downgrades were more widespread in this forecast, with about 47% of economies seeing their growth revised lower.

For advanced economies, the IMF expects overall growth to edge up from 2.0% in 2025 to 2.1% in 2026, then slow to 1.8% in 2027. Within advanced economies, conditions remain uneven: net energy exporters are partly benefiting from favorable terms of trade, while net energy importers are being dragged down by more pronounced energy price increases unless their economies are boosted by technology-related activity.

The IMF forecasts US growth of 2.3% in both 2026 and 2027, with the 2026 projection unchanged from April and the 2027 forecast revised up by 0.2 percentage points. The IMF cited strong private consumption, fiscal policy, accommodative financial conditions, continued technology-related business investment (net of its large import content) and productivity strength as supporting economic activity, with the direct impact of the Middle East conflict limited given the country's status as a net energy exporter.

The IMF forecasts euro area growth of 1.1% in 2026 and 1.2% in 2027, both unchanged from April, reflecting the persistent drag from higher energy prices and weak consumer confidence. Among other advanced economies, the IMF expects UK economic growth to stabilize at 1.3% in 2026, up 0.5 percentage points from April, before slowing slightly to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on consumption and investment. Japan's growth is expected to slow to 0.7% in 2026, though fiscal support measures will partly cushion the impact of higher energy prices and stabilize at that level in 2027 as the energy shock dissipates and monetary policy gradually normalizes. For South Korea, growth is projected to rise to 3.3% in 2026 and 2.8% in 2027, supported by strong external demand for semiconductors, partly offsetting the negative effects of the Middle East conflict.

For emerging market and developing economies as a whole, the IMF expects growth to slow from 4.5% in 2025 to 3.7% in 2026, then recover to 4.4% in 2027. Prospects vary widely across economies, reflecting differences in commodity dependence, geographic exposure to the Middle East conflict, remittance and tourism receipts, financial conditions, policy frameworks and positions in global technology value chains. Regions directly affected by the conflict are driving a V-shaped growth pattern, while others are expected to follow a more balanced growth path.

The IMF expects growth in emerging and developing Asia to slow. India remains one of the fastest-growing major economies, with growth projected at 7.0% in 2026. This reflects stronger-than-expected momentum supported by resilient domestic demand and robust services activity. In addition, several Southeast Asian economies are expected to benefit from data center activity and an upturn in the global technology cycle, and in some cases from emergency fiscal measures.

Sticky inflation reignites, financial assets repriced

On global inflation, previous WEO reports had projected a steady decline toward target levels. But in this report, the IMF said that mainly because of the negative supply shock triggered by the Middle East, global inflation is expected to stop declining steadily. The IMF expects headline inflation to rise from 4.1% in 2025 to 4.7% in 2026, then fall to 4.1% in 2027, with the increase in 2026 mainly due to higher energy and food prices. The 2026 forecast is unchanged from the July WEO update, but the 2027 forecast was revised up by 0.2 percentage points. Compared with the April 2026 WEO, the cumulative revision is 0.7 percentage points.

The IMF said global headline inflation rose in August as energy prices rebounded after a brief ceasefire in the Middle East. Core inflation remained moderate, although core goods prices in some advanced economies began to reflect rapid increases in memory chip costs. US core inflation rose, driven mainly by a rebound in travel services prices.

The IMF expects inflation dynamics to remain uneven across countries, reflecting differences in exchange rate pass-through, persistence of services price inflation, labor market conditions, policy credibility and other factors. Core inflation in several major economies is expected to gradually return to 2%: Japan and the UK by the end of 2027, and the euro area and the US by mid-2028.

In addition, the IMF analyzed the broad repricing of financial assets, saying it was driven by a recent benign reversal in markets rather than by specific factors related to the Middle East conflict or AI. This could test corporate resilience and affect household consumption. Market stress could prompt a flight to safety and have a particularly strong impact on emerging market economies by widening sovereign spreads, adding exchange rate pressure and tightening domestic financial conditions. These effects could interact with already elevated fiscal vulnerabilities.

"As long-term government borrowing costs rise in major advanced economies, higher public debt and large refinancing needs are making sovereigns increasingly vulnerable to sudden changes in financial conditions. More persistent inflation and monetary policy restraint for longer than currently expected could further increase debt servicing costs, crowd out other critical spending, limit the ability of fiscal policy to respond to future shocks and put upward pressure on global interest rates," the IMF wrote. "Higher long-term borrowing costs in major economies could themselves weigh on growth in those economies and, in turn, affect financing conditions elsewhere. In low-income countries, reduced official development assistance could exacerbate these challenges, leaving fewer resources to build buffers and meet development needs. Financial vulnerabilities could also intensify, especially in economies with limited fiscal space that rely heavily on domestic banks."