Conflicts in the Middle East cloud global economic outlook

The International Monetary Fund (IMF) this week released its latest World Economic Outlook. In addition to a baseline forecast, the IMF included alternative “adverse” and “severe” scenarios, whereby trends remain weaker than in the baseline, reflecting uncertainty over the duration and scope of the ongoing conflict in the Middle East. The baseline scenario assumes that the war between the United States, Israel, and Iran ends in the coming weeks, and that commodity production in the Middle East, as well as exports, normalise by mid-2026. Under the adverse scenario, oil and natural gas prices significantly exceed the baseline this year, and also remain somewhat elevated next year. By contrast, in the severe scenario, commodity prices remain well above baseline this year and next year, and do not return to trend until 2028. The two downside scenarios include the assumption that inflation expectations rise over the short term in reaction to elevated energy prices, thereby requiring tighter monetary policy. The risk premia for firms also rises.

The WEO baseline forecast sees the global economy growing by 3.1 % this year and 3.2 % next year. According to the IMF, the current negative impact of the Middle East conflict on growth is 0.3 percentage points if the war ends in the coming weeks. If the conflict continues in line with the adverse scenario, growth slows to 2.5 % this year and 3.0 % next year. In the severe scenario, the global economy only grows by 1.3 % this year and 2.2 % next year.

The conflict has its biggest impacts on growth in developing countries dependent on commodity imports. Many of these countries are vulnerable to both rising energy and food prices. Global food prices are expected to rise as the Middle East conflict has also disrupted global supply of fertilisers. The IMF sees the Chinese economy growing by 4.4 % this year and 4.0 % next year. It also predicts that Russian economic growth will remain at 1.1 % in both 2026 and 2027. BOFIT’s latest forecast for the Russian economy, released at the end of March, sees the Russian economy growing by around 1 % this year and around ½ percent in 2027 and 2028. In conjunction with the release of our Forecast for China 2026–2026, BOFIT will hold a webinar briefing in Finnish on Tuesday May 5 (sign-up link here).

Driven by investment in artificial intelligence and adjustment of international supply chains to deal with US import tariffs, global trade saw healthy growth of 5.1 % last year. AI investment should continue to support growth this year, while reductions in US tariffs following the US Supreme Court's decision at the beginning of the year should bolster trade growth. The IMF sees global trade growing by 2.8 % this year and 3.8 % next year.

IMF growth forecasts, %. (Previous forecast in parentheses.)