Middle East war

Middle East war casts a shadow on IMF forecasts

The International Monetary Fund recently released its World Economic Outlook with a telling subtitle: Global Economy in the Shadow of War. Since March, the US-Israeli attack on Iran has disrupted commodity markets and reignited inflation expectations.

As might be expected, the IMF cut its global growth forecast for this year (though not 2027) and increased its inflation forecast for the next two years. But given the situation’s potential to deteriorate, it also set out “adverse” and “severe” scenarios.

The IMF’s “reference forecast” assumes the war remains limited in scope, with disruptions fading by mid-2026. Under this scenario, global growth is projected at 3.1% in 2026 — down 0.2 percentage points from the previous January forecast — while headline inflation rises to 4.4%. An “adverse” scenario puts global growth at 2.5% with inflation at 5.4%; a “severe” scenario — involving damage to energy infrastructure — cuts growth to about 2%, while inflation would surpass 6% by 2027.

Country-by-country revisions show that only India (where domestic demand is robust) and Japan (notable for its stockpiled oil reserves) are expected to see their growth momentum remain intact.

The UK sits at the other end of the spectrum, facing one of the sharpest downgrades among advanced economies — a reflection of its energy dependence, persistent current account deficit and inflation that has only recently come off the boil.

The IMF’s annual forecasts capture the broader picture, but monthly data show how the damage has already been done.

S&P Global’s purchasing managers indices’ (PMIs) had been trending firmly in expansionary territory through January and February in both developed and emerging markets. But March brought a sharp reversal across all components — manufacturing, services, and composite — in both groupings. The momentum from the start of the year was effectively erased in a single month.

Consumer sentiment tells the same story. The Ipsos consumer confidence index (CCI), which had been edging toward the 50 (neutral) mark after years of pessimism, dropped back in March as households responded to higher energy prices and rising uncertainty.

Overall, downside risks dominate; the window for a “non-adverse” scenario is narrowing each week the conflict continues.