Despite six months of war in the Middle East, the global economy has shown resilience, weathering energy shocks better than anticipated. This was achieved through the use of strategic oil and gas reserves, a shift to new energy sources, and demand management measures. The IMF maintains its projection for world growth at around 3%, acknowledging that uncertainty remains high, with the economy being pulled in opposite directions by negative supply shocks from energy and commodity prices, and a positive demand shock from the AI-led technology cycle.
The energy shock is not yet over, with oil and gas prices remaining elevated and refined product prices also very high. The Strait of Hormuz ship traffic is only one-tenth of pre-war levels, and strategic reserves will need restocking. The AI boom is also increasing energy demand in some countries, and the upcoming Northern Hemisphere winter will further elevate energy requirements. Concurrently, global public debt is nearing 100% of GDP, the highest since World War II, and is projected to climb further, with many advanced economies having high debt-to-GDP ratios.
The disinflation process from the 2022 Cost of Living crisis has stalled, leading to increased attention on the interplay between fiscal and monetary policy. The IMF revised its 2026 global headline inflation forecast to 4.7% in July, while core inflation projections remained broadly unchanged. Inflation expectations have risen for the current year but are expected to remain anchored in the longer run. Ten-year sovereign bond yields for key advanced economies like the US, France, and Japan are at their highest in some time, driven by rising term premia, which has a ripple effect on borrowing costs globally, even for emerging economies with improved policy frameworks.
IMF Managing Director Kristalina Georgieva warned against complacency by policymakers, noting that Brent crude oil prices have hovered between $80-$90 per barrel since mid-June, well below spring peaks above $118. She emphasized that central banks must remain focused on price stability mandates despite concerns that tight monetary policy could cool growth. The IMF advises fiscal authorities to develop credible medium-term fiscal consolidation plans and to implement structural reforms to boost growth, which would also help address fiscal challenges. If the Middle East conflict extends into 2027 and oil prices reach around $125 per barrel, the global economy could face a "much worse outcome," with inflation climbing and expectations de-anchoring. In such a severe scenario, global growth could slow to just 2% with headline inflation at 5.8%.
