The International Monetary Fund (IMF), in its latest World Economic Outlook (WEO) report updated on October 13, projected global economic growth of 3.1% in 2026 and 3.4% in 2027.

The IMF also expects overall 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 mainly driven by energy and food prices.

The IMF stated that the global economy has once again proven resilient, but this resilience is uneven, and the pace of adjustment is narrowing rapidly in the short term. Despite the protracted conflict in the Middle East and persistent trade tensions, activity in the first half of 2026 was still better than expected. Driven by strong investment in artificial intelligence (AI), the technology cycle has provided a demand boost.

The interaction of these forces — geopolitics and technology — has produced a fragmented global economy: favorable terms of trade or technology-related exports and investment have provided buffers 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 lanes, inventory drawdowns, fiscal support measures, and lower energy intensity than in previous decades have helped contain the economic impact of conflicts. Private businesses 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 buoyed by the technology sector boom.

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 abruptly 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 could lead to sustained increases and volatility in energy and food prices, rekindle inflation pressures, and further deteriorate fiscal and external balances, thereby weighing on economic 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 significantly reduce investment, trigger stock market corrections, tighten financial conditions, and generate spillover effects on economies integrated into technology supply chains. Fiscal vulnerabilities and new trade tensions could further weaken growth.

Geopolitics and Technology: A Two-Pronged Pull

The IMF analysis noted that geopolitics and technology — two transformative forces — are reshaping the global economy, with short-term effects gradually emerging and long-term implications largely still unknown. "Geopolitics is most prominently and acutely manifested 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 stated.

Meanwhile, technology is playing a positive demand shock role, driven 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 in the long run remains to be seen.

In addition, the IMF noted that other factors, especially fiscal policy and financial conditions, are equally important and are to some extent influenced by these two shocks. Implemented fiscal policies have helped ease the rising energy costs faced by households and businesses due to conflicts. 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 concerns about conflict-induced inflation and public spending pressures on one hand, and market enthusiasm and expectations for technology investment on the other.

Specifically, the IMF expects global economic growth to slow from 3.5% in 2025 to 3.1% in 2026, then recover to 3.4% in 2027. But the IMF emphasized that stable aggregates mask a reality: 32 economies now account for 95% of global growth, compared with 54 economies in April, and downward revisions are more widespread in this forecast, with about 47% of economies having their growth downgraded.

For advanced economies, the IMF expects overall growth to edge up slightly from 2.0% in 2025 to 2.1% in 2026, then decelerate 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 expects the United States to grow 2.3% in both 2026 and 2027, with the 2027 forecast revised up by 0.2 percentage points from the previous estimate. The IMF cited strong private consumption, fiscal policy, accommodative financial conditions, sustained technology-related business investment (net of its large import component), 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 at 1.1% in 2026 and 1.2% in 2027, 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, then edge down slightly to 1.2% in 2027, as higher energy prices and long-term interest rates weigh on consumption and investment. Japan's economic growth will slow to 0.7% in 2026, though fiscal support measures will partially offset the impact of higher energy prices, and growth will stabilize at that level in 2027 as the energy shock dissipates and monetary policy gradually normalizes. For South Korea, growth is projected to accelerate to 3.3% in 2026 and 2.8% in 2027, supported by strong external demand for semiconductors, partially offsetting the negative impact 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 across economies, reflecting differences in commodity dependence, geographic exposure to the Middle East conflict, remittance and tourism revenues, 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 a projected growth rate of 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 the upturn in the global technology cycle, and in some cases from emergency fiscal measures.

Sticky Inflation Resurgence, Financial Asset Repricing

Regarding global inflation, previous WEO reports had projected a steady decline toward target levels. However, in this report, the IMF stated that primarily due to the negative supply shock triggered by the Middle East, global inflation is expected to stop its steady decline. The IMF projects headline inflation to rise from 4.1% in 2025 to 4.7% in 2026, then fall to 4.1% in 2027, with the 2026 increase mainly due to higher energy and food prices. The 2026 forecast is unchanged from the July WEO update, but the 2027 forecast has been revised up by 0.2 percentage points.

The IMF noted that global headline inflation rose in August as energy prices rebounded after a brief ceasefire in the Middle East. Core inflation remains moderate, although core goods prices in some advanced economies are beginning to reflect rapid increases in memory chip costs. US core inflation rose, mainly driven 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, and policy credibility. Core inflation in several major economies is expected to gradually return to 2%: by the end of 2027 for Japan and the UK, and by mid-2028 for the euro area and the United States.

Additionally, the IMF analyzed the broad repricing of financial assets, stating that it was driven by the market's recent benign reversal 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 lead to a flight to safety and particularly affect emerging market economies through wider sovereign spreads, exchange rate pressures, and tighter domestic financial conditions. These effects could interact with already heightened fiscal vulnerabilities.

"As long-term government borrowing costs rise in major advanced economies, increased public debt and substantial refinancing needs are making sovereigns increasingly vulnerable to sudden changes in financial conditions. More persistent inflation and longer-than-currently-expected monetary policy restraint 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, which in turn could 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, particularly in economies with limited fiscal space and high reliance on domestic banks."