## World Economic Outlook: Global Economy in the Shadow of War (April 2026) — Preface and Chapters

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### Overview and editorial information
- WEO presents IMF staff analysis and projections based on information available through April 1, 2026.
- Project coordination: Research Department under Pierre-Olivier Gourinchas.
- Project directors: Petya Koeva Brooks and Deniz Igan.
- Primary contributors include Hippolyte Balima, Christian Bogmans, Patricia Gomez-Gonzalez, Chris Jackson, Toh Kuan, Jorge Miranda Pinto, Jean-Marc Natal, Andrea Paloschi, Andrea Presbitero, and Zhao Zhang.
- Editorial leadership: Gemma Rose Diaz (Communications Department); production and editorial support by Bonner Publishing, Michael Harrup, Lucy Scott Morales, James Unwin, MPS Limited, and Absolute Service, Inc.

### Assumptions for projections
- Data vintage: information available through April 1, 2026; some figures may be estimates.
- Real effective exchange rates: assumed constant at their average levels during February 10, 2026–March 10, 2026, except ERM II currencies assumed constant in nominal terms relative to the euro.
- Policy assumption: established policies of national authorities are assumed maintained.
- Oil price assumptions:
  - Average price of oil: $82.22 a barrel in 2026.
  - Average price of oil: $75.97 a barrel in 2027.
- Short-term government bond (three-month) yield assumptions:
  - United States: 3.5 percent in 2026 and 3.3 percent in 2027.
  - Euro area: 2.0 percent in 2026 and 2.0 percent in 2027.
  - Japan: 0.9 percent in 2026 and 1.4 percent in 2027.
- Ten-year government bond yield assumptions:
  - United States: 4.0 percent in 2026 and 3.8 percent in 2027.
  - Euro area: 2.8 percent in 2026 and 3.0 percent in 2027.
  - Japan: 2.3 percent in 2026 and 2.4 percent in 2027.
- Assumptions described as working hypotheses rather than forecasts.

### Conventions, data notes, and access
- “Billion” = a thousand million; “Trillion” = a thousand billion.
- “. . .” indicates data not available; “–” denotes a covered span (for example, 2024–25); “/” denotes fiscal or financial year (for example, 2024/25).
- Composite group data: calculations based on 90 percent or more of weighted group data unless noted.
- Corrections incorporated into digital editions; multiple digital formats available on IMF eLibrary.

### What is new
- Bulgaria joined the euro area on January 1, 2026; Bulgaria is included in euro area and advanced-economy aggregates.
- Yemen data reflect territory under control of the Internationally Recognized Government (IRG).

---

### The war’s impact on the global economy: channels and distributional effects
- Key transmission channels:
  - Direct commodity price increases (negative supply shock) raising costs of energy-intensive goods and services and feeding into headline inflation.
  - Second-round wage-price dynamics if inflation expectations de-anchor.
  - Financial market reactions: risk-off episodes can impair asset valuations, increase risk premiums, cause capital flight and dollar appreciation, and dampen aggregate demand.
- Distributional effects:
  - Energy importers, especially low-income developing countries with macro vulnerabilities, are most exposed.
  - Gulf region energy exporters likely to suffer from conflict-related damage and export constraints.
  - Countries supplying migrant workers may face remittance losses.
  - Reduced fiscal resources and higher spending needs may force drawdowns of external wealth, pushing up global real interest rates.

### Scenarios and headline projections
- Reference forecast (short-lived conflict; consistent with futures as of March 10):
  - Global growth: 3.1 percent for this year (2026), a downward revision of 0.2 percentage point from January projections.
  - Headline inflation: rises from 4.1 percent in 2025 to 4.4 percent in 2026.
  - Later statement: global growth projected 3.1 percent in 2026 and 3.2 percent in 2027; historic average (2000–19) = 3.7 percent.
- Adverse scenario (larger, more persistent energy price increases):
  - Global output: 2.5 percent.
  - Inflation: 5.4 percent.
- Severe scenario (extended dislocations, de-anchoring of expectations, tightening financial conditions):
  - Global growth: around 2 percent this year and next.
  - Headline inflation: near 6 percent.
- Counterfactuals:
  - Absent the war, 2026 growth would have been 3.4 percent (0.1 percentage point upward revision relative to January WEO Update).
  - Downward revision for 2026 largely reflects conflict disruptions; emerging market and developing economies (EMDEs) downward revision = 0.3 percentage point for 2026 relative to January; advanced economies broadly unchanged.

### Reference forecast—key numerical projections (selected)
- World output (percent change):
  - 2025: 3.4; 2026: 3.1; 2027: 3.2.
- Market exchange rate basis:
  - World output: 2025: 2.9; 2026: 2.6; 2027: 2.6.
- Advanced economies:
  - 2025: 1.9; 2026: 1.8; 2027: 1.7.
- United States:
  - 2025: 2.1; 2026: 2.3; 2027: 2.1.
- Euro area:
  - 2025: 1.4; 2026: 1.1; 2027: 1.2.
- China:
  - 2025: 5.0; 2026: 4.4; 2027: 4.0.
- India (fiscal-year basis):
  - 2025: 7.6; 2026: 6.5; 2027: 6.5.
- EMDEs:
  - 2025: 4.4; 2026: 3.9; 2027: 4.2.
- World consumer prices:
  - 2025: 4.1; 2026: 4.4; 2027: 3.7.
- Oil (average price per barrel):
  - 2025 actual: $67.74; 2026 assumed: $82.22; 2027 assumed: $75.97.

### Downside scenario specifics (top-down model-based)
- Adverse scenario assumptions (starting 2026:Q2 relative to January 2026 WEO Update baseline):
  1. Oil prices increase by 80 percent in 2026:Q2, then fall to about 20 percent above baseline in 2027; average petroleum spot price index ≈ $100 per barrel in 2026 and ≈ $75 in 2027.
  2. Gas prices for Europe and Asia increase by 160 percent in 2026:Q2, mostly unwinding in 2027.
  3. Food commodity prices increase by 2.5 percent.
  4. One-year-ahead inflation expectations rise by 50 basis points in advanced economies and by 90 basis points in emerging markets excluding China by 2027.
  5. Corporate premiums increase by 50 basis points in advanced economies and China, and by 100 basis points in emerging markets excluding China; sovereign spreads in emerging markets excluding China increase by 50 basis points.
  6. Tightening in financial conditions fades in 2027.
  7. Monetary policy response assigns less weight to output stabilization.
- Adverse scenario impacts:
  - Global growth reduced by 0.8 percentage point in 2026 to 2.5 percent.
  - Inflation higher by 1.5 percentage points at 5.4 percent in 2026; 2027 inflation higher by 0.4 percentage point at 3.9 percent.
  - Emerging markets excluded China: 2026 growth lower by 1.3 percentage points relative to baseline.
- Severe scenario assumptions:
  1. Oil prices increase by 100 percent starting 2026:Q2 and stay at that level in 2027; average petroleum spot price index ≈ $110 per barrel in 2026 and ≈ $125 in 2027.
  2. Gas prices for Europe and Asia increase by 200 percent.
  3. Food commodity prices increase by 5 percent in 2026 and 10 percent in 2027.
  4. One-year-ahead inflation expectations increase by 100 basis points in advanced economies by 2027 and by 130 basis points in emerging markets excluding China by 2027.
  5. Corporate premiums rise by 100 basis points in advanced economies and China; emerging markets excluding China see corporate premiums rise by 200 basis points and sovereign spreads widen by 100 basis points over 2026–27.
  6. Monetary policy response geared toward containing inflation over stabilizing output.
- Severe scenario impacts:
  - Global growth reduced by 1.3 percentage points in 2026; growth near or below 2 percent (close call for global recession).
  - Global growth reduced by 1.0 percentage point in 2027 to 2.2 percent.
  - Inflation 190 basis points higher in 2026, reaching 5.8 percent, and 260 basis points higher in 2027, reaching 6.1 percent.
  - Oil and gas price increases subtract 0.6 percentage point from growth in 2026 and a further 0.5 percentage point in 2027.
  - Federal funds rate increases by 50 basis points in 2026 and 100 basis points in 2027 relative to baseline.

### Lessons from the 2022 energy crisis
- 2022: global inflation rose to levels not seen since the 1970s; subsequent disinflation without recession is viewed as major policy success.
- Differences for current shock:
  - Positive: softer labor markets, normalized private-sector balance sheets, and more subdued pre-shock inflation pressures in some countries.
  - Negative: price levels permanently higher since 2022; flatter supply curve and greater sensitivity of inflation expectations where central-bank credibility has eroded.

---

### Policy guidance — preserving price and financial stability
- Monetary policy:
  - Central banks should look through supply shocks while inflation expectations remain well anchored.
  - If inflation expectations de-anchor, central banks must take firm action to reanchor expectations; this takes precedence over near-term growth.
  - Recommended approach: graduated and state-contingent response—look through as long as expectations stable; communicate that de-anchoring will be met with strong response.
  - Exchange rate flexibility serves as a buffer; temporary FX intervention or capital flow measures may be warranted where disorderly moves emerge.
  - If shock proves permanent, coordinated tightening can help reduce global demand and energy prices.
- Fiscal policy:
  - Avoid wasteful, untargeted measures (broad energy caps or subsidies).
  - Fiscal support should be well targeted, temporary, include clear sunset clauses, and be consistent with medium-term fiscal plans.
  - Preserve price signals; avoid price controls and export restrictions.
  - Consider direct, targeted transfers to the most vulnerable.
- Financial and liquidity policies:
  - If financial conditions deteriorate markedly, monetary and fiscal policies should pivot toward supporting the economy and financial system alongside appropriate financial and liquidity measures.
- Debt sustainability:
  - Limit distortion of price signals; temporary measures only under exceptional conditions (temporary shock; strong headline-to-core pass-through; available fiscal space).
  - Offset temporary measures via reductions in nonpriority spending or new revenues where fiscal space is limited.
  - Replenish fiscal buffers given high public debt and diminished fiscal space.

### International cooperation and medium-term priorities
- Geopolitical shift toward multipolarity and potential fragmentation—avoid inward-looking policies.
- Critical minerals and rare earths:
  - Supply is geographically concentrated; disruptions can produce sizable output losses.
  - Case for multilateral coordination emphasized over unilateral industrial policy.
- Technology and productivity:
  - Agentic AI raises productivity prospects; upside potential between 0.1–0.8 percentage point in the medium term and up to 0.3 percentage point in near term if realized.
  - Policies should encourage diffusion, investments in skills, and labor-market transition support.
- Energy transition:
  - Faster renewable adoption strengthens resilience and supports climate transition.
- Trade policy:
  - Reduce trade uncertainty, preserve predictable rules, and modernize rules to reflect services and digital shifts.

---

### Fiscal outlook in major jurisdictions (selected exact figures)
- United States:
  - General government fiscal-balance-to-GDP ratio expected to deteriorate by 0.7 percentage point in 2026 to 7½ percent (reflecting OBBBA), partly offset by tariff revenues.
  - US public debt projected to climb from 124 percent of GDP in 2025 to 142 percent in 2031 under current policies.
- Euro area:
  - Germany’s deficit widens by over 1 percentage point to 3.8 percent in 2026 as infrastructure and defense spending ramp up.
  - Debt-to-GDP ratio rises from 87 percent in 2025 to 90 percent in 2031.
- Japan:
  - Deficit projected to widen by 1 percentage point of GDP in 2026.
  - Fiscal policy expected to remain moderately expansionary through 2030.
- EMDEs:
  - Public debt projected to rise from 74 percent of GDP in 2025 to 86 percent in 2031.
  - China: deficit expected to widen by 0.3 percentage point in 2026 before narrowing medium term.

### Trade-policy assumptions (exact)
- IMF staff assumes real-time current trade policy as of end of March is permanent, including measures framed as temporary or pending (for example, US Section 122 tariffs).
- US effective statutory tariff rate underlying projections: 13.5 percent (compared with 18.7 percent in October 2025 forecast).
- Effective tariff rate imposed by rest of world on US imports unchanged at 3.5 percent.

---

### Defense spending: macroeconomic consequences and trade-offs (Chapter 2 highlights)
- Empirical regularities:
  - Defense spending booms raise defense spending by about 2.7 percentage points of GDP on average and last more than two-and-a-half years.
  - About two-thirds of additional spending financed through higher budget deficits.
  - Average defense-boom fiscal deficit increase: about 2.6 percentage points of GDP; public-debt-to-GDP ratio increases by about 7 percentage points three years after onset.
  - Wartime booms: public debt jumps by about 14 percentage points of GDP and social spending falls in real terms.
- Multipliers and channels:
  - Defense spending multipliers close to 1 on average.
  - Short-term boosts to consumption and investment in defense-related sectors; import leakages can mute multipliers.
  - Multipliers larger when buildup is permanent, when arms exporters supply domestic demand, and when deficit financed.
- Firm-level evidence:
  - Analysis of >4.6 million private nonfinancial firms shows firm investment becomes less sensitive to internal funds during booms (positive demand effect), but crowding out occurs when public debt rises.
  - Import-intensive countries see muted demand channels.
- Policy guidance:
  - Embed defense buildup within medium-term fiscal frameworks to preserve sustainability.
  - Prefer public investment that raises long-term productivity, avoid crowding out nondefense productive investment.
  - Promote joint procurement and reduce import leakages to increase domestic output effects.

### Case study: Poland (selected figures)
- Poland defense spending increased from 2.2 percent to an estimated 4.5 percent of GDP between 2021 and 2025 (cash terms).
- Personnel scaled from 116,200 in 2020 to 233,800 in 2025.
- Equipment spending rose from 0.7 percent to 2.4 percent of GDP; imports accounted for about 80 percent of total capital spending.

---

### Commodity market developments (special feature highlights; selected exact figures)
- Oil:
  - Prices increased 57.6 percent between August 2025 and March 2026 to $105.8 per barrel.
  - Oil shipments through the Strait of Hormuz stopped, curtailing about 8.5 million barrels per day (mb/d) of crude oil exports.
  - Typical flow: about 20 mb/d through the strait, of which 15 mb/d is crude oil.
  - Brent prices peaked at $119 on March 10.
- Natural gas and LNG:
  - TTF hub prices in Europe rose by 61 percent between August 2025 and March 2026, peaking at $17.7 per MMBtu.
  - Asian LNG prices surged to $20.8 per MMBtu—an 80.6 percent increase since August 2025.
  - US Henry Hub prices rose by 4.9 percent to $3 per MMBtu.
  - Futures: TTF futures reach $7.5 per MMBtu through 2031; Henry Hub futures ≈ $3.5 per MMBtu through 2031.
- Metals and food:
  - Metals price index jumped 36.6 percent between August 2025 and March 2026.
  - Gold up 44.4 percent, reaching prices exceeding $5,000 per ounce (later retrenched).
  - Copper surged 29.5 percent; aluminum increased 29.8 percent.
  - IMF food and beverages price index rose by 4.7 percent between August 2025 and March 2026.
  - Food prices expected to increase by 6.0 percent in 2026; beverage prices plunged by 24.8 percent, driven by a 57.4 percent drop in cocoa and a 9.9 percent fall in coffee.

---

### The economics of rare earth elements (REEs): market structure, vulnerabilities, and policy
- Market size (2024 figures):
  - Rare earth oxides (REOs) valued ≈ $6 billion.
  - Permanent magnets valued ≈ $25 billion.
  - Magnet-4 (neodymium, praseodymium, terbium, dysprosium) jointly comprise 96 percent of REO market value while representing 23 percent of REO production by weight.
  - Permanent magnets consume 83 percent of REO value.
- China’s dominance (2024 shares):
  - LREE mining: China’s share reduced from 97 percent in 2010 to 58 percent in 2024.
  - Oxide separation: China 88 percent of world capacity.
  - Metal refining: China 93 percent.
  - HREEs: China retains 98 percent of mining (including Myanmar), 97 percent of oxide separation, 95 percent of metal refining, and 90 percent of permanent magnet production.
- Substitutability:
  - HREEs substitutability index: 78 out of 100 (100 = no adequate substitute); non-REEs score 57.
- Recent disruptions and policy response:
  - China introduced export licensing for seven REEs and REE-based permanent magnets in April 2025; permanent magnet exports fell about 70 percent year over year as of May 2025 before returning to trend.
  - July 2025 US-MP Materials agreement included price protection mechanism; October 2025 agreements and G7 Action Plan mobilized an estimated $6.4 billion to de-risk REE supply chains.
- Model and policy simulations:
  - Baseline simulated shock: persistent 80 percent reduction in all rare earth inputs.
  - GDP declines in low-substitutability scenario: United States GDP declines by 1.5 percent; Germany by about 1.2 percent.
  - High-elasticity substitution scenario (elasticity = 0.8) yields average GDP losses ≈ 0.006 percent.
  - Industrial-policy calibration to reach 25 percent self-sufficiency by 2035:
    - Unilateral investment subsidy must cover 77.2 percent of total investment costs for US to reach target.
    - Unilateral price floor must be 2.4 times (reported as 2.42 times in figure note) the period market price.
    - Fiscal costs over first decade: investment subsidy costs ≈ 141 percent of annual US market size—equivalent to about $1.19 billion ($0.81 billion).
  - Policy guidance: de-risking supply chains simultaneously across importers reduces fiscal costs; investment subsidies are more fiscally efficient in present-value terms than price floors; industrial policies should be cautious and complemented by structural reforms.

---

### Conflicts and recovery (Chapter 3 highlights)
- Conflict economic costs:
  - Output declines sharply at conflict onset, by approximately 3 percent, reaching cumulative losses ≈ 7 percent within five years.
  - Losses often exceed those from financial crises and severe natural disasters.
- Transmission channels:
  - Supply-side: capital destruction, reduced labor supply, infrastructure damage, higher production costs.
  - Demand-side: declines in private consumption and investment; possible dissaving.
  - Fiscal: weaker revenues, higher spending needs, financing constraints, possible monetary financing or arrears.
  - External: export capacity impairment, trade relocation, FX shortages, capital outflows.
- Scarring and recovery:
  - Five years after conflict onset: capital stock ≈ 4 percent lower; employment ≈ 3 percent lower.
  - Prices: increase ≈ 35 percent five years after onset in conflict-site economies.
  - Recovery depends on sustained peace: when peace sustained, output rises gradually; when peace fragile, output does not recover.
  - Refugees: in 2024 about 25 million refugees (~80 percent of global refugee population) originated from active conflict-site economies.
  - When peace holds, refugee returns reach about 60 percent five years after termination.
- Policy packages to support recovery (modeled scenarios and evidence):
  - Macroeconomic stabilization, debt restructuring, donor aid, increases in public investment efficiency, and policies aiding return migration are complementary and more effective together.
  - Financing scenario assumptions: domestic tax-to-GDP increase by 3 percentage points over 15 years; donor aid ≈ 0.5 percent of GDP per year during first 5 years.
  - Public investment efficiency increase by 10 percentage points boosts output return of tax-funded recovery by about 1.4 percentage points.
  - Combining policies accelerates recovery beyond sum of individual effects; effectiveness depends on implementation quality and institutional capacity.
- Case evidence:
  - Ukraine: output plunged by more than one-third in Q2 2022; IMF EFF program and $130 billion external financing secured; notable policy sequence described.
  - Rwanda: post-1994 recovery involved tax-to-GDP increase from 9 percent to 13 percent and sustained aid surges.
  - Côte d’Ivoire: post-2010–11 crisis recovery saw tax-to-GDP rise from 10 percent to 13 percent and debt decline.

---

### Executive Directors’ remarks (Annex 1.SF.1 — summary)
- Directors agree: war in Middle East is significant headwind, risks tilted to downside.
- Policy priorities emphasized:
  - Preserve price stability; central banks ready to act decisively.
  - Rebuild fiscal buffers; support targeted, temporary social protection measures within existing resource envelopes.
  - Strengthen financial supervision, stress testing, and reserve buffers.
  - Advance structural reforms: invest in AI and digitalization, upskill labor, energy transition.
  - International cooperation: re-anchor predictable trade rules; well-resourced IMF role for tailored advice, lending, capacity development; strengthen G20 Common Framework for Debt Treatments.

*Source: World Economic Outlook: Global Economy in the Shadow of War, International Monetary Fund, April 2026.*

### Preface                                                                                                                 

### Preface

### Overview
- The World Economic Outlook (WEO) presents the IMF staff’s analysis and projections based on information available through April 1, 2026.
- The survey is the product of an interdepartmental review drawing on IMF area departments and cross-cutting departments, coordinated in the Research Department under Pierre-Olivier Gourinchas.
- The project was directed by Petya Koeva Brooks and Deniz Igan.
- Primary contributors listed include Hippolyte Balima, Christian Bogmans, Patricia Gomez-Gonzalez, Chris Jackson, Toh Kuan, Jorge Miranda Pinto, Jean-Marc Natal, Andrea Paloschi, Andrea Presbitero, and Zhao Zhang, among others.
- Editorial leadership: Gemma Rose Diaz (Communications Department) with production and editorial support from Bonner Publishing, Michael Harrup, Lucy Scott Morales, James Unwin, MPS Limited, and Absolute Service, Inc.

### Assumptions for the Projections
- Real effective exchange rates are assumed to have remained constant at their average levels during February 10, 2026–March 10, 2026, except for currencies in ERM II, assumed constant in nominal terms relative to the euro.
- Established policies of national authorities are assumed to be maintained (see Box A1 in the Statistical Appendix for specific fiscal and monetary policy assumptions for selected economies).
- Oil price assumptions:
  - Average price of oil: $82.22 a barrel in 2026.
  - Average price of oil: $75.97 a barrel in 2027.
- Short-term government bond yield assumptions (three-month):
  - United States: 3.5 percent in 2026 and 3.3 percent in 2027.
  - Euro area: 2.0 percent in 2026 and 2.0 percent in 2027.
  - Japan: 0.9 percent in 2026 and 1.4 percent in 2027.
- Ten-year government bond yield assumptions:
  - United States: 4.0 percent in 2026 and 3.8 percent in 2027.
  - Euro area: 2.8 percent in 2026 and 3.0 percent in 2027.
  - Japan: 2.3 percent in 2026 and 2.4 percent in 2027.
- These assumptions are described as working hypotheses rather than forecasts; uncertainties around them add to the margin of error in projections.
- Estimates and projections are based on statistical information available through April 1, 2026, but may not reflect the latest published data in all cases.

### Conventions and Data Notes
- Symbols and date conventions:
  - “. . .” indicates that data are not available or not applicable.
  - “–” between years or months (for example, 2024–25 or January–June) indicates the years or months covered, including the beginning and ending periods.
  - “/” between years or months (for example, 2024/25) indicates a fiscal or financial year.
- Numerical definitions:
  - “Billion” means a thousand million.
  - “Trillion” means a thousand billion.
  - “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
- Data coverage and presentation:
  - Data refer to calendar years, except for a few countries that use fiscal years (see Table F in the Statistical Appendix for economies with exceptional reporting periods).
  - For some countries, figures for 2025 and earlier are based on estimates rather than actual outturns (see Table G in the Statistical Appendix).
  - Composite group data represent calculations based on 90 percent or more of the weighted group data unless noted otherwise.
  - Tables and figures listing their source as “IMF staff calculations” or “IMF staff estimates” draw on data from the WEO database.
  - When countries are not listed alphabetically, ordering is based on economic size.
  - Minor discrepancies between sums of constituent figures and totals reflect rounding.
  - Map boundaries and depictions do not imply IMF judgment on legal status or endorsement.

### What Is New in This Publication
- On January 1, 2026, Bulgaria became the 21st country to join the euro area; data for Bulgaria are now included in aggregates for the euro area and for advanced economies and relevant subgroups.
- For Yemen, revised data reflect the territory under control of the Internationally Recognized Government (IRG).

### Corrections, Editions, and Access
- When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and the IMF eLibrary; all substantive changes are listed in the online table of contents.
- Print copies of this WEO can be ordered from the IMF bookstore at imfbk.st/574802.
- Multiple digital editions (ePub, enhanced PDF, HTML) are available on the IMF eLibrary at eLibrary.IMF.org/WEO.
- A free PDF and data sets for charts are available from the IMF website at www.IMF.org/publications/weo.

### Data Usage and Inquiries
- WEO data and metadata are provided “as is” and “as available”; efforts are made to ensure timeliness, accuracy, and completeness but these cannot be guaranteed.
- Historical data and projections are compiled by IMF staff drawing on country desk officers’ information; structural breaks may be adjusted using splicing and other techniques; IMF staff estimates may serve as proxies when complete information is unavailable.
- WEO data can differ from other official sources, including the IMF’s International Financial Statistics.
- For details on terms and conditions for usage of the WEO database, see the IMF Copyright and Usage website.
- Inquiries about WEO content and the WEO database:
  - World Economic Studies Division, Research Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA.
  - Email: DataHelp@IMF.org.

### Editorial and Institutional Notes
- The analysis and projections are IMF staff work and should not be attributed to Executive Directors or national authorities.
- The report benefited from comments by IMF departmental staff and Executive Directors following the Executive Board discussion on April 6, 2026.

*Source: World Economic Outlook, International Monetary Fund, April 2026 (Preface).*

### PREFACE

### PREFACE

### The War’s Impact on the Global Economy
- The outbreak of war in the Middle East on February 28, 2026, and the closure of the Strait of Hormuz, together with serious damage to critical production facilities, could cause an energy crisis on an unprecedented scale.
- The overall impact of the shock depends on three channels:
  - Direct commodity price increases as a negative supply shock, raising costs of energy-intensive goods and services—including fertilizers, chemicals, food, transportation, and heating—disrupting supply chains, feeding into headline inflation, and reducing purchasing power.
  - Second-round effects as workers and firms try to recoup expected income losses through higher wages and prices, with a higher risk of wage and price spirals where inflation expectations are poorly anchored.
  - Financial market reactions: a classic risk-off episode could impair asset valuations, increase risk premiums, cause capital flight and the dollar to appreciate, and dampen aggregate demand.
- Distributional effects:
  - Energy importers, especially low-income developing countries with preexisting macroeconomic vulnerabilities and limited buffers, are highly exposed and likely to be hit hardest.
  - Gulf region energy exporters are likely to suffer due to conflict-related damage and production closures, export constraints, and weaker tourism and business activity.
  - Countries supplying migrant workers may face remittance losses.
  - Reduced fiscal resources amid higher spending needs may force many countries to lower net savings, possibly through drawdowns of their substantial external wealth, pushing up global real interest rates and further tightening global financial conditions.

### Scenarios and Key Projections
- The report presents a reference forecast based on a bottom-up assessment assuming a relatively short-lived conflict (consistent with commodity futures prices as of March 10), plus two model-based scenarios assuming a longer-lasting or expanding conflict.
- Reference forecast (short-lived conflict):
  - Projects global growth of 3.1 percent for this year, a downward revision of 0.2 percentage point from the January projections.
  - Headline inflation is expected to rise from 4.1 percent in 2025 to 4.4 percent in 2026.
  - Later statement: global growth is projected to be 3.1 percent in 2026 and 3.2 percent in 2027, slower than about 3.4 percent in 2024–25, and to settle at about that rate in the medium term, slower than the historical (2000–19) average of 3.7 percent.
  - The forecast for 2026 is revised downward by 0.2 percentage point and that for 2027 is unchanged, compared with the January 2026 WEO Update.
- Adverse scenario (larger, more persistent energy price increases):
  - Global output would be expected to decline to 2.5 percent, with inflation rising to 5.4 percent.
- Severe scenario (dislocations in energy markets extending to next year, de-anchoring of inflation expectations, and tightening of financial conditions):
  - The global economy would come close to experiencing a recession, with growth around 2 percent this year and next and global headline inflation near 6 percent.
- Additional scenario projections and comparisons:
  - Absent the war, forecasts based on preconflict assumptions would have shown a slight upward revision of 2026 growth by 0.1 percentage point to 3.4 percent relative to the January WEO Update.
  - The downward revision for 2026 largely reflects disruptions from the conflict, partly offset by carryover from recent strong data and reduced tariff rates.
  - The downward revision to growth in emerging market and developing economies is 0.3 percentage point for 2026, relative to that in the January WEO Update, while the forecast is broadly unchanged for advanced economies.
  - Under an adverse scenario, global growth would slow to 2.5 percent in 2026, and inflation would reach 5.4 percent. Under a more severe scenario, global growth would be cut to only about 2 percent in 2026, while headline inflation would be just above 6 percent by 2027.
  - The impact on emerging market and developing economies would be almost twice that on advanced economies.

### Lessons from the 2022 Energy Crisis
- Comparison with 2022:
  - In 2022, global inflation rose to levels not seen since the 1970s, triggering broad synchronized monetary policy tightening; subsequent disinflation without a recession is viewed as a major policy success.
  - Differences this time:
    - Positive factors: labor markets are significantly softer, private sector balance sheets have normalized, and pre-shock inflation pressures are more subdued—though still above target in some countries, notably the United States—suggesting possibly more subdued inflation impact if the shock remains modest.
    - Negative factors: price levels remain permanently higher from 2022, increasing sensitivity of inflation expectations to price developments where central bank credibility is perceived to have eroded; the supply curve now appears much flatter, so disinflation could prove more costly.

### Policy Guidance and Recommendations
- Overarching objective:
  - An early and orderly end to the war is the best way to limit damage to the global economy.
- Monetary policy:
  - Standard response to a surge in energy prices is for central banks to look through the supply shock, as long as inflation expectations remain well anchored.
  - If inflation expectations start drifting up, central banks need to take firm action to reanchor expectations; this must take precedence over near-term growth concerns.
  - Suggested approach: a graduated and state-contingent monetary policy response—look through if and as long as inflation expectations remain stable, while communicating clearly and forcefully that any sign of de-anchoring will be met with a strong policy response.
  - Exchange rate flexibility plays an important role as a buffer and by allowing monetary policy to concentrate on price stability.
  - If the energy shock proves more permanent, coordinated tightening across countries to curb global demand can help reduce energy prices.
- Fiscal policy:
  - Avoid wasteful, untargeted fiscal measures (e.g., energy caps or broad subsidies) that are often poorly designed and very costly.
  - Fiscal support should be well targeted, temporary, have clear sunset clauses, and be consistent with medium-term fiscal plans.
  - Avoid fiscal stimulus at a time of rising inflation so as not to complicate the task of central banks.
  - Preserve price signals; price controls or export restrictions distort scarcity signals, risk rationing, push up ex-subsidy prices, and generate negative spillovers to other countries.
  - Consider deploying fiscal support through direct and targeted transfers focusing on the most vulnerable.
- Financial and liquidity policies:
  - If financial conditions deteriorate markedly with weakening global demand, monetary and fiscal policies should pivot toward supporting the economy and the financial system, together with appropriate financial and liquidity policies.

### Fragmentation, Multipolarity, and Medium-Term Priorities
- Geopolitical trends:
  - The war highlights fraying alliances, emerging conflicts, and national security prioritization in policymaking, contributing to a more complex global economic environment and signs of a transition toward a more multipolar world.
  - Countries are seeking alternative trading partners and deviating from established geopolitical alignments, illustrated by a recent rise in new regional trade agreements.
  - Major concern: these trends may encourage more inward-looking policies.
- Critical minerals and rare earths:
  - Extraction and refining of critical minerals are highly geographically concentrated and indispensable for the green and digital transition.
  - Output losses associated with supply disruption of rare earths are sizable, and the case for multilateral coordination rather than unilateral industrial policy is emphasized.
- Technology and productivity:
  - Recent developments in artificial intelligence, most recently with the arrival of agentic AI, raise the prospect of meaningful productivity gains.
  - Risks: financial markets’ enthusiasm for these technologies may have run ahead of fundamentals, creating potential for price correction; rapid technological transformation could render many jobs obsolete, potentially slowing aggregate demand.
  - Policy priorities: encourage diffusion and adoption of new technologies, ensure adequate investments in skills to facilitate smoother labor market transitions.
- Energy transition:
  - Faster adoption of renewable energy can strengthen resilience to energy shocks, improve energy security, and support the climate transition.
- International cooperation:
  - The world may become more multipolar but need not become more fragmented; improve global cooperation and preserve principles of economic and financial cooperation and integration to sustain global prosperity.

*Source: PREFACE, World Economic Outlook, April 2026.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Global Economy Tested Again
- The global economy has withstood a series of shocks; the latest is "a military conflict engulfing the Middle East since the end of February."
- The conflict has inflicted humanitarian costs, damaged critical infrastructure, and severely disrupted maritime and air traffic in the affected region.
- Economies face repercussions through:
  - direct impact of higher commodity prices;
  - indirect second-order effects on inflation expectations—"especially sensitive to energy and food prices";
  - amplification from risk-off sentiment in financial markets.
- Commodity-importing emerging market and developing economies are at risk of being hit harder, with currency depreciation exacerbating higher energy and food prices.
- The global economic impact will crucially depend on the conflict’s "duration, intensity, and scope."

### Recent Developments: Continued Resilience and Rising Fragility
- Aggregate global growth in Q4 2025 increased to 3.9 percent on an annualized basis.
- Country and region outcomes in Q4 2025:
  - China sequential growth accelerated to 6.1 percent (per IMF staff seasonal adjustment).
  - Euro area excluding Ireland accelerated to 1.5 percent, aided by stronger fiscal spending in Germany.
  - United States growth slowed to 0.5 percent, influenced by a government shutdown that led to a sharp contraction in public expenditure.
  - Japan growth rebounded to 1.3 percent owing to stronger consumption and investment.
- China’s merchandise goods trade surplus hit a record $1.2 trillion (6 percent of GDP) in 2025.
- Global trade remained robust, with brisk expansion in technology-related exports offsetting slowing momentum elsewhere.
- Reorientation of trade:
  - US imports from China dropped sharply and were offset by increases in imports from Taiwan Province of China, Vietnam, and Mexico.
  - Chinese exports reoriented from the United States to other Asian economies and, temporarily, to Europe.
- Inflation and financial conditions:
  - Global inflation largely steady, with divergence across economies.
  - US core personal consumption expenditures inflation maintained a year-over-year rate of 3.1 percent in January 2026.
  - Inflation in Japan fell sharply in January 2026 to below the 2 percent target, reflecting the provisional gasoline tax abolition.
  - Risk-off sentiment after the Middle East outbreak led to moderate tightening of global financial conditions; bond yields rose and equity prices fell.
  - Emerging markets—especially commodity importers and those with preexisting vulnerabilities—were the most affected.
  - The US dollar strengthened somewhat; market volatility remained relatively subdued, while gold experienced sharp swings.

### Geopolitical and Trade Policy Developments
- Geopolitical tensions have risen markedly across regions in recent years (Figure 1.1 referenced).
- US trade policy shifts:
  - "The overall US effective statutory tariff rate is about 5.3 percentage points below the level assumed in the October 2025 WEO."
  - The environment has incentivized countries to finalize long-standing trade negotiations or start new partnerships (example cited: EU–MERCOSUR).
- Timing and policy uncertainty:
  - Extension beyond initial 150 days of the Section 122 tariffs requires congressional approval; otherwise similar tariffs would need other legal authorities.
  - The United States–Mexico–Canada Agreement (USMCA) is set for a mandatory joint review in July 2026.
  - Many US agreements with trading partners provide only temporary relief and are set to expire by the end of 2026.
- Uncertainty, while lower than 2025 peaks, "is still historically high" and several near-term inflection points could trigger spikes.

### Risks, Scenarios, and Medium-Term Prospects
- The baseline (reference) forecasts are predicated on a relatively short-lived conflict and are complemented with top-down model-based projections under more prolonged and intense conflict assumptions.
- Near-term prospects worsened because of disruptions from the closure of the Strait of Hormuz and attacks on production facilities.
- Medium-term prospects constrained by geoeconomic fragmentation and structural challenges.
- Upside potential exists if AI-related investment leads to strong productivity gains and increased business dynamism, but policy settings are crucial to ensure broadly balanced growth.

### Global Assumptions and Key Projections
- Reference forecast assumes the conflict "will last for a few more weeks and a recovery will then gradually take hold," with disruptions fading and production and exports from the region normalizing by mid-2026.
- These assumptions are "broadly captured in the projections for global commodity prices—consistent with futures pricing as of March 10—and interest rates."
- Fiscal and trade policies are assumed to remain in place through the forecast horizon; uncertainty assumed to remain elevated through 2027.
- Commodity price projections:
  - Prices for energy commodities are expected to rise by 19 percent in 2026.
  - Oil prices are expected to increase by 21.4 percent, corresponding to the average petroleum spot price index averaging $82 per barrel.
  - Natural gas prices are expected to be affected more than oil prices.
  - Food prices are expected to increase more than projected in October 2025 because of higher energy and fertilizer prices, disrupted shipping routes, and increased transport costs.
  - Base and precious metal prices are projected to maintain the gains experienced in 2025.
- Monetary policy projections:
  - In the United States, "the federal funds rate is projected to be reduced gradually, reaching its terminal rate of about 3.1 percent by the end of 2027."
  - In the euro area, "the policy rate is expected to increase by 50 basis points over the course of 2026."
  - In Japan, "the policy rate is projected to gradually rise, at a slightly steeper clip than thought in October 2025, toward a neutral setting of about 1.5 percent."
- Fiscal policy projections:
  - Fiscal policy in advanced economies, on average, is expected to be neutral in 2026 and tighten in the latter years of the forecast.

### Policy Priorities and Recommendations
- A comprehensive policy package should combine country-level actions and pragmatic international cooperation to enhance resilience, agility, and adaptability.
- First priorities:
  - Preserve price and financial stability.
  - Safeguard fiscal sustainability.
  - Implement structural reforms without further delay.
- Monetary policy guidance:
  - "Central banks should remain vigilant and be prepared to act clearly and decisively in line with their mandates."
  - Central banks must guard against prolonged supply shocks destabilizing inflation expectations.
  - Monetary policymakers should "reserve the option to look through negative supply shocks—such as the current one—as long as inflation expectations remain well anchored and the monetary policy stance is already properly calibrated."
  - Transparent communication and strong central bank independence are critical for credibility.
  - Where imminent risk of excessive or disorderly exchange rate movements emerges, temporary foreign exchange intervention and capital flow management measures may be warranted, provided they support appropriate monetary and fiscal policy stances.
- Financial sector guidance:
  - Financial supervisors should ensure robust prudential oversight, conduct scenario analysis, and maintain adequate capital, liquidity, and reserve buffers.
- Fiscal and social protection guidance:
  - Where fiscal support is necessary to protect the most vulnerable against extreme external shocks, it should be targeted, timely, temporary, and funded within current budget envelopes by reprioritizing spending, or, if not possible, "with the path to restoring fiscal balances clearly communicated."
  - To replenish buffers for future shocks, governments should—as appropriate for country-specific circumstances—mobilize revenues, reprioritize expenditures, make spending more efficient, and manage windfalls prudently.
- Addressing domestic and external imbalances:
  - Priority is addressing domestic imbalances, especially when doing so also reduces excessive external imbalances.
  - Removing domestic distortions—through fiscal, structural, and industrial policies—can simultaneously narrow external imbalances while enhancing global output.
  - Trade restrictions "play a limited role in correcting imbalances but can worsen output."
  - Countries should cooperate and take coordinated actions to restore stability in international economic relations and "seek opportunities to enhance trade integration, supported by predictable, transparent, and well-communicated trade policy frameworks."
- Defense spending and conflict considerations:
  - Scaling up defense spending prompted by rising geopolitical tensions could boost short-term activity but also bring inflationary pressures, weaken fiscal and external sustainability, and risk crowding out social spending, which could ignite discontent and social unrest.
  - Where conflict erupts, "acute macroeconomic trade-offs and scarring follow and last well beyond the immediate wartime shock."

*Source: EXECUTIVE SUMMARY, World Economic Outlook: GLOBAL ECONOMY IN THE SHADOW OF WAR (April 2026).*

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### Fiscal outlook in major jurisdictions
- United States:
  - General government fiscal-balance-to-GDP ratio is expected to deteriorate by 0.7 percentage point in 2026 to 7½ percent, reflecting the impact of the One Big Beautiful Bill Act (OBBBA), partly offset by additional tariff revenues.
  - Under current policies, US public debt is projected to climb from 124 percent of GDP in 2025 to 142 percent in 2031.
- Euro area:
  - Fiscal balance is projected to decline; Germany’s deficit registering a widening of over 1 percentage point to 3.8 percent as infrastructure and defense spending ramp up.
  - Debt-to-GDP ratio rises from 87 percent in 2025 to 90 percent in 2031.
- Japan:
  - Deficit is projected to widen by 1 percentage point of GDP in 2026.
  - Fiscal policy is expected to remain moderately expansionary through 2030.
- Emerging market and developing economies (EMDEs):
  - On average, fiscal policy is projected to gradually tighten over the forecast horizon.
  - China: deficit is expected to widen by 0.3 percentage point in 2026, before starting to narrow in the medium term.
  - Public debt in EMDEs is projected to rise from 74 percent of GDP in 2025 to 86 percent in 2031.

### Trade policy assumptions
- IMF staff projections assume real-time current trade policy as of the end of March is permanent.
  - This includes measures framed as temporary or pending; for example, US Section 122 tariffs are assumed to be extended or reimposed under different statutes.
- US effective statutory tariff rate underlying the projections is 13.5 percent, compared with 18.7 percent in the October 2025 forecast.
- The corresponding effective tariff rate imposed by the rest of the world on imports from the United States is unchanged at 3.5 percent.

### Global growth forecast: baseline (reference forecast)
- World output:
  - Projected at 3.1 percent for 2026 and 3.2 percent for 2027 (Table 1.1).
  - At market exchange rates, world output is projected to grow by 2.6 percent in both 2026 and 2027 (Table 1.2).
- Comparison with preconflict and prior forecasts:
  - Preconflict WEO forecast would have been 3.4 percent in 2026 and 3.2 percent in 2027.
  - Compared with the preconflict WEO forecasts, growth in the near term is revised downward by 0.2 percentage point.
  - Compared with the January 2026 WEO Update, global growth in the reference forecast is modestly revised downward overall; specifically, cumulative growth over 2026–27 is revised downward by 0.5 percentage point for low-income net energy-importing economies relative to the January 2026 WEO Update, compared with a downward revision of 0.2 percentage point in energy-importing advanced economies and positive or neutral revisions for net energy-exporting economies.
- Drivers moderating the impact:
  - Continued tailwinds partially offset negative shocks from the conflict, including lower tariffs, preexisting policy support, and carryover from stronger-than-expected outturns at the end of 2025 and the first quarter of 2026 in some cases.

### Regional and country projections (selected figures from Table 1.1 and Table 1.2)
- World Output (percent change)
  - 2025: 3.4; 2026: 3.1; 2027: 3.2 (Table 1.1)
- Advanced Economies
  - 2025: 1.9; 2026: 1.8; 2027: 1.7 (Table 1.1)
- United States
  - 2025: 2.1; 2026: 2.3; 2027: 2.1 (Table 1.1)
- Euro Area
  - 2025: 1.4; 2026: 1.1; 2027: 1.2 (Table 1.1)
- China
  - 2025: 5.0; 2026: 4.4; 2027: 4.0 (Table 1.1)
- India (fiscal year basis)
  - 2025: 7.6; 2026: 6.5; 2027: 6.5 (Table 1.1)
- Emerging Market and Developing Economies (EMDEs)
  - 2025: 4.4; 2026: 3.9; 2027: 4.2 (Table 1.1)
- World Growth based on Market Exchange Rates
  - 2025: 2.9; 2026: 2.6; 2027: 2.6 (Table 1.1 memorandum and Table 1.2)

### Commodity prices and inflation assumptions
- Oil:
  - Average price of oil in US dollars a barrel was $67.74 in 2025; the assumed price, based on futures markets, is $82.22 in 2026 and $75.97 in 2027 (Table 1.1 note 5).
- Commodity index (panel reference): Index, 2024:Q4 = 100 (Figure 1.7).
- World consumer prices (Table 1.1):
  - 2025: 4.1; 2026: 4.4; 2027: 3.7
- Advanced economies inflation assumed for 2026 and 2027 (Table 1.1 note 7):
  - Euro area: 2.6 percent and 2.2 percent for 2026 and 2027, respectively.
  - Japan: 2.2 percent and 2.3 percent for 2026 and 2027, respectively.
  - United States: 3.2 percent and 2.1 percent for 2026 and 2027, respectively.

### Downside scenarios: adverse and severe (top-down model-based)
- Adverse scenario assumptions (relative to the January 2026 WEO Update baseline starting in 2026:Q2):
  1. Oil prices increase by 80 percent in 2026:Q2 relative to January 2026 WEO Update baseline, before falling back to about 20 percent above baseline in 2027, with the increase dissipating in 2028 (corresponding to an average petroleum spot price index of about $100 per barrel in 2026 and about $75 in 2027).
  2. Gas prices increase for Europe and Asia by 160 percent in 2026:Q2 relative to baseline, before mostly unwinding in 2027.
  3. Food commodity prices increase by 2.5 percent.
  4. One-year-ahead inflation expectations increase by 50 basis points in advanced economies and by 90 basis points in emerging markets excluding China by 2027; inflation expectations unchanged in China.
  5. Corporate premiums increase by 50 basis points in advanced economies and China, and by 100 basis points in emerging markets excluding China; sovereign spreads in emerging markets excluding China increase by 50 basis points.
  6. Tightening in financial conditions fades in 2027.
  7. Monetary policy response assigns less weight to output stabilization than usually assumed.
- Adverse scenario impact:
  - Global growth reduced by 0.8 percentage point in 2026, dropping to 2.5 percent.
  - Global growth reduced by 0.2 percentage point in 2027, bringing growth to 3.0 percent.
  - Inflation higher by 1.5 percentage points at 5.4 percent in 2026, and higher by 0.4 percentage point at 3.9 percent in 2027.
  - Most impact on inflation and over half the impact on growth in 2026 come from higher energy prices.
  - By 2027, tighter financial conditions and higher inflation expectations imply a modest tightening in policy rates of 50 basis points in advanced economies by 2027 and a somewhat larger increase in emerging market economies.
  - Distributional effect: impact on emerging markets greater than on advanced economies; in the adverse scenario, growth in 2026 is lower by 1.3 percentage points in emerging markets excluding China, relative to baseline.
- Severe scenario assumptions:
  1. Oil prices increase by 100 percent starting in 2026:Q2 relative to January 2026 WEO Update baseline and stay at that level in 2027 (corresponding to an average petroleum spot price index of about $110 per barrel in 2026 and about $125 in 2027); dissipating in 2028.
  2. Gas prices for Europe and Asia increase by 200 percent over the same period.
  3. Food commodity prices increase by 5 percent in 2026 and 10 percent in 2027.
  4. One-year-ahead inflation expectations increase by 100 basis points in advanced economies by 2027 and by 130 basis points in emerging markets excluding China by 2027.
  5. Corporate premiums rise by 100 basis points in advanced economies and China in 2026 and stay at that level in 2027; emerging markets excluding China experience corporate premiums increase of 200 basis points and sovereign spreads widen by 100 basis points over 2026–27.
  6. Monetary policy response is geared toward containing inflationary pressures rather than stabilizing output.
- Severe scenario impact:
  - Global growth reduced by 1.3 percentage points in 2026; global growth would be reduced to a rate that is a close call for a global recession (growth rate below 2 percent).
  - Global growth reduced by 1.0 percentage point in 2027, to 2.2 percent.
  - Inflation 190 basis points higher in 2026, reaching 5.8 percent, and 260 basis points higher in 2027, reaching 6.1 percent.
  - Oil and gas price increase subtracts 0.6 percentage point from growth in 2026 and a further 0.5 percentage point in 2027.
  - Amplification through inflation expectations and financial conditions reduces growth by 0.7 percentage point in 2026 and 0.5 percentage point in 2027.
  - Federal funds rate increases by 50 basis points in 2026 and 100 basis points in 2027, relative to baseline.

### Distributional and regional vulnerability notes
- Lower-income commodity-importing economies are hit particularly hard through higher energy and food prices as well as foreign exchange depreciation.
- Cumulative GDP growth revisions for 2026–27 relative to the January 2026 WEO Update:
  - Low-income net energy-importing economies: downward revision of 0.5 percentage point.
  - Energy-importing advanced economies: downward revision of 0.2 percentage point.
  - Net energy-exporting economies: positive or neutral revisions.
- Impact on emerging markets in scenarios is larger than on advanced economies; in the adverse scenario, emerging markets excluding China see growth in 2026 lower by 1.3 percentage points relative to baseline.

*Source: CHAPTER 1 GLObAL PROSPECTS AND POLICIES, text - CHAPTER 1 GLObAL PROSPECTS AND POLICIES*

### 0.6 percentage point in advanced economies. The

### text - 0.6 percentage point in advanced economies. The

### Growth Forecast for Advanced Economies
- Under the reference forecast, growth in advanced economies is projected to be 1.8 percent in 2026 and 1.7 percent in 2027.
- The overall effect on growth in advanced economies of the conflict in the Middle East is modest, lowering growth by 0.2 percentage point in 2026 relative to the preconflict forecast.
- United States:
  - Projected to expand by 2.3 percent in 2026.
  - 0.1 percentage point downward revision relative to the January 2026 WEO Update.
  - Projected to grow 2.1 percent in 2027.
- Euro area:
  - Growth expected to decline from 1.4 percent in 2025 to 1.1 percent in 2026 and to 1.2 percent in 2027.
  - Forecast revised downward by 0.2 percentage point in each year compared with the January 2026 WEO Update.
- Japan:
  - Projected to drop from 1.2 percent in 2025 to 0.7 percent in 2026 and to 0.6 percent in 2027.
- United Kingdom:
  - Projected to decline from 1.3 percent in 2025 to 0.8 percent in 2026 (a downward revision of 0.5 percentage point relative to the October 2025 forecast).
  - Projected to recover to 1.3 percent in 2027.
- Canada:
  - Projected to slow from 1.7 percent in 2025 to 1.5 percent in 2026 before recovering to 1.9 percent in 2027.

### Growth Forecast for Emerging Market and Developing Economies
- Aggregate:
  - Growth expected to fall to 3.9 percent in 2026 and recover to 4.2 percent in 2027.
  - The conflict in the Middle East lowers growth in 2026 for this group by 0.3 percentage point relative to the preconflict forecast.
- Emerging and developing Asia:
  - Expected to decline from 5.5 percent in 2025 to 4.9 percent in 2026 and to 4.8 percent in 2027.
  - China:
    - Growth for 2026 revised upward by 0.2 percentage point, to 4.4 percent.
    - Growth expected to decelerate to 4.0 percent in 2027.
  - India:
    - Growth for 2025 revised upward by 1.0 percentage point, to 7.6 percent.
    - 2026 growth revised upward by 0.3 percentage point to 6.5 percent (0.1 percentage point relative to January).
    - Projected to stay at 6.5 percent in 2027.
  - Philippines:
    - Growth revised downward by 1.5 percentage points for 2026 relative to January.
- Middle East and Central Asia:
  - Projected to decline from 3.6 percent in 2025 to 1.9 percent in 2026 and recover to 4.6 percent in 2027.
  - Iran:
    - Growth in 2026 revised downward by 7.2 percentage points, to –6.1 percent.
    - 2027 revised upward by 1.6 percentage points, to 3.2 percent.
  - Saudi Arabia:
    - 2026 growth revised downward by 1.4 percentage point, to 3.1 percent.
    - 2027 revised upward by 0.9 percentage point, to 4.5 percent.
  - Noted that contractions for 2026 are more pronounced for Bahrain, Iran, Iraq, Kuwait, and Qatar and less significant for Oman, Saudi Arabia, and the United Arab Emirates.
- Caucasus and Central Asia:
  - Aggregate GDP growth for the group revised upward in 2026 and 2027 by a cumulative 0.3 percentage point.
- Sub-Saharan Africa:
  - Expected to be relatively stable at 4.3 percent in 2026 and 4.4 percent in 2027.
  - Nigeria: growth momentum sustained at 4.1 percent in 2026 and expected to strengthen to 4.3 percent in 2027.
  - South Africa: projected to slow to 1.0 percent in 2026 and bounce back to 1.3 percent in 2027.
  - Other countries in the region: growth expected to decline from 5.6 percent in 2025 to 5.2 percent in both 2026 and 2027, revised downward relative to January by a cumulative 0.6 percentage point.
- Latin America and the Caribbean:
  - Projected to remain broadly stable at 2.3 percent in 2026 and pick up to 2.7 percent in 2027.
  - Brazil:
    - Projected to moderate to 1.9 percent in 2026 and 2.0 percent in 2027.
    - War expected to boost growth by about 0.2 percentage point in 2026.
    - 2027 growth reduced by approximately 0.3 percentage point compared with the projection in January.
  - Mexico: projected to expand at 1.6 percent in 2026 and 2.2 percent in 2027.
- Emerging and developing Europe:
  - Expected to expand at an average rate of 2.0 percent in 2026 and 2.1 percent in 2027 after a sharp slowdown to 2.0 percent in 2025.
  - Russia: 2026 growth revised up by 0.3 percentage point relative to January, to 1.1 percent; 2027 projected at 1.1 percent.
  - Türkiye: 2026 growth revised downward by 0.8 percentage point to 3.4 percent relative to January.

### Inflation Forecast
- Global headline inflation:
  - Projected to increase from 4.1 percent in 2025 to 4.4 percent in 2026 before falling back to 3.7 percent in 2027.
  - This is a 0.7 percentage point upward revision for 2026 from the figure in the October 2025 WEO.
- Country-specific notes:
  - United States: US core inflation projected to return to the country’s 2 percent target during 2027.
  - United Kingdom: inflation expected to pick up temporarily toward 4 percent before returning to target by the end of 2027.
  - Japan: inflation expected to moderate in 2026 relative to 2025 and converge toward the country’s target by the end of 2027.
  - Euro area: headline inflation projected to increase temporarily to above 2 percent in 2026 and remain above target in 2027; core inflation expected to stay above 2 percent until 2028.
  - China: inflation projected to start rising from low levels.
  - India: inflation expected to return to near target levels after subdued food prices drove a marked decline in 2025.

### World Trade Outlook and Global Imbalances
- World trade volume growth:
  - Expected to decline from 5.1 percent in 2025 to 2.8 percent in 2026 and increase to 3.8 percent in 2027.
- Exports of goods and services:
  - Projected to decline in percent of world GDP over the forecast horizon; decline in services trade is much less pronounced than for goods.
- Medium-term external positions:
  - Global imbalances expected to decline only modestly.
  - Expansionary fiscal packages in some surplus economies expected to contribute to cyclical decline in imbalances.
  - Technology-driven business investment surge expected to continue to attract capital flows to the United States.
  - Sustained large fiscal deficits in the United States and China’s continued reliance on export-led growth contribute to external imbalances in these two countries.

### Medium-Term Outlook
- Global economy projected to expand at an average annual pace of 3.1 percent in 2028–31.
- This compares with the prepandemic (2000–19) historical average of 3.7 percent.
- Primary drivers:
  - Slowdown in China’s growth.
  - Slower average annual growth expected in several major Asian economies, the Middle East and Central Asia, sub-Saharan Africa, North America, and Europe.
- Potential costs of geoeconomic fragmentation:
  - Estimates of long-term global GDP losses from trade fragmentation alone range between 0.3 percent and 7.0 percent after 10 years.

### Risks to the Outlook: Downside Risks
- Risks are firmly on the downside, with notable prominence of a more protracted conflict in the Middle East.
- Downside risks include:
  - Further intensification of conflicts and eruption of domestic political tensions.
  - Volatile commodity prices, disrupted supply chains, and exchange rate depreciation worsening.
  - Food security threats from disruptions to fertilizer markets ahead of the planting season leading to substantial food price inflation.
  - Erosion of real incomes and increasing poverty in commodity-importing countries, exacerbating external imbalances and risking balance of payments distress and social unrest.
  - Increased risk aversion or frictions in cross-border financial transactions leading to capital flow reversals and abrupt asset price adjustments, particularly in emerging market economies with weaker policy frameworks.
  - Surges in military spending that may boost activity short term but distort resource allocation and involve nontrivial macroeconomic trade-offs.

*International Monetary Fund | April 2026 — WORLD ECONOMIC OUTLOOK: GLOBAL ECONOMY IN THE SHADOW OF WAR*

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### Geopolitical risk: empirical impacts and transmission channels
- Episodes of elevated geopolitical risk tend to be relatively short-lived, with a half-life of about two quarters.
- A one-standard-deviation increase in geopolitical risk is associated with a decline in real GDP of about 0.8 percent one year after the initial shock, driven by weaker private consumption and investment.
- Europe’s average geopolitical risk rose by about 1.2 standard deviations in 2022 and remained elevated at about 0.5 standard deviation in 2025.
- Roughly 10 percent of the estimated GDP impact can be attributed to the direct effect of higher oil prices.
- Increased geopolitical risk is associated with a level of prices about 2.5 percent higher relative to the no-shock baseline three years after the shock.
- Core inflation also rises, but more modestly, indicating most inflationary impact comes via commodity prices and disruptions to global food and energy supply chains.
- The nominal exchange rate depreciates by about 1.8 percent one year after the shock, potentially compounding upward price pressures.
- Empirical local-projection analysis controls for lagged country-specific geopolitical risk, changes in macroeconomic variables, and country and time fixed effects; geopolitical risk is measured using newspaper archives.

### Severe geopolitical scenarios and broader macrofinancial channels
- A more pronounced conflict could result in a major energy crisis with a significant effect on global output (severe scenario referenced in chapter).
- Beyond oil price effects, other transmission channels (trade disruptions, capital flow reversals, destruction of physical capital) are likely to dominate.
- Fiscal vulnerabilities in major economies with important roles in international financial markets could trigger repricing of borrowing costs, tightening broader financial conditions, and amplifying market volatility (see scenario B in Box 1.3).
- Elections can be associated with fiscal slippage, raising borrowing costs and risking boom-bust growth dynamics.
- Planned reductions in official development assistance (ODA) present additional challenges for low-income countries; China’s lending expanded post-global financial crisis but has weakened recently, with net transfers recently turning negative (see Figure 1.13 reference).

### Upside risks: AI and trade
- Sooner materialization of productivity gains from artificial intelligence could lift global growth by as much as 0.3 percentage point in the near term and by 0.1–0.8 percentage point in the medium term (Box 1.3 of October 2025 WEO).
- Benefits of AI depend on complementary policies: relaxing power supply constraints, scaling critical intermediate inputs, and labor market programs to manage workforce transitions.
- In low-income countries, unlocking AI benefits may require closing gaps in energy and digital infrastructure and reducing concentration of labor in sectors with limited AI gains.
- Structural reform packages (upskilling, labor mobility, business regulation, internal trade, competition, innovation) could lift near-term global growth by more than half a percentage point (scenario C in Box 1.3).
- A broad reduction in US tariffs and reduction in uncertainty could lift global growth by 0.6 percentage point (scenario C in Box 1.3).
- Trade policy disruptions—additional tariffs, sector-specific tariffs on upstream industries, and nontariff measures targeting critical inputs—could create supply bottlenecks and have outsized impacts on activity and prices; effects would be amplified by retaliatory measures.

### Policies: addressing the current shock and preparing for the next

H3: Preserving price and financial stability
- Central banks should be ready to act decisively in line with their mandates to preserve price stability and to guard against spillovers from actual inflation to inflation expectations, especially over the medium- to long-term horizon.
- The transmission of the current war-infused shock to inflation varies by country exposure to commodity markets, anchoring of inflation expectations, and exchange rate depreciation.
- Premature tightening risks destabilization if financial conditions tighten further or confidence declines; reacting strongly to flexible commodity prices can bring inflation down fast but risks a later recession.
- Where negative demand shocks lower activity below potential, a reduction in policy rates may be appropriate only if risks to price stability remain contained.
- In non-inflation-targeting economies (e.g., fixed exchange rate regimes), fiscal policy may need to play a larger role in managing shocks.
- Clear, timely, and consistent central bank communication is essential; central banks should articulate commitment to mandates and the resolve to tighten policy if necessary.
- Safeguarding legal and operational central bank independence is crucial to anchor inflation expectations and to avoid fiscal dominance; central banks should be able to maintain a prolonged period of restrictive policy if necessary.
- Exchange rates should generally move flexibly, but temporary foreign exchange intervention or targeted capital flow management measures may be warranted in select cases alongside appropriate monetary and fiscal stances.
- Enhance prudential oversight: identify, quantify, and manage risks from heightened uncertainty, rising geopolitical risks, and asset valuation fragilities; conduct scenario analysis that contemplates different conflict paths; deploy macroprudential policies and oversight of nonbank financial institutions; preserve liquidity, capital, and international reserve buffers.

H3: Upholding debt sustainability
- Fiscal responses to commodity price shocks should limit distortion of price signals and keep fiscal and monetary policy consistent with price stability.
- Temporary fiscal measures (subsidies, tax cuts, price caps) can be considered under an exceptional set of conditions: the shock is temporary; pass-through from headline to core inflation is strong; economic overheating is low; spillovers to global commodity markets are small; and fiscal space is available.
- Such measures should be timely, explicitly temporary, tightly targeted to the most vulnerable, include clear sunset clauses, and be offset by reductions in nonpriority spending or new revenue measures where fiscal space is limited.
- For economies experiencing increased fiscal room (for example, windfalls from recent commodity price swings), maintaining fiscal discipline and using gains within a coherent medium-term fiscal framework with debt sustainability at its core is essential.
- Replenishing fiscal buffers is crucial given high public debt levels, eroded fiscal space after sequential global shocks, uncertainty around conflict outcomes, and pressing spending needs; credible medium-term fiscal consolidation should be grounded in realistic assessments.

*Source: CHAPTER 1 GLObAL PROSPECTS AND POLICIES, text - CHAPTER 1 GLObAL PROSPECTS AND POLICIES (April 2026).*

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### CHAPTER 1 GLObAL PROSPECTS AND POLICIES

### Fiscal sustainability and public finance
- Avoid dependence on financial repression, monetary financing, or benign market sentiment because they "would carry significant macrofinancial risks and should be avoided."
- Strengthen revenues through base broadening and improved tax administration.
- Enhance spending efficiency and reorient expenditures toward high-multiplier areas such as infrastructure, skills development, and well-targeted social protection while crowding in private investment.
- Core institutional supports: strong fiscal frameworks, credible fiscal rules, independent fiscal institutions, and prudent debt management practices.
- Calibration guidance:
  - Mix of expenditure rationalization and revenue mobilization should be calibrated to country circumstances.
  - High-debt countries might need to limit state-financed services, better target social spending, and explicitly integrate interest payment risks into fiscal planning.
  - High-debt low-income countries facing refinancing and rollover risks may require international cooperation, timely concessional financing, and debt resolution.

### Promoting medium-term growth
- Mobilizing labor:
  - Raise labor utilization and job creation to ease macroeconomic trade-offs and support fiscal sustainability.
  - Labor market institutions should promote mobility and increase matching efficiency; measures to help workers reallocate and stay skill-ready for a job market reshaped by AI.
  - Portable benefits across jobs and contract types, together with affordable childcare and parental leave, can raise labor market participation—particularly among women—and smooth income risks during transitions.
  - Pension and retirement systems should support participation and well-being among older workers through flexibility and actuarially fair incentives, including voluntary part-time work and gradual retirement options.
  - Migration policies aligned with domestic skill shortages can help alleviate bottlenecks while safeguarding domestic workers.
- Implementing smarter regulation:
  - Reduce inefficient regulations and constraints through well-targeted and carefully sequenced deregulation to lift impediments to entrepreneurship, investment, and innovation.
  - Focus on promoting competition, broadening access to finance, and increasing efficiency of capital allocation to stimulate risk sharing and productivity growth.
  - Maintain prudential standards and macrofinancial stability; avoid premature or uncoordinated reforms that could heighten vulnerabilities and trigger destabilizing boom-bust cycles.
- Harnessing technological progress:
  - Digitalization and AI can accelerate productivity growth and expand potential output.
  - Complementary measures needed: investments in skills, energy, and digital infrastructure; competitive markets; robust frameworks for data governance and cybersecurity.
  - Policies should encourage diffusion and adoption of new technologies alongside support for research and development; competition and product market reforms can facilitate resource reallocation toward more productive firms.
  - Where trade or technological shocks are concentrated, prefer targeted and time-bound adjustment assistance (training, relocation support, wage insurance) over open-ended protectionist measures.
- Fostering energy transition:
  - Adoption of renewable and energy-efficient systems can contain energy price impacts, enhance resilience, advance climate mitigation goals, and prepare countries for increased climate-change-related extreme weather risks.
- Addressing domestic imbalances:
  - Correcting domestic imbalances supports sustainable growth and can reduce global imbalances.
  - Country-specific guidance:
    - China: progress toward a more consumption-led growth model would help narrow external surpluses; near-term fiscal support should focus on boosting household consumption and stabilizing the property sector; medium-term sustainability requires addressing the overhang of local government debt.
    - United States: credible fiscal consolidation would help moderate demand pressures and limit associated global spillovers.
    - EU: further deepening of the single market, alongside growth-enhancing reforms to stimulate private investment, would support more resilient and sustainable growth.

### Restoring predictable international economic rules
- Advancing efforts to resolve tensions and promote trade:
  - Clear, transparent, and coherent trade policy frameworks reduce uncertainty, limit volatility, and anchor expectations.
  - Pragmatic cooperation can contain adjustment costs and lower distortive barriers to trade and investment.
  - Modernize international rules to reflect structural shifts (including a growing share of services) and align with policies that bolster job growth, the green transition, or supply-chain resilience.
  - Modernization should be targeted and proportionate, focusing on clearly identified cross-border spillovers and respecting legitimate prudential objectives.
  - Negotiations at bilateral, regional, and plurilateral levels should aim to reduce frictions, remain open to new participants, and avoid discriminatory provisions; avoid distortive arrangements such as purchase commitments and quantitative restrictions.
  - Policymakers should avoid export controls and barriers to cross-border trade that would exacerbate supply disruptions, including those associated with the war in the Middle East.
- Promoting effective international cooperation:
  - International cooperation is essential to address immediate threats from the Middle East conflict and longer-term challenges.
  - Refugee inflows: integration support should be adequately funded with strong international contributions rather than be left to host countries lacking fiscal space.
  - Access to emergency liquidity, including through IMF facilities, is a crucial backstop against international financial spillovers.
  - For countries at risk of debt distress, liquidity support may not suffice; timely and orderly debt resolution is the best way to contain economic fallout.
  - Continue progress in operationalizing international sovereign debt resolution mechanisms—including the Group of Twenty (G20) Common Framework—and greater convergence of practices through the Global Sovereign Debt Roundtable to make restructuring more predictable and less costly.

### Box 1.1 — Explaining the resilience of global growth in 2025
- April 2025 WEO context:
  - April 2025 WEO reference forecast (information up to April 4, 2025) incorporated a rise in the statutory US tariff rate to about 25 percent and countermeasures from Canada and China.
  - Trade policy uncertainty had increased markedly, weakening investment incentives and tightening financial conditions.
  - These factors, partly offset by fiscal stimulus in China and Germany, reduced global growth by 0.6 percentage point in 2025 in simulations.
- Actual outcomes and tailwinds:
  - Global GDP growth was 3.4 percent in 2025, 0.6 percentage point stronger than expected in the April 2025 WEO reference forecast.
  - Reduced impact of tariffs:
    - Effective statutory tariff rate was reduced to about 18 percent by the end of the year due to bilateral trade agreements and exemptions.
    - The actual collected tariff rate has been persistently below the effective statutory tariff rate and "was about half the announced rate in December 2025."
  - Accommodative financial conditions:
    - Despite initial tightening in April, financial conditions eased over the remainder of 2025: equity prices rose and sovereign spreads narrowed in many emerging markets.
    - The US dollar depreciated by 6   percent between April 1 and the end of December, strengthening balance sheets in emerging market and developing economies.
  - Fiscal support:
    - The United States passed the One Big Beautiful Bill Act in July 2025, renewing expiring provisions in the 2017 Tax Cuts and Jobs Act, providing support to activity in 2025.
  - Investment in artificial intelligence:
    - Technology investment related to AI added an estimated 0.5 percentage point to US GDP growth in 2025; the import-intensive nature of this investment implied large spillovers, notably to Asia.
- Tally of net effect:
  - Together, these factors added an estimated 0.6 percentage point to global growth in 2025, close to the upward revision in the latest forecasts compared with those in the April 2025 WEO.
  - About a quarter of the gain came from a lower-than-expected impact of tariffs; the remainder came from other tailwinds.
  - The total impact was close to zero relative to the headwinds incorporated in the April 2025 WEO, and the net effect is somewhat below the upward revision of 0.2 percentage point to the growth forecast compared with that in the October 2024 WEO.
- A revival in US productivity?
  - US output per hour worked averaged 2.2 percent every year since 2020 compared with a 1.5 percent annual pace over the previous business cycle (2009–19).
  - Possible drivers: investment in labor-saving technologies during pandemic-era labor shortages, reallocation of labor across sectors, increased remote-work flexibility, surge in new business formation, and fiscal policy support for infrastructure and tax incentives for private investment.
  - Measurement caveats: compositional issues and temporary cyclical effects could generate noise and revisions; AI adoption correlates with faster productivity growth across sectors but "explains little of the aggregate gain in productivity" and "is not part of the reference forecast."

### Services trade and structural change
- Long-term trends:
  - Between 1985 and 2024, services exports as a share of world GDP expanded by 150 percent, compared with 60 percent for exports of goods.
  - Goods still account for more than 70 percent of global trade.
  - In 2000 transportation and travel accounted for about 70 percent of services trade; by 2023 their share fell to less than 40 percent.
- Geography and tradability:
  - Geography has become less of a barrier to services trade; a gravity regression explains about 63 percent of the variation in goods trade patterns in 2019.
  - In the early 2000s, a 1 percent increase in geographic distance was associated with a 0.63 percent decline in bilateral trade; this fell to 0.52 percent in 2022–23 for services.
- Drivers:
  - Composition shifted toward "modern services"—primarily financial, information technology (IT), and business services in broadly equal measure—which are less constrained by distance.
  - Advances in information and communications technology, accelerated by the pandemic (digital platforms, cloud computing, remote delivery), have made previously nontradable services tradable.
- Resilience to geopolitical tensions:
  - Geopolitical distance (measured by disagreement in UN General Assembly voting) adversely affects bilateral goods trade intensity and this effect intensified since 2016; there is no similar trend for services trade.
  - Some modern services—most notably IT and intellectual property licensing—show sensitivity to geopolitical alignment, but aggregate services trade remains largely unaffected.
- Opportunities for emerging markets:
  - Services have accounted for two-thirds of GDP growth in emerging markets over the past three decades, but this growth has been domestic rather than export led, indicating untapped potential.

*Source: CHAPTER 1 GLObAL PROSPECTS AND POLICIES, World Economic Outlook, April 2026.*

### Box 1.2. Services Trade: An Emerging Engine for Global Growth

### Box 1.2. Services Trade: An Emerging Engine for Global Growth

### Geographic patterns and concentration
- Services trade shows strong geographic clustering and is more concentrated among advanced economies.
- The United States remains central; smaller advanced economies such as Ireland and The Netherlands play a larger role than would be expected given their economic size.
- Emerging markets that are major players in goods trade, such as China, occupy a much smaller position in services trade.
- Economic size and geography matter less for services trade, providing an opening for smaller, distant economies, yet many emerging markets remain peripheral to global services flows (Li and others 2025).

### Productivity, wages, and complementarities with manufacturing
- Services exporters are more productive and pay higher wages than nonexporters (Breinlich and Criscuolo 2011).
- Firms that export both goods and services outperform those focusing on goods alone (Ariu, Mayneris, and Parenti 2020; Berlingieri, Marcolin, and Ornelas 2025), indicating services exports can reinforce manufacturing development.
- Digital transformation creates leapfrogging opportunities by reducing reliance on traditional physical infrastructure.

### Barriers to expanding services trade
- Unlike goods trade (where tariffs are a major obstacle), services trade faces barriers relating to:
  - infrastructure,
  - skills, and
  - behind-the-border regulatory barriers: restrictions on foreign ownership, licensing requirements, local-presence requirements, and regulatory standards.
- Regulatory barriers can be eased through multilateral efforts or deeper bilateral and regional integration frameworks.
- Complementary investments in digital infrastructure, skills development, and regulatory quality can help countries better capture gains from expanding services trade.

### Empirical evidence on distance and geopolitics (figures referenced)
- Figures 1.2.2 and 1.2.3 analyze the impact of geographic distance and geopolitical distance on bilateral trade for goods and services using structural gravity models with fixed effects and time-varying coefficients; whiskers reflect 95 percent confidence bands.
- “Geographic distance” is measured as the weighted average distance between trade partners’ most populous cities.
- “Geopolitical distance” is measured as the ideal-point distance between trade partners.
- Horizontal lines in the figures reflect the values in 2004–06 for each panel.
- Sources: Centre d’Études Prospectives et d’Informations Internationales; and IMF staff calculations. See Li and others (2025) for details.

*Source: World Economic Outlook: Global Economy in the Shadow of War (Box 1.2).*

### 2026. Lower demand for US assets is instead globally

### 2026. Lower demand for US assets is instead globally neutral

### Scenario B: Lower demand for US assets — macro impacts
- US dollar: depreciation of 6 percent in nominal effective terms.
- US GDP: combined effect yields a large decrease of 1.5 percent in 2026 relative to the reference forecast.
- External demand and financial conditions:
  - Depreciation supports external demand for US exports.
  - Depreciation also adds to tightening in US financial conditions.
  - Positive effect of net exports slightly dominates for US GDP.
- Regional spillovers:
  - China benefits via management of its exchange rate; immediate impact is mitigated by temporary real depreciation of the renminbi.
  - Euro area activity declines by 1 percent.
  - China GDP impact is milder: 0.3 percent decline.
  - Other regions experience decreases in GDP from lower external demand.
  - Global activity is 1.2 percent lower.
- Inflation and policy rates:
  - US inflation and policy rates are lower than in the reference forecast, notwithstanding the depreciation of the US dollar.
- Current accounts and global imbalances:
  - US current account balance increases (its deficit decreases) by about 1 percent of GDP.
  - Current account surpluses in China and the euro area decrease.
  - Global imbalances are reduced over the WEO horizon.

*Source: IMF staff estimates.*

### Scenario C: Policy reforms and global effects
- China reforms:
  - Private saving rate lowered by 2 percent, boosting private consumption.
  - Residential investment rekindled over 2026–28.
  - Long-term productivity and potential output raised by close to 2 percent.
  - China’s GDP increases by 1–2 percent over the WEO horizon.
  - Inflation boost: 0.7 percent during 2027–30 from domestic demand.
  - China current account surplus decreases by 1.5 percent of GDP from this layer alone.
  - Under exchange rate flexibility, reduced demand for foreign assets accounts for real appreciation of the renminbi.
- Euro area reforms:
  - GDP increase of 1–1.4 percent in 2026–27.
  - Inflation increases by close to 30 basis points over the WEO horizon.
  - Policy rate increases by 60 basis points over the same period.
  - Buildup in public capital raises productivity and potential output.
  - Euro area current account surplus decreases; spillovers to other regions are positive but small.
- US fiscal reforms:
  - Reduce US public debt by 25 percent of GDP over the long term.
  - Combination of growth-friendly measures and lower premiums lifts US GDP by 0.7 percent in 2026–27.
  - Inflation net of tax effects is slightly higher; policy rates are slightly higher.
  - Lower fiscal deficits contribute to a decrease in the US current account balance.
- Trade and uncertainty measures:
  - Tariff rollback and reduced uncertainty raise global GDP by 0.6 percent in 2026, with broadly similar effects across countries.
- Combined effect of Scenario C:
  - Increase in global output of 1.2 percent by 2026 (1.5 percent in the long term).
  - Reduction in global imbalances.

*Source: IMF staff estimates.*

### Commodity market developments (April 2026 WEO Special Feature)
- Oil and energy:
  - Oil prices increased 57.6 percent between August 2025 and March 2026 to $105.8 per barrel.
  - Oil shipments through the Strait of Hormuz stopped, curtailing about 8.5 million barrels per day (mb/d) of crude oil exports.
  - Usually about 20 mb/d of oil flow daily through the strait, of which 15 mb/d is crude oil.
  - Global strategic and commercial inventories at a five-year high of 8 billion barrels.
  - Brent prices peaked at $119 on March 10.
  - Futures curve in steep backwardation, signaling supply disruptions and elevated geopolitical risk.
- Natural gas and LNG:
  - Title Transfer Facility (TTF) trading hub prices in Europe rose by 61 percent between August 2025 and March 2026, peaking at $17.7 per million British thermal units (MMBtu).
  - Asian LNG prices surged to $20.8 per MMBtu—an 80.6 percent increase since August 2025.
  - US Henry Hub prices rose by 4.9 percent to $3 per MMBtu.
  - Futures: TTF futures reach $7.5 per MMBtu through 2031; Henry Hub futures expected to hover around $3.5 per MMBtu through 2031.
- Metals:
  - IMF’s metals price index jumped 36.6 percent between August 2025 and March 2026.
  - Gold up 44.4 percent, reaching record prices exceeding $5,000 per ounce; later retrenched to start-of-year levels after retail profit taking.
  - Copper surged 29.5 percent following mining accidents in Chile and Indonesia.
  - Aluminum increased 29.8 percent following the shutdown of smelters in Iceland, Mozambique, and the Middle East (which accounts for roughly 9 percent of global aluminum production).
- Food and beverages:
  - IMF’s food and beverages price index rose by 4.7 percent between August 2025 and March 2026.
  - Beverage prices plunged by 24.8 percent, led by a 57.4 percent drop in cocoa prices.
  - Coffee prices fell by 9.9 percent.
  - Food prices are expected to increase by 6.0 percent in 2026.
  - Cereal prices rebounded from historical lows; higher fuel and fertilizer costs could drive food prices higher if the conflict lingers.
- Risk and uncertainty:
  - Uncertainty surrounding commodity price outlook is very high, with risks tilted to the upside.
  - A longer conflict would delay restoration of oil and gas production and exports to preconflict levels, with ripple effects on refined product prices.

*Contributors to the Special Feature are listed in the source document.*

### The economics of rare earth elements (REEs)
- Market size and concentration:
  - Rare earth oxides (REOs) valued at about $6 billion and permanent magnets at approximately $25 billion in 2024.
  - Four elements—neodymium, praseodymium (LREEs), terbium, dysprosium (HREEs)—the “magnet-4” jointly comprise 96 percent of the total REO market value despite representing only 23 percent of REO production by weight.
  - Permanent magnets consume 83 percent of the value of all REOs.
- Supply chain structure and bottlenecks:
  - REE supply chain stages: mining → concentration → separation (solvent-based extraction) → refining to metals or alloys → downstream manufacturing (permanent magnet production).
  - Separation stage is technically demanding and pollution-intensive; establishing new separation and refining capacity requires billions in capital, years of approvals, and specialized expertise.
  - China’s dominance by segment (2024 figures):
    - LREE mining: China’s share of global output reduced from 97 percent in 2010 to 58 percent in 2024.
    - China maintains 88 percent of the world’s oxide separation capacity and 93 percent of its metal refining.
    - HREEs: China retains 98 percent of mining (including Myanmar), 97 percent of oxide separation, 95 percent of metal refining, and 90 percent of permanent magnet production.
  - Nearly all rare earth concentrates, regardless of origin, flow through Chinese processing facilities; separation and refining stages are the most binding bottlenecks.
  - Permanent magnet manufacturing has lower barriers to capacity expansion; established producers operate in Japan, the United States, and Europe, though typically at smaller scale than in China.
- Substitutability:
  - HREEs have weak substitutability: HREEs score 78 out of 100 on a substitutability index (100 = no adequate substitute), compared with 57 for non-REEs.
- Recent disruptions and impacts:
  - China introduced export licensing requirements for seven REEs and REE-based permanent magnets in April 2025, causing temporary but serious supply disruptions.
  - Exports of permanent magnets fell about 70 percent year over year as of May 2025, indicating a system-wide disruption that proved short-lived as monthly Chinese export volumes later returned to trend and displayed double-digit year-over-year growth.
  - October 2025 tightening of licensing requirements was suspended in November under a China-US agreement; January 2026 restrictions targeted HREE exports to Japan.
  - Despite restrictions, strong REE export growth continued in January and February 2026.
- Policy considerations:
  - Tensions and trade restrictions have harmed international cooperation and growth since 2020, heightening economic security concerns and accelerating reshoring and diversification efforts.
  - Establishing processing capacity outside China is capital- and time-intensive; policy options to de-risk supply chains carry fiscal costs.

*Source: IMF staff analysis in the April 2026 World Economic Outlook Special Feature.*

*Italic: Source — text from the IMF World Economic Outlook (April 2026) chapter as provided.*

### 1. LREE Supply Chain Segments

### 1. LREE Supply Chain Segments

### Supply chain structure and export patterns
- Panels and figures in the source distinguish LREE and HREE supply chain segments across stages: Mining → Oxide separation → Metal refining → (for HREE) Permanent magnets.  
- China is a dominant exporter in rare earth metals, compounds, and permanent magnets (panel data from 2024, WITS; export series Code HS 850511 used for permanent magnets).
- Sources: Bedford 2025; World Bank, World Integrated Trade Solution (WITS); and IMF staff calculations.

### Economic importance and "value added at risk" (VAAR)
- Rare earths are used as inputs in 34 of the 405 sectors of the US economy (Nassar and others 2025).  
- These 34 sectors jointly added $233 billion in goods and services value in 2017, equivalent to 0.8 percent of nominal GDP.  
- Country shares of value added dependent on rare earths (value-added share): France (0.4 percent), Germany (2.5 percent), India (1.3 percent), Japan (1.7 percent), United Kingdom (0.6 percent), United States (0.8 percent).  
- In the United States, rare earth permanent magnets drive about 70 percent of VAAR.  
- VAAR is a first-pass estimate and:  
  - Likely overstates losses by assuming no substitutability.  
  - Likely understates losses by abstracting from cascading input-output linkages.  

### Model simulations of REE supply disruptions
- A small open economy model with network linkages calibrated using an REE-augmented I-O table (US Geological Survey data) is used to quantify impacts; it incorporates imported REE supply constraints and intersectoral linkages.  
- Baseline simulated shock: a persistent 80 percent reduction in all rare earth inputs—oxides, metals, compounds, and magnets—consistent with average single-supplier import concentration of advanced economies.  
- Key simulation results:  
  - With limited substitution (short horizons, low elasticity), network amplification can make GDP losses exceed VAAR estimates.  
  - GDP declines by 1.5 percent in the United States under the low-substitutability scenario (an outcome almost twice as large as the VAAR measure).  
  - GDP declines by about 1.2 percent in Germany (VAAR measure score of 2.5 percent).  
  - When substitution elasticity is set higher (reflecting longer horizons, innovation; Alfaro and others 2025), estimated GDP losses average only 0.006 percent.  
- Elasticity assumptions noted:  
  - High-elasticity scenario uses a substitution elasticity of 0.8 (as in Alfaro and others 2025).  
  - Low-elasticity scenario uses an elasticity of 0.015.  
- Model features: domestic general equilibrium adjustment, common shock across countries, limits exports to commodity sectors, REE-intensive sectors (such as motor vehicles) assumed fully domestic.

### Coping strategies and recent policy actions
- Short- to medium-term adaptation strategies: stockpiling, recycling, substitution, reshoring, and import diversification. Observations:  
  - Stockpiling: short-term buffer; does not address structural dependence and may be constrained.  
  - Recycling: longer-term promise but not yet a primary supply source in a rapidly expanding market.  
  - Substitution: large-scale substitution unlikely in the near term due to superior performance of permanent magnets.  
  - Reshoring and import diversification: main medium-term responses but face long development timelines, coordination challenges, and potential skilled-labor shortages.  
- Following China’s April 2025 REE export licensing requirements, advanced economies accelerated industrial policies to reduce China-centric supply chains. Examples and policy tools:  
  - Price floors and offtake agreements to provide investment certainty in volatile markets; cited neodymium price about $55 per kilogram (Online Annex Figure 1.1.1 referenced).  
  - July 2025 agreement between the US government and MP Materials included a price protection mechanism akin to a floor.  
  - Governments provided direct financial support—equity stakes, loans, and grants—to signal long-term commitment.  
  - October 2025 agreements (US with Australia, Japan, Malaysia, Thailand) and the G7 Critical Minerals Action Plan mobilized an estimated $6.4 billion in public and private funding to de-risk REE supply chains.  
- Market response: fiscal and policy support have improved financial prospects of publicly listed non-China rare-earth firms (sample of 89 companies tracked).

### Industrial policy analysis: investment subsidies vs. price floors
- A calibrated dynamic trade model assesses two industrial policies applied to oxide separation: investment subsidies and price floors, under two implementation scenarios: unilateral (US only) and simultaneous (all importers). Policies are calibrated to achieve 25 percent self-sufficiency in rare earth processing by 2035 for the US (25 percent = 15 percentage points higher than baseline).  
- Key quantitative policy findings:  
  - Sizable interventions required to reach 25 percent self-sufficiency:  
    - Unilateral scenario: investment subsidy must cover 77.2 percent of total investment costs for the US to reach 25 percent self-sufficiency by 2035.  
    - Unilateral scenario: price floor must be 2.4 times the period market price (reported elsewhere as 2.42 times in figure note).  
  - Fiscal cost comparisons: investment subsidies are typically more fiscally efficient in present-value terms than price floors because subsidies target new capacity while price floors yield windfall gains to incumbents.  
  - To achieve the 25 percent target under the unilateral scenario, US fiscal costs associated with the investment subsidy over the first decade amount to 141 percent of the annual US market size—equivalent to about $1.19 billion ($0.81 billion).  
  - Global REEs’ market size is about $6 billion; the US share is 14 percent, so roughly $0.81 billion.  
  - Investment subsidies are more costly in the short term as they front-load outlays; costs decline long term as investment shifts to replacement of depreciated capital.  
  - Simultaneous action across importers reduces fiscal costs and concentrates less capacity buildup in any single country; simultaneous incentivization lets importing economies leverage higher US processing efficiency and achieve self-sufficiency gains at lower fiscal cost.  
- Calibration and scenario assumptions (from figure notes):  
  - Investment subsidy to US refiners only implemented with a 77.2 percent subsidy; investment subsidy to refiners outside China only implemented with a 77.8 percent subsidy.  
  - Price floor subsidy to US refiners only implemented with a price floor 2.42 times the period market price; price floor subsidy to refiners outside China implemented with a price floor 2.2 times the period market price.  
  - Baseline scenario assumes 4.7 percent global demand growth in 2025–29, 1.42 percent global demand growth in 2030–34.

### Policy guidance and conclusions
- Large disruptions to REE supplies could substantially reduce GDP in many economies, particularly in the short term when substitution options are limited.  
- First-best outcome: avoid trade tensions and restrictions to promote steady REE supply.  
- De-risking supply chains through targeted industrial policies is fiscally costly; costs are lower if:  
  - De-risking is pursued simultaneously by various importers, and  
  - Policy instruments directly target expansion of new production capacity (investment subsidies over price floors in present-value terms).  
- Industrial policies should be used cautiously; complementary structural reforms can lower barriers to entry into REE markets, including simpler mining permits, investment in specialized skills (from separation chemistry to metallurgy), and competitive allocation of subsidies.

*Sources: Bedford 2025; World Bank, World Integrated Trade Solution (WITS); and IMF staff calculations.*

### Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

### Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment

### Overview
- Table reports annual percent change (unless noted otherwise) for Real GDP, Consumer Prices (annual averages), Current Account Balance (percent of GDP), and Unemployment (percent, national definitions may differ).
- Projections are provided for 2025, 2026, and 2027.
- Source: IMF staff estimates.

### Regional aggregates (selected)
- Asia — Real GDP: 5.0 (2025), 4.4 (2026), 4.2 (2027); Consumer Prices: 1.4 (2025), 2.6 (2026), 2.4 (2027); Current Account Balance: 3.5 (2025), 3.0 (2026), 2.9 (2027).
- Advanced Asia — Real GDP: 2.5 (2025), 2.0 (2026), 1.6 (2027); Consumer Prices: 2.5 (2025), 2.4 (2026), 2.2 (2027); Current Account Balance: 5.9 (2025), 5.3 (2026), 5.3 (2027); Unemployment: 2.9 (2025), 2.9 (2026), 2.9 (2027).
- Emerging and Developing Asia — Real GDP: 5.5 (2025), 4.9 (2026), 4.8 (2027); Consumer Prices: 1.1 (2025), 2.6 (2026), 2.5 (2027); Current Account Balance: 2.7 (2025), 2.2 (2026), 2.0 (2027).

### Notable country projections (selected)
- Japan — Real GDP: 1.2 (2025), 0.7 (2026), 0.6 (2027); Consumer Prices: 3.2 (2025), 2.2 (2026), 2.3 (2027); Current Account Balance: 4.8 (2025), 3.8 (2026), 3.8 (2027); Unemployment: 2.5 (2025), 2.5 (2026), 2.5 (2027).
- Korea — Real GDP: 1.0 (2025), 1.9 (2026), 2.1 (2027); Consumer Prices: 2.1 (2025), 2.5 (2026), 1.9 (2027); Current Account Balance: 6.6 (2025), 5.6 (2026), 5.4 (2027); Unemployment: 2.8 (2025), 2.8 (2026), 2.9 (2027).
- Australia — Real GDP: 2.0 (2025), 2.0 (2026), 1.7 (2027); Consumer Prices: 2.9 (2025), 4.0 (2026), 3.2 (2027); Current Account Balance: –2.6 (2025), –2.3 (2026), –2.2 (2027); Unemployment: 4.2 (2025), 4.2 (2026), 4.3 (2027).
- Taiwan Province of China — Real GDP: 8.7 (2025), 5.2 (2026), 3.0 (2027); Consumer Prices: 1.7 (2025), 1.5 (2026), 1.6 (2027); Current Account Balance: 17.4 (2025), 18.1 (2026), 18.1 (2027); Unemployment: 3.4 (2025), 3.4 (2026), 3.4 (2027).
- China — Real GDP: 5.0 (2025), 4.4 (2026), 4.0 (2027); Consumer Prices: 0.0 (2025), 1.2 (2026), 1.5 (2027); Current Account Balance: 3.7 (2025), 3.5 (2026), 3.3 (2027); Unemployment: 5.1 (2025), 5.1 (2026), 5.1 (2027).
- India — Real GDP: 7.6 (2025), 6.5 (2026), 6.5 (2027); Consumer Prices: 2.1 (2025), 4.7 (2026), 4.0 (2027); Current Account Balance: –0.9 (2025), –2.0 (2026), –1.6 (2027); Unemployment: 4.9 (2025), 4.9 (2026), 4.9 (2027).
- Indonesia — Real GDP: 5.1 (2025), 5.0 (2026), 5.1 (2027); Consumer Prices: 1.9 (2025), 3.0 (2026), 2.6 (2027); Current Account Balance: –0.1 (2025), –1.1 (2026), –0.9 (2027); Unemployment: 4.9 (2025), 4.9 (2026), 4.8 (2027).
- Vietnam — Real GDP: 8.0 (2025), 7.1 (2026), 6.7 (2027); Consumer Prices: 3.3 (2025), 4.9 (2026), 4.6 (2027); Current Account Balance: 6.7 (2025), 5.3 (2026), 4.4 (2027); Unemployment: 2.2 (2025), 2.1 (2026), 2.2 (2027).
- Philippines — Real GDP: 4.4 (2025), 4.1 (2026), 5.8 (2027); Consumer Prices: 1.7 (2025), 4.3 (2026), 3.2 (2027); Current Account Balance: –3.3 (2025), –4.4 (2026), –3.5 (2027); Unemployment: 4.2 (2025), 4.7 (2026), 4.6 (2027).

### Memoranda and groupings
- ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, Thailand) — Real GDP: 4.5 (2025), 4.1 (2026), 4.4 (2027); Consumer Prices: 1.4 (2025), 2.6 (2026), 2.3 (2027); Current Account Balance: 3.0 (2025), 2.2 (2026), 2.4 (2027).
- Emerging Asia (China, India, Indonesia, Malaysia, the Philippines, Thailand, Vietnam) — Real GDP: 5.6 (2025), 5.0 (2026), 4.8 (2027); Consumer Prices: 0.8 (2025), 2.4 (2026), 2.3 (2027); Current Account Balance: 2.7 (2025), 2.2 (2026), 2.1 (2027).

### Notes and definitions (as provided)
- Movements in consumer prices are shown as annual averages; year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix.
- Current Account Balance is reported as percent of GDP.
- Unemployment is reported as percent; national definitions of unemployment may differ.
- Some country data are based on fiscal years; see Table F in the Statistical Appendix for economies with exceptional reporting periods.
- Country group definitions: Other Emerging and Developing Asia comprises bangladesh, bhutan, brunei Darussalam, Cambodia, Fiji, Kiribati, Lao P.D.R., Maldives, the Marshall Islands, Micronesia, Mongolia, Myanmar, Nauru, Nepal, Palau, Papua New Guinea, Samoa, the Solomon Islands, Sri Lanka, Timor-Leste, Tonga, Tuvalu, and Vanuatu. Emerging Asia comprises China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

*Source: IMF staff estimates.*

### 2.7 percentage points of GDP, with roughly two-thirds

### 2.7 percentage points of GDP, with roughly two-thirds

### Introduction and context
- Geopolitical tensions resurged in the mid-2010s; conflicts increased substantially since then.
- Over 2020–24, 50 percent of countries worldwide increased their defense spending budgets.
- As of 2024, almost 40 percent of countries allocated more than 2 percent of GDP to defense spending.
- NATO commitments:
  - In June 2025, NATO members committed to raise their annual defense and security-related spending to 5 percent of GDP by 2035.
  - In June 2025, NATO members committed to investing 3.5 percent of GDP annually on core defense requirements and up to 1.5 percent of GDP to security-related spending.
- Dataset and scope:
  - Comprehensive dataset on yearly defense spending and macroeconomic variables for 164 countries since 1946.
  - Defense spending booms defined as periods when the two-year moving average of defense spending increases by at least 1 percentage point of GDP, lasting as long as defense spending does not decline as a share of GDP.

### Key empirical findings
- Typical size, duration, and financing of booms:
  - Booms raise defense spending by about 2.7 percentage points of GDP.
  - Booms last for more than two-and-a-half years, on average.
  - About two-thirds of the additional spending is financed through higher budget deficits.
- Fiscal and debt effects:
  - Average defense spending boom is followed by an increase in the fiscal deficit of about 2.6 percentage points of GDP.
  - Public-debt-to-GDP ratio increases by about 7 percentage points three years after the boom’s onset.
  - Wartime booms: public debt jumps by about 14 percentage points of GDP and social spending falls in real terms.
- Short-term macro effects:
  - Defense spending multipliers are close to 1, on average.
  - Defense spending boosts private consumption and investment in defense-related sectors, lifting output and prices in the short term.
  - Firm-level analysis shows a strong demand channel for defense firms, but rising public debt reduces private investment through tighter financing constraints.
- External balances and import leakages:
  - Stronger demand is partly directed at importing foreign goods, worsening the current account, especially in countries importing military equipment.
  - Multipliers are smaller in countries that rely heavily on arms imports due to demand leakages abroad.
- Heterogeneity and uncertainty:
  - Multipliers vary with import content, financing mix, allocation between current and capital spending, persistence of the buildup, and policy responses.
  - Estimates are characterized by substantial uncertainty and endogeneity concerns; when these concerns are attenuated, average multipliers align with model-based simulations (close to 1).

### Macroeconomic channels and transmission
- Defense buildups act as sector-specific positive demand shocks and can raise inflation in the short term.
- Supply-side implications:
  - Booms can raise long-term capital stock and total factor productivity.
  - Bottlenecks in sectoral reallocation can mitigate demand boosts.
- Design and policy interactions:
  - A deficit-financed buildup concentrated in current spending (personnel, operations) maximizes short-term demand effects but risks overheating and requires close coordination with monetary policy.
  - A buildup prioritizing public investment and fostering integrated markets for military equipment production can support long-term productivity growth and reduce import leakages.
  - Monetary accommodation raises the multiplier but increases inflation and worsens the current account; immediate fiscal offsets contain pressures but dampen output effects.
  - Regional joint procurement and reduced import content can increase output effects and contain external imbalances.

### Policy recommendations
- Recognize modest aggregate output effects that depend on structural characteristics and policy choices.
  - Deficit-financed stimulus maximizes demand effects.
  - Larger allocation to current spending can boost employment and domestic demand but risks overheating; coordinate closely with monetary policy.
  - Large shares spent on imported equipment reduce inflationary pressure and demand effects while worsening the current account unless domestic capacity lowers import leakages.
  - Defense capital spending (including R&D) can foster innovation and growth if it does not crowd out nondefense productive investment.
- Preserve fiscal and external sustainability:
  - Embed defense spending decisions within a medium-term fiscal and macroeconomic framework that preserves fiscal sustainability, mitigates external vulnerabilities, and safeguards social and growth-enhancing expenditures.
  - Be mindful that sustained buildups, particularly in wartime, risk crowding out social spending and narrowing fiscal space.
- Promote procurement and industrial policies that reduce import leakages:
  - Coordinate plans to promote joint procurement within regional blocs and reduce the import content of defense outlays to increase output multipliers and contain external imbalances.

*International Monetary Fund — World Economic Outlook: April 2026, Chapter 2.*

### CHAPTER 2 DEFENSE SPENDING: MACROECONOMIC CONSEQUENCES AND TRADE-OFFS

### CHAPTER 2 DEFENSE SPENDING: MACROECONOMIC CONSEQUENCES AND TRADE-OFFS

### Transmission channels and macroeconomic mechanisms
- Defense buildups function as sector-specific demand shocks concentrated in industries such as aerospace and transport equipment, electronics and instruments, machinery, and specialty materials.
- Defense spending is more often allocated to government consumption (military personnel, services, and supplies) than to investment (military equipment and infrastructure).
  - For 35 NATO and European Union member countries for which data are available, current spending accounts for about 80 percent of total government defense spending.
  - The capital share—including procurement and R&D—has been comparatively larger in countries such as the United States.
- Short-term effects of a defense fiscal expansion (ΔG > 0):
  - Increases in demand, employment, and capital utilization: Y ↑, K ↑, L ↑ plus reallocation from nondefense to defense sectors.
  - Multiplier effects (C ↑; I ↑ or ↓) depend on: marginal propensity to consume; size of domestic defense industry (import leakages); spending composition (C versus I); sectoral reallocation frictions; financing; monetary policy response.
  - Output and inflation increase: Y ↑, Inflation ↑, with ↑↑ if reallocation bottlenecks.
- Medium-term effects:
  - Investment-led stimulus and R&D spillovers can raise TFP ↑ and potential output Y* ↑.
  - External balance: M ↑, CAB ↓, with import leakage ↑↑ for arms importers; ER appreciates, conditional on monetary policy.
- Debt dynamics depend on financing and multiplier:
  - If deficit financed: Public debt ↑, borrowing cost ↑, crowding out of I.
  - If tax financed: Public debt →, C and/or I ↓.
  - If spending reprioritization: Public debt →, C ↓.

### Composition, leakages, and supply constraints
- Defense-related government consumption tends to generate weaker and less-persistent effects on potential output relative to public investment because it does not directly expand productive capacity.
- Large import leakages:
  - Nearly half of total arms revenue among the world’s top 100 arms-producing firms is generated in the United States; Europe accounts for about 14 percent and China 12 percent.
  - Europe’s share increases to 22 percent when the United Kingdom is included.
  - Many countries import a large share of their military equipment, with this ratio as high as 80 percent for European Union member countries.
  - Examples cited where spending is directed toward imported equipment: Denmark and Poland.
- Sectoral reallocation frictions can damp short-term output response and amplify inflation, especially when economies are near potential, labor markets tight, or key inputs scarce.

### Empirical patterns of defense spending booms
- Definition used in the chapter:
  - A defense spending boom is a period when the two-year moving average of a country’s defense spending increases by at least 1 percentage point of GDP, with the boom lasting for as long as defense spending does not decline as a share of GDP.
  - Wartime booms: booms that immediately follow a conflict or culminate in an on-site conflict within three years.
  - Alternative robustness checks mentioned: (1) threshold at 0.5 percentage point of GDP; (2) measure proposed by Marzian and Trebesch (2025).
- Frequency and distribution:
  - There have been 215 defense spending booms since 1946 across 164 countries.
  - 88 percent of booms occurred in emerging market and developing economies.
  - Booms are especially common in the Middle East and in Africa.
  - Episodes in advanced economies are less frequent (about 11 percent in European countries) but tend to be larger and last longer.
- Typical size and duration:
  - The average boom lasts more than two-and-a-half years and accounts for an increase in defense spending of about 2.7 percentage points of GDP.
  - Booms in advanced economies during conflicts last, on average, three-and-a-half years and amount to about 4.5 percentage points of GDP.
  - Post–Cold War period: booms have become slightly shorter and smaller.
  - Size is broadly similar across booms linked to a temporary or permanent increase in defense spending; permanent booms are 0.7 percentage point of GDP greater than temporary booms.

### Financing of defense buildups
- Timing and front-loading:
  - Most defense outlays take place in the first year of a boom, and nearly all additional spending is completed within three years of the boom’s onset.
- Financing decomposition and magnitudes:
  - Initial buildup is financed largely through widening budget deficits:
    - Deficits increase by about 1.1 percentage points of GDP in the first year and reach roughly 2 percentage points cumulatively by year 3.
  - Revenue mobilization contributes about 0.2 percentage point of GDP in the first year and 1.2 percentage points overall (three-year horizon).
  - Spending reprioritization plays a limited early role and becomes prominent only in later years.
  - Average temporary booms are entirely deficit financed in the first three years; higher revenues account for about half of the three-year increase in military spending during permanent booms.
- Heterogeneity across episodes:
  - The deficit is the dominant source of financing overall, accounting for 39 percent of booms (especially during peacetime).
  - Revenue mobilization is the primary financing channel in 35 percent of cases.
  - Spending reprioritization is the primary conduit in 26 percent of cases.

### Strengthening defense capabilities and economic magnitudes
- Within three years of a boom onset:
  - Real defense outlays increase by about 60 percent—an amount equivalent to almost 2 percent of GDP.
  - Composite Index of National Capability rises by 7 percent.
  - Arms imports increase by 55 percent over three years.
  - Personnel increase by roughly 13 percent.
  - Countries expand adoption of advanced military technologies (artillery, armored vehicles, aircraft, helicopters), increasing the share of available arms technologies in use.

### Macroeconomic identification and interpretation
- Empirical identification challenges:
  - Defense spending correlates positively with lagged GDP growth and government revenues, implying procyclicality that may bias upward estimated macroeconomic effects.
  - Defense outlays may respond endogenously to domestic economic conditions, fiscal space, or security developments, complicating causal interpretation.
- Policy-relevant trade-offs based on financing choice:
  - Tax-financed defense spending tends to crowd out private consumption, dampening expansionary effects on output and inflation.
  - Spending reprioritization reduces transfers and public services, lowering household disposable income and private consumption.
  - Deficit-financed buildups produce larger short-term demand effects but may prompt forward-looking reductions in current consumption and raise medium-term vulnerabilities through higher borrowing costs and crowding out of private investment.
  - Permanent defense buildups require durable financing arrangements—such as higher revenues or lasting changes in spending composition—to limit medium-term vulnerabilities.

*Source: CHAPTER 2 DEFENSE SPENDING: MACROECONOMIC CONSEQUENCES AND TRADE-OFFS, International Monetary Fund | April 2026. Canonical URL: https://www.imf.org/-/media/files/publications/weo/2026/april/english/text.pdf*

### 1. Defense Spending

### 1. Defense Spending

### Macroeconomic dynamics after peacetime defense spending booms
- Sample and identification:
  - Sample period spans 1946–2024.
  - Fragile and conflict-affected states, as well as commodity-exporting emerging market and developing economies, are excluded from the peacetime-boom sample.
- Output and prices:
  - Real output is more than 3 percent higher than in nonboom periods, with the increase materializing about two years after the boom’s onset and persisting over the medium term.
  - In episodes linked to a permanent increase in defense spending, real GDP increases by more than 5 percent over five years.
  - Consumer prices increase by almost 3.6 percent on average relative to nonboom periods; the inflationary effect is temporary and fades over the medium term.
- Demand composition and external sector:
  - Government consumption rises by about 9 percent within three years.
  - Private consumption increases by roughly 3 percent.
  - Total investment shows a comparable positive response driven by higher public investment in defense equipment and infrastructure and increased private investment.
  - Imports accelerate while exports remain broadly unchanged, leading to wider external imbalances and deterioration of current account and trade balance.
- Factors of production:
  - Booms are associated with a subsequent increase in the stock of capital.
  - Total factor productivity increases, consistent with changes in capacity utilization and learning by necessity.

### Firm-level evidence on defense spending and private investment
- Data and scope:
  - Analysis draws on data for more than 4.6 million private nonfinancial firms across 41 countries between 1995 and 2023.
- Financing constraints and demand vs crowding-out:
  - Firm investment becomes less sensitive to internal funds during defense spending booms, consistent with a positive demand effect that relaxes financing constraints and supports aggregate investment.
  - When booms coincide with higher public debt, financing conditions tighten and firm investment sensitivity to cash flow increases, indicating crowding out.
  - In defense-related sectors, sensitivity of investment to cash flow falls to zero during budget-neutral booms, suggesting government demand fully offsets financing frictions.
  - In import-intensive countries (defined as those for which arms imports are above the cross-country average), the demand channel is muted and investment sensitivities during booms remain unchanged relative to normal periods.

### Fiscal costs and trade-offs
- Overall fiscal impact (three years after boom onset):
  - Government deficit widens by about 2.6 percentage points of GDP.
  - Public-debt-to-GDP ratio increases by almost 7 percentage points more than that of countries not ramping up defense spending.
- Crowding out of nondefense spending:
  - In booms financed predominantly through spending reprioritization, nondefense primary spending declines by more than 20 percent in real terms (about 2 percent of GDP) in the three years following a boom.
  - The decrease in social spending amounts to about 1 percentage point of GDP across multiple categories (social protection, health, and education).
  - The decline in social spending is smaller, at about 7 percent in real terms, for advanced economies.
- Wartime vs peacetime differences:
  - Wartime booms are followed by a sharp increase in public debt and a contraction in real social spending.
  - Peacetime booms are associated with positive output effects and are not followed, on average, by an increase in debt-to-GDP ratios or by crowding out of social spending.

### Estimating defense spending multipliers
- Identification strategies and main findings:
  - Narrative methods and alliance-based samples were used to attenuate endogeneity.
  - Using narrative defense spending booms as an instrument leads to multipliers estimated at about 1.
  - Restricting the sample to members of defense alliances (NATO and the Islamic Military Counter Terrorism Coalition) yields estimates close to 1, though not always statistically significant.
  - Estimated multipliers on a large cross-country sample are generally closer to 1.
- Context and literature:
  - Earlier estimates in the literature range between 0.6 and 1.2 for defense spending and are centered on 1 for government spending.
- Heterogeneity in multipliers (three years ahead, cumulative):
  - Multipliers are larger when the defense buildup is permanent.
  - Multipliers are larger for arms exporters (lower leakage through imports).
  - Multipliers are larger when defense spending is financed mostly by deficits rather than by revenue mobilization or spending reprioritization.
  - Spending composition matters: larger multipliers are estimated for current spending items (personnel and operating expenses) than for capital spending (equipment and infrastructure).
  - Multipliers are larger in countries with fixed exchange regimes and with higher public investment efficiency.
  - A change in defense spending in year t is defined as “Permanent” if the direction of the change in the ratio of defense spending to GDP in that year is sustained over the subsequent 10 years and as “Temporary” otherwise.

### Model simulations and general equilibrium considerations
- Modeling framework:
  - The IMF’s Flexible System of Global Models (annual multiregion dynamic stochastic framework) is used to quantify general equilibrium implications of defense spending buildups under different scenarios.
- Complementary evidence:
  - Results stress trade-offs policymakers face when scaling up defense spending: output and demand gains versus fiscal costs, potential crowding out of social spending, and external balance deterioration.
  - Financing choices matter: deficit financing tends to raise multipliers but increases public debt; spending reprioritization can avoid immediate increases in debt but may entail meaningful distributional and social consequences over the medium term.

*Source: IMF staff calculations; figures and estimates are based on the analysis in Chapter 2 of the World Economic Outlook: Global Economy in the Shadow of War, sample period 1946–2024.*

### 1. IV: Post–World War II2. IV: Post–Cold War

### IV: Post–World War II2. IV: Post–Cold War

### Model setup and calibration
- Model: general equilibrium model combining micro‑founded and reduced‑form formulations (Andrle and others 2015); uses the model’s euro area module with blocs for 11 major euro area countries plus 13 other blocs.
- Calibration target: planned increase in defense spending across a representative group of European Union member countries, as of October 2025, measured as a deviation from spending levels before Russia’s invasion of Ukraine.
- Assumptions on the defense spending path:
  - Projected to reach 1 percent of GDP in 2026 and increase to 1.3 percent by 2030.
  - Level assumed constant as a share of GDP until 2035, then decline linearly to 75 percent of the 2030 level by 2050.
  - Allocation of defense spending: 80 percent to consumption and 20 percent to investment (European Commission 2025).
  - Import content of government spending: baseline 20 percent, with the investment component having a much higher import content (notably toward the United States).
  - Financing: buildup fully debt financed through 2028; offsetting measures gradually introduced and fully implemented by 2033, when all spending is budget neutral.
- Timing: simulation starts in 2026 and treats the buildup as an unanticipated shock at that date.

### Baseline scenario results (European Union calibration)
- Real GDP:
  - Projected increase of 0.7 percentage point in 2026 and 0.9 percentage point by 2028, after which it broadly stabilizes.
- Fiscal multiplier: medium‑term fiscal multiplier slightly below unity (about 0.8).
- Inflation and interest rates:
  - Inflation peaks at about 28 basis points in 2029 and then declines gradually.
  - Inflation remains permanently 0.16 percentage point higher than without the stimulus.
  - Policy rate increases as monetary policy reacts to higher inflation; long‑term interest rates rise; exchange rate appreciates.
- External accounts:
  - Current account deficit peaks at 0.4 percent of GDP in 2028 and then stabilizes at 0.3 percent of GDP.
  - Worsening driven partly by import purchases of foreign military equipment.
- Government finances:
  - Deficit increases through 2029 while spending is debt financed, then declines as offsetting measures take effect.
  - Budget balance improves by about 0.2 percent of GDP over the long term due to higher GDP.
  - Public debt increases by almost 2 percentage points of GDP by 2030 and then declines toward baseline.

### Alternative scenarios and trade-offs
- Monetary accommodation scenario:
  - Central bank does not react following a standard interest rate rule.
  - Larger demand effect: higher private consumption, stronger investment, higher real GDP path.
  - Multiplier: above 1 over the medium term.
  - Costs: core inflation spikes by 0.5 percentage point; current account deteriorates by 0.5 percentage points of GDP despite exchange rate depreciation.
- Immediate fiscal measures scenario:
  - Offsetting fiscal measures implemented immediately to make the defense spending shock budget neutral.
  - Deficit contained and dynamics more favorable for debt, but stimulus effectiveness weaker.
  - Multiplier: about 0.7.
- Higher defense investment scenario:
  - Larger share (40 percent rather than 20 percent) of government defense spending allocated to investment.
  - Raises public capital stock, boosts productivity, crowds in private investment, stimulates labor demand, and yields larger long‑term output effects.
  - Additional analysis: allocation up to 40 percent (close to the share in the United States) sustains output growth over the projection horizon.
- Coordinated defense spending and financing scenario:
  - Joint assumptions: lower import content of the spending shock; 20 basis point reduction in exogenous risk premiums while spending is fully debt financed; 20 percent increase in the productivity of public investment (reflecting economies of scale, specialization, faster diffusion).
  - Short‑term outcomes: larger output boost, short‑term multiplier close to 1; real investment increases more than in baseline.
  - Medium term: productivity gains support long‑term growth; smaller increase in public debt but higher inflation.
  - Context: scenario aligned with proposals such as Security Action for Europe, a €150 billion loan facility for common procurement.
- Adverse risk scenario (outlined in text):
  - One‑off increase in risk premiums by 50 basis points models rising spreads in countries with limited fiscal space and no coordination.
  - Effects: more muted output and price response and a larger increase in public debt; sustained sovereign yield increases could create macrofinancial vulnerabilities.

### Empirical findings across a broad sample
- Sample: 164 countries since the end of World War II.
- Stylized empirical results:
  - Governments have frequently engaged in sizable defense spending booms, mostly financed through borrowing.
  - Peacetime defense buildups act as sector‑specific demand shocks that raise output and prices in the short term, especially when increases are permanent.
  - Medium‑term growth effects can arise via higher capital stock and possible productivity gains.
  - Firm‑level evidence: spending booms have larger demand effects on defense‑related sectors, boosting investment; however, debt buildups can crowd out private investment.
  - Wartime booms: typically followed by sharp increases in public debt and large reductions in social spending (guns versus butter trade‑off).
  - Peacetime booms: tend to raise output without worsening debt or crowding out social spending.
  - External effects: stronger imports (including foreign military equipment) worsen current account.

### Policy implications and recommendations
- Integrate defense buildup within credible medium‑term fiscal frameworks:
  - Defense booms are typically front‑loaded and tend to be debt financed; embedding plans in medium‑term frameworks helps safeguard fiscal sustainability.
  - Prepare contingency plans for conflict‑related buildups, including mechanisms to protect vulnerable populations and preserve essential services—especially salient for fragile and conflict‑affected states with limited domestic defense industries and weak fiscal frameworks.
- Carefully manage macroeconomic conditions to prevent overheating and friction costs:
  - Defense buildups raise prices and utilization rates, especially near capacity.
  - Coordination with monetary authorities is essential to avoid inflationary pressures while maintaining space for productive private investment.
  - Smoothing the pace of buildup can mitigate bottlenecks when large reallocations across sectors are expected.
- Recognize that defense spending composition matters:
  - Current spending produces larger short‑term multipliers.
  - Capital spending, directed at R&D and not crowding out nondefense productive investment, can support long‑term productivity.
  - Scaling up defense investment typically requires a large up‑front commitment and sustained spending, making it more fiscally demanding than increases in current outlays.

### Country example — Poland (Box summary)
- Poland’s defense scaling:
  - Defense spending increased from 2.2 percent to an estimated 4.5 percent of GDP between 2021 and 2025 (cash terms).
  - Poland’s defense outlay: $46.7 billion, the fifth‑largest in Europe.
- Composition and imports:
  - Equipment spending rose from 0.7 percent to 2.4 percent of GDP and now accounts for more than half of total defense outlays—the highest share in NATO.
  - Given limited domestic capacity, the surge was largely met through imports, accounting for 80 percent of total capital spending (private estimates), particularly from Korea and the United States.
  - Government initiatives aim to increase domestic production.
- Personnel and fiscal bookkeeping:
  - Military personnel scaled from 116,200 in 2020 to 233,800 in 2025 (no conscription), with personnel outlays rising from 0.9 percent to 1.2 percent of GDP between 2021 and 2025.
  - Poland now has the first‑largest standing military in the European Union (by personnel).
- Macro effects to date:
  - Between 2021 and 2025, Poland increased total public spending in accrual terms by 6.5 percent of GDP, of which defense accounted for about 2 percentage points.
  - Increase financed almost entirely by increases in the deficit given initially low public debt (48 percent of GDP in 2022) and ready access to financing.
  - The macroeconomic impact of the defense buildup alone was likely modest because the spending was highly import intensive.
  - Broader fiscal expansion contributed to economic growth and likely led to a tighter monetary policy path than would have occurred without such spending increases.

*Source: IMF staff calculations and analysis as presented in the chapter.*

### Box 2.1. Scaling Up Defense Spending: The Case of Poland

### Box 2.1. Scaling Up Defense Spending: The Case of Poland

### Poland: Defense Spending
- Defense outlays are described as often large, persistent, and characterized by complex cross-border supply chains.
- In panel notes: 2024 and 2025 data are estimates. “Other” includes operations and maintenance expenditure, other research and development expenditure, and unallocated expenditure.
- Personnel figures are not fully comparable across countries because of differences in definitions and coverage of active personnel, reserves, and auxiliary forces.
- Data labels in the figure use International Organization for Standardization (ISO) country codes.

### International spillovers and measurement
- The box constructs country-specific foreign defense expenditure measures based on a trade-weighted aggregation of partner countries’ defense expenditure to capture how higher defense spending abroad translates into increased import demand.
- These trade-weighted measures form the basis for quantifying the international transmission of defense spending shocks (Auerbach and Gorodnichenko 2013; Furceri and others 2026).
- Higher values of these measures imply higher output in exporting countries through increased import demand.

### Empirical findings on spillovers
- Estimates from local projections on the sample used to estimate the defense spending multipliers show:
  - Spillovers to advanced economies are statistically significant in the post-1990 period.
  - Spillovers are smaller and not statistically significant in the full sample (1948–2023).
  - There is no evidence of spillovers to emerging market and developing economies.
- The results are consistent with:
  - The larger share of advanced economies in global exports and international arms trade.
  - Deeper trade integration, more interconnected supply chains, and greater cross-border participation in defense-related production in the post–Cold War period.
- Quantitative magnitude:
  - Most spillovers originate from trade linkages among advanced economies, and boost GDP by about 0.2 percent in response to a defense spending shock by 1 percent of trading partners’ GDP.
  - Spillovers are even larger for common trade areas, such as the European Union (Furceri and others 2026).
  - Spillovers from emerging market and developing economies’ defense spending are close to zero.

### Key policy instruments and data sources
- Panel 3 of the figure is titled “Key Policy Instruments” and references indicators such as:
  - General government fiscal deficit (percent of GDP)
  - NBP policy interest rate (percent)
  - Percent of labor force (right scale)
  - NATO average spending (unweighted)
  - Infrastructure, Personnel, Equipment, Other (components of defense spending)
- Sources cited for the box’s charts and calculations:
  - Haver Analytics; IMF, World Economic Outlook; National Bank of Poland (NBP); North Atlantic Treaty Organization (NATO); Statistics Poland; and IMF staff calculations.
- Note on timing: In panel 2, data for France and the United Kingdom refer to 2024.

### Authors
- The authors of this box are Pedro Juarros and Anh Dinh Minh Nguyen.

*Source: Box 2.1. Scaling Up Defense Spending: The Case of Poland, World Economic Outlook, International Monetary Fund, April 2026.*

### CHAPTER 3 ThE MACROECONOMICS OF CONFLICTS AND RECOVERy

### CHAPTER 3 ThE MACROECONOMICS OF CONFLICTS AND RECOVERy

### Key findings and implications for postconflict recovery
- Conflicts impose large and persistent economic costs on conflict-site economies:
  - Output declines sharply at conflict onset, by approximately 3 percent, and continues to decline, reaching cumulative losses of about 7 percent within five years.
  - Losses deepen over time and persist even after a decade.
  - Estimated output costs from conflicts exceed those typically associated with financial crises (banking, currency, and debt crises) and those induced by severe natural disasters.
- Conflict dynamics amplify macroeconomic challenges through multiple channels:
  - Supply-side shocks: destruction of physical capital, reductions in labor supply from casualties and displacement, reallocation of productive capacity to military uses, and higher production costs from damaged infrastructure.
  - Demand-side shocks: declines in private consumption and investment as incomes fall and uncertainty rises; possible dissaving if income losses are perceived as temporary.
  - Fiscal pressures: weakened tax revenue, increased spending pressures (military outlays, humanitarian needs, infrastructure repair), binding fiscal financing constraints, monetary financing, accumulation of arrears, or debt default—exacerbating inflation.
  - External sector strains: impaired export capacity, trade relocation, foreign exchange shortages, import rationing in favor of military and essential goods, uncertainty-driven capital outflows, and reliance on countercyclical inflows (remittances and aid).
  - Exchange rate and reserve dynamics: sustained exchange rate depreciation, reserve losses, and inflationary pressures; wartime authorities may raise policy rates to contain inflation and external pressures.
- Recovery dynamics and conditions:
  - Economic recoveries from conflicts are typically slow and uneven and critically depend on sustained peace.
  - When peace is sustained, output rebounds but remains modest relative to wartime losses and varies widely across countries.
  - Recoveries are driven primarily by labor dynamics; capital accumulation and productivity remain subdued amid lingering uncertainty and binding financial constraints.
  - Fragile peace and relapse into conflict undermine recovery prospects; in such cases, output may fail to recover.
- Macroeconomic stabilization, debt restructuring, and international support:
  - Successful recoveries are typically underpinned by early and decisive debt restructuring to restore fiscal sustainability and create space for macroeconomic stabilization.
  - Macroeconomic stabilization anchored in low and stable inflation and a stable real effective exchange rate, combined with timely financing and international support (including capacity development and aid), supports stronger recoveries.
  - Stabilization is often achieved through a combination of rapid restoration of supply, credible nominal anchors, fiscal adjustment, and IMF-supported programs.
  - In episodes with large aid inflows, risks of exchange rate appreciation or Dutch disease are generally mitigated, partly via effective coordination between fiscal and monetary authorities in managing aid surges.
- Complementary domestic reforms and policy packages:
  - Stabilization and international support need to be accompanied by reforms to rebuild institutions and state capacity, promote inclusion, and mitigate persistent human capital losses while helping consolidate peace.
  - Concrete measures include strengthening anti-corruption frameworks, rebuilding judicial and public investment institutions, creating fiscal space for nonmilitary and social spending, and facilitating reintegration of former combatants.
  - Model-based analysis suggests comprehensive policy packages—centered on lowering uncertainty and rebuilding capital—deliver stronger recoveries than piecemeal approaches due to positive externalities, complementarities across policies, and expectations effects (for example, reducing uncertainty alongside capital rebuilding can trigger reinforcing dynamics through expectations, capital inflows, wages, and return migration).

### Macroeconomics of conflict: channels and mechanisms (Primer)
- Supply-side effects:
  - Wars destroy productive capacity via damage to physical capital and reductions in labor supply from casualties and displacement.
  - Reallocation of capacity from civilian to military uses reduces civilian output.
  - Infrastructure damage disrupts transportation, energy, and communications, increasing production costs.
  - Disruptions to schooling, loss of work experience, and deteriorating health outcomes weaken human capital accumulation and productivity.
  - The negative supply shock generally puts upward pressure on inflation (Keynes 1940).
- Demand-side effects:
  - Private consumption and investment typically decline as incomes fall and uncertainty increases.
  - Temporary income losses may lead to dissaving, yielding economic effects similar to capital destruction (Collier 1999).
  - Public expenditure may be diverted from growth-enhancing uses toward military spending.
- Fiscal, monetary, and external sector feedbacks:
  - Fiscal revenues fall while spending needs rise, creating binding financing constraints and incentives for monetary financing or arrears.
  - Export capacity impairment and trade relocation can produce foreign exchange shortages, constrain imports, and lead to import rationing.
  - External financing tightens amid capital outflows; governments may use capital controls and rely on remittances and aid.
  - Feedback loops among fiscal pressures, external imbalances, and supply disruptions strain exchange rates (depreciation in flexible regimes or devaluation in fixed regimes), reserves, and inflation; policy rate hikes may be used to contain inflation.

### Definitions, data, and stylized facts
- Data and coverage:
  - The chapter uses existing datasets and a newly constructed database for geographic locations of conflicts during 1946–2024, leveraging large language models for geographic coding and text analysis of United Nations Security Council annual reports.
- Classification of exposure:
  - Conflict-site economies: military action on their own territory.
  - Belligerent economies: parties to a conflict whose territory is not the conflict site.
  - Third countries: not parties but indirectly exposed via a common land border with a conflict site or through trade linkages.
- Conflict categorization (for conflict-site economies):
  - Actor type: between states or within states (civil wars, colonial wars, nonstate conflicts).
  - Intensity: minor (defined as those involving 25–999 battle-related deaths) or major (those with 1,000 or more battle-related deaths).
  - Duration: short (two years or less) or long (more than two years).
- Observed patterns:
  - The majority of post–World War II conflicts have involved within-state actors.
  - The sustained rise in conflicts since the early 1960s has been driven by an increase in minor conflicts.
  - The incidence of major conflicts has remained broadly stable over time, with increased frequency in recent years.
  - Within-state conflicts account for the majority of both minor and major episodes; between-state conflicts tend to be predominantly major.
  - Conflict duration varies with intensity: minor conflicts are typically shorter lived, whereas major conflicts tend to be more protracted, especially in commodity-exporting countries.
  - Regions with consistently high shares of conflict episodes include: Asia and the Pacific; the Middle East, North Africa, Afghanistan, and Pakistan; and sub-Saharan Africa.

### Empirical approach and robustness
- Methodology:
  - Cross-country empirical analysis using local projections difference-in-differences (LP-DiD) to trace outcome evolution following conflict onset relative to controls.
  - Complementary empirical analysis using survey data of individuals aged 50 and older to assess long-term scarring effects on health outcomes.
- Identification and robustness:
  - The identification strategy assumes conflict onset is exogenous to contemporaneous business cycle conditions.
  - Robustness checks include a narrative classification of conflict motives, alternative sample restrictions, clean control definitions, and conflict measures based on battle-related deaths.
  - Additional evidence shows government spending tends to increase in belligerent economies following conflict onset; such spending expansions are associated with positive output effects (see Chapter 2).

*Source: CHAPTER 3 ThE MACROECONOMICS OF CONFLICTS AND RECOVERy (text - CHAPTER 3 ThE MACROECONOMICS OF CONFLICTS AND RECOVERy).*

### 3. Conflicts by Geographic Regions

### 3. Conflicts by Geographic Regions

### Economic costs and international spillovers
- Major conflicts impose nontrivial economic costs beyond conflict-site economies; third countries commonly experience negative output effects of about 1 percent or less during the first two years following conflict onset.
- Spillovers arise as trade routes adjust, firms reorient supply chains, and policy responses absorb shocks (Qureshi 2013).
- Trade partners are defined as countries whose share of imports from conflict-site economies exceeds the 90th percentile of the distribution (Figure 3.5 note).

### Macroeconomic trade-offs in conflict-site economies
- Output declines reflect sustained contractions in:
  - Investment
  - Private consumption
  - Public consumption remains broadly stable due to a compositional shift toward defense spending (Online Annex 3.2).
- Fiscal positions weaken, with public debt increasing in the initial years of conflict (Figure 3.6, panel 2).
- External sector dynamics:
  - Imports contract sharply.
  - Exports decline even more substantially, resulting in a deterioration of the trade ratio.
  - The trade balance relative to prewar GDP widens, confined to the first four years of conflict, signaling import compression thereafter to accommodate reserve scarcity.
- Capital flows and financing:
  - Heightened uncertainty triggers capital outflows; foreign direct investment and portfolio flows decline, constraining wartime governments to relying on aid and, in some cases, remittances to finance trade deficits.
  - Governments introduce capital controls (Figure 3.6, panel 3).
- Prices and monetary responses:
  - Prices rise steadily, with the increase reaching approximately 35 percent five years after conflict onset.
  - Monetary authorities respond by increasing the short-term nominal policy rate.
- Wartime fiscal adjustments include budget reprioritization toward defense spending, monetary financing, capital controls, and temporary tax and prudential regulatory adjustments (Box 3.1 examples: Ukraine and Russia).

### Scarring effects on macroeconomy and individuals
- Macroeconomic scarring (five years after conflict onset):
  - Capital stock: approximately 4 percent lower.
  - Employment: approximately 3 percent lower.
  - Total factor productivity declines in initial years with wide confidence bands in the medium term (Figure 3.7, panel 1).
- Human costs:
  - Marked increase in deaths, especially in the first few years (Figure 3.7, panel 2).
  - Sizable forced displacement (Boxes 3.1 and 3.3).
- Long-term individual health impacts (sample of 41 countries):
  - Individuals who experience war during their lifetime are likely to age in worse health (Figure 3.7, panel 3).
  - War exposure reduces composite health measures, measured cognitive abilities, self-reported physical abilities, and mental health.
- Additional wartime trade-offs and institutional effects:
  - Gross national savings decline by more than investment.
  - Fiscal authorities cut social spending to accommodate deteriorating fiscal positions (Online Annex Table 3.2.3).
  - Institutional quality deteriorates and informality increases.
  - Wars can have sizable effects on asset prices, sovereign risk premiums, and financial contagion (reference to Chapter 2 of the April 2025 Global Financial Stability Report).

### Macroeconomic dynamics after conflict termination: methods and definitions
- Analytical approaches:
  - Cross-country LP-DiD analysis to estimate postconflict dynamics of output, inflation, capital, employment, and productivity.
  - Micro-level analyses at project, subnational, and firm levels to assess aid and governance reforms, and firm capital/labor/productivity evolution.
  - Model-based simulations using an open-economy general equilibrium model with realistic demographics.
- Conflict termination definition:
  - A conflict is “terminated” when battle-related deaths fall below the chapter’s baseline threshold of 25 deaths per calendar year and remain below that level for at least five consecutive years.
- Postconflict episode classification:
  - “Nonfragile” postconflict episodes: peace lasts at least five years.
  - “Fragile” episodes: conflict restarts within five years.
  - Robustness checks using a 10-year window yield broadly similar results.
- Identification caveats:
  - LP-DiD characterizes average trajectories and should be interpreted as correlations; conflict termination is assumed exogenous to contemporaneous business cycle conditions.
  - Countries’ initial conditions or policies undertaken during conflict may shape subsequent dynamics.

### Cross-country evidence on peace duration and recovery
- Fragility of peace:
  - In about 40 percent of post-WWII postconflict episodes, countries relapse into conflict within five years (Figure 3.8, panel 1).
  - Relapse risk is higher for within-state conflicts than for between-state conflicts.
- Macroeconomic correlates of fragile peace (stylized comparisons between fragile and nonfragile episodes):
  - Fragile episodes tend to exhibit:
    - Weaker growth
    - Higher level and volatility of inflation
    - Real exchange rate appreciation
    - Higher fiscal deficits and uncertainty
    - Lower aid-to-GDP ratio
    - Typically lower public expenditure
- Recovery conditional on peace:
  - When peace is fragile, output does not recover.
  - When peace is sustained, output rises gradually, reaching about 3.9 percent five years after conflict ends, with only about half of the observed output loss recovered five years after conflict onset.
  - Confidence intervals around the 3.9 percent estimate are wide, indicating pronounced cross-country heterogeneity.
  - Prices may increase during recovery, suggesting demand recovers faster than supply (Figure 3.9, panel 2), though this effect is not statistically distinguishable from zero.
- Supply-side dynamics:
  - On average, postconflict recoveries in capital stock and productivity do not differ significantly from those in nonconflict countries, indicating muted capital accumulation and investment due to lingering uncertainty and financing constraints.
  - Labor input recovers more rapidly as workers reallocate from military to civilian activities and refugees gradually return (Box 3.3).

### Policy correlates of stronger recoveries
- Sound macroeconomic policies are associated with better recovery outcomes (Figure 3.10):
  - Macroeconomic stabilization—low and stable inflation and a stable real effective exchange rate—correlates with stronger recovery performance.
  - Financing and international assistance matter:
    - Postconflict debt restructuring and greater engagement in capacity development are positively associated with stronger recoveries.
  - Inclusive policies and maintenance of productive public expenditure are implied as important to avoid undermining recovery prospects.

*Source: IMF staff calculations; World Economic Outlook: Global Economy in the Shadow of War, Chapter 3, April 2026.*

### 1. Impact on Output

### 1. Impact on Output

### Definition and estimation approach
- Conflict termination is defined as battle-related deaths falling below the chapter’s baseline threshold of 25 per calendar year and remaining below that level for at least five consecutive years.
- Fragile denotes conflict terminations followed by a relapse within five years; nonfragile cases are those in which peace persists for at least five years.
- Estimates are local projections difference-in-differences (LP-DiD) of the effects of conflict termination on selected macroeconomic outcomes in postconflict-site economies up to five years after termination.
- Bars denote point estimates and whiskers indicate 90 percent confidence intervals.

### Key empirical findings on aggregate output and prices
- Average annual output growth during the first five postconflict years in six rapid-recovery case studies ranged between 4.5 percent (Nepal) and 24.5 percent (Bosnia and Herzegovina).
- Macroeconomic stabilization in rapid-recovery cases involved substantial reductions in the level and volatility of inflation (for example, double-digit reductions in Cambodia).
- Aid inflows were particularly sizable in some recoveries: aid inflows averaged about 20 percent of GDP per year during the first five years of recovery in Bosnia and Herzegovina and Rwanda.

### Production factors and CPI (as presented)
- Figures report effects on capital stock, total factor productivity, and employment up to five years after conflict termination with 90 percent confidence intervals.
- Separate panels report impact on CPI and on production factors across the five-year horizon.

---

### 2. Correlates of Postconflict Recovery (Policy and institutional factors)

### Macroeconomic stabilization and financing
- Low inflation, stable inflation, and stable REER (real effective exchange rate) are used as indicator variables to capture macroeconomic stability; regressions control for postconflict episode and horizon fixed effects.
- Debt restructuring is coded as 1 if a restructuring occurs.
- Capacity development is proxied by the log number of participants in IMF training.
- Debt restructuring, stable REER, stable inflation, and low inflation are shown as correlates influencing the percentile of the growth distribution over the first five years.

### Institutional and policy correlates
- Inclusive policies (notably increases in social spending) are associated with more robust postconflict growth.
- Significant improvements in governance were achieved in some cases (Côte d’Ivoire, Rwanda, Sri Lanka), with governance scores increasing by 40–60 percent.
- In most examined cases except Nepal, debt restructuring yielding sizable debt reductions occurred in the first five years to help restore fiscal sustainability.
  - Example: Restructuring with external private creditors in Bosnia and Herzegovina resulted in a cumulative reduction of about 70 percent in the nominal value of the country’s outstanding debt.

### Aid management and coordination
- Aid-related Dutch disease risks were mitigated through:
  - Absorb-and-spend strategies (monetary accommodation and increased nonaid fiscal deficit), or
  - Absorption without spending (foreign exchange inflows absorbed without corresponding fiscal expansion).
- Coordination between fiscal and monetary authorities is underscored as important when managing aid surges.

---

### 3. Micro-Level Evidence on Aid, Projects, and Subnational Recovery

### Project-level findings
- Projects implemented during postconflict peace episodes perform better on average than projects implemented in countries that have not experienced conflict.
- Project success is more likely when:
  - Supervision quality is high;
  - Projects are in education, health, and infrastructure sectors.
- Projects targeting the private sector tend to perform poorly on average, suggesting lingering uncertainty and the need for enhanced supervision and careful sequencing.
- Project effectiveness is high when implementation occurs outside periods of rapid public investment scale-up; when implemented during large investment surges, estimated effects remain positive but are less precisely measured, pointing to absorptive capacity constraints.

### Timing and absorptive capacity
- Performance of projects improves gradually as peace persists, suggesting absorptive capacity increases over time after conflict termination.

### Subnational evidence
- Aid in postconflict settings is positively associated with local economic recovery (measured with nighttime lights and other indicators).
- The recovery conditional on aid is significantly higher when domestic efforts lead to major improvements in governance.
- When governance remains weak, both gains from aid and unconditional recovery are more muted.

---

### 4. Firm-Level Dynamics after Conflicts

### Average firm responses (first five postconflict years)
- Surviving firms expand employment modestly after conflict ends.
- Capital stocks remain weak on average.
- Total factor productivity shows limited improvement on average.
- Pattern indicates substitution toward labor amid difficulties in rebuilding capital.

### Heterogeneity across sectors and firm characteristics
- Firms in capital-intensive sectors, exporters, and firms with stronger balance sheets record gains in both employment and productivity.
- Firms in labor-intensive sectors and nonexporters primarily expand employment while capital stocks remain well below preconflict levels.
- Financially constrained firms face especially persistent capital shortfalls.
- Results point to partial factor reallocation driven by stronger firms and persistent capital scarring for weaker but potentially viable firms.

---

### 5. Model-Based Evidence and Channels of Impact

### Model and calibration
- Uses an extension of an open-economy overlapping-generations model with frictional international capital markets calibrated to an average low-income country.
- Model incorporates channels consistent with empirical findings and aligns aggregate magnitudes with empirical evidence.

### Key propagation channels modeled
- Human losses:
  - Capture persistent adverse effects on human capital accumulation and population dynamics (casualties, forced displacement, long-lasting health impacts, reduced fertility).
  - Demographic shocks to the working-age population exert pronounced but transitory effects; scarring on younger cohorts can be persistent and affect long-term growth trajectories.
- Physical capital destruction:
  - Capital destruction accounts for a sizable share of the early output decline.
  - In isolation, capital destruction tends to fade over time absent additional shocks to investment, as higher marginal product of capital stimulates investment.
- Country risk premiums and uncertainty:
  - Elevated perceptions of economic and political risk depress investment, especially in economies relying on foreign capital.
  - Domestic households may reduce investment amid policy uncertainty, fear of relapses, or expropriation risk.
  - Model simulations show a two-pronged confidence channel: capital flight at conflict onset pushes interest rates higher, followed by a prolonged investment slump.
  - In recovery, absent stabilization, foreign investors respond inelastically, constraining capital inflows and delaying return to precrisis investment levels.
  - Financial openness increases vulnerability to capital flight at conflict onset but can enable faster rebounds once confidence is restored.

### Model decomposition (illustrative contributions)
- Simulations report deviations from baseline when the economy is hit by shocks to country risk, human losses, and capital destruction—either in isolation or jointly (combined shock).
- Channels labeled in simulations include Domestic confidence, Capital destruction, WAP (working-age population), Country risk, Non-WAP, and Combined conflict shock.

*Source: IMF staff calculations; material excerpted from Chapter 3, "THE MACROECONOMICS OF CONFLICTS AND RECOVERY," World Economic Outlook: Global Economy in the Shadow of War, April 2026.*

### Annex 3.9 for details. WAP = working-age population.

### How can policies help restore economic activity and rebuild productive capacity after conflict?

### Policy layers and modeled scenarios
- Macroeconomic stabilization
  - Assumes the wedges generated by the two-pronged confidence shocks associated with conflict gradually converge to their preconflict levels over eight years.
  - Rationale: Well-coordinated domestic economic policies, including IMF-supported programs anchored in credible and sustained peace, reduce perceived country risk and help restore confidence (Gehring and Lang 2020).
- Financing
  - Scenario assumptions:
    - Domestic efforts to gradually increase the tax-to-GDP ratio by 3 percentage points over 15 years.
    - Additional donor aid averaging about 0.5 percent of GDP per year during the first 5 years of postconflict recovery.
  - Context: Many conflict-affected economies have tax revenues averaging about 15 percent of GDP and often lack market access; concessional financing can therefore play a key role.
- Increasing public investment efficiency
  - Scenario assumption: public investment efficiency increases by 10 percentage points relative to the average level reported in the October 2025 Fiscal Monitor.
  - Effect: boosts the output return of tax-funded recovery by about 1.4 percentage points.
- Policies to alleviate protracted losses of human capital
  - Scenario assumption: displaced populations are assumed to return gradually over a four-year period.
  - Measures that encourage return migration include increased housing availability, enhanced security, better access to basic services (water, education, health care), and policies supporting labor market reintegration.

### Model simulation findings and interactions
- Combining policies from the four layers supports recovery substantially; individual policies taken in isolation are less effective at fully offsetting conflict-related output losses.
- A coordinated and comprehensive policy package:
  - Accelerates recovery beyond the sum of individual policies due to positive externalities, complementarities across policies, and improved expectations.
  - Improves economic agents’ expectations, relaxes borrowing constraints, facilitates greater capital inflows, raises wages, and encourages return of displaced workers and refugees.
- Caveat: positive complementarities across policies are not universal and may exhibit threshold effects; for example, scaling up public investment reduces sovereign risk when public investment quality is high but increases risk when quality is low (Adarov and Panizza 2026). Effectiveness depends critically on institutional capacity and implementation quality.
- Figure-related notes:
  - Simulations show output effects up to 19 years after conflict onset.
  - “Tax-financed reconstruction” raises public spending by 3 percentage points over 15 years.
  - “Aid package” amounts to 0.5 percent of GDP over five years.
  - “Confidence restoration” fully undoes the confidence shocks.
  - “Population recovery” assumes a gradual return of refugees.

### Summary of empirical evidence and historical cases
- General patterns
  - Wars impose large and persistent economic costs; output losses in conflict-site economies exceed those typically associated with financial crises or severe natural disasters.
  - Postwar recoveries are possible but neither automatic nor rapid; recoveries since WWII have been driven primarily by labor dynamics (workers shift back to civilian activities and refugees gradually return), while capital accumulation and productivity often remain subdued due to lingering uncertainty and financing constraints.
  - Neighboring countries and trading partners also bear nonnegligible spillovers from conflicts.
- Key ingredients of successful recoveries
  - Early and decisive debt restructuring combined with macroeconomic stabilization anchored in low and stable inflation and a stable exchange rate.
  - Timely international assistance, including capacity development and aid.
  - Domestic reforms to rebuild state capacity and improve governance (e.g., restoring administrative capacity to collect taxes, strengthening anti-corruption measures).
  - Peace dividend: reductions in military spending creating fiscal space for nonmilitary and social expenditures.
  - Policies to address human capital losses, including measures to support refugees’ return and integration.
- Complementarity emphasis
  - Durable postconflict recovery is supported by a package of macroeconomic stabilization, sizable debt restructuring, international support, and complementary domestic reforms, but effectiveness ultimately depends on the durability of peace.

### Selected case evidence and quantitative outcomes
- Refugee-related statistics and drivers
  - In 2024, about 25 million refugees—roughly 80 percent of the global refugee population—originated from active conflict-site economies.
  - Five years after the onset of a major conflict, cumulative refugee outflows from the conflict-site economy are about 95 percent higher than in the year preceding the conflict.
  - When conflicts end and sustained peace takes hold, refugee returns to their country of origin gradually increase, reaching about 60 percent five years after conflict termination.
  - Decomposition of return intentions: policy-related factors explain about 54 percent of refugees’ stated intentions to return to their countries of origin; individual socioeconomic characteristics account for about 20 percent.
- Ukraine (February 24, 2022 invasion)
  - Output plunged by more than one-third in the second quarter of 2022.
  - Phase developments:
    - Phase 1 (2022): rapid redirection of public spending to defense; temporary monetary financing; IMF emergency financing and EU macrofinancial assistance; debt-service standstills; NBU introduced FX controls and pegged the exchange rate, then devalued the currency in July following a 1,500-basis-point policy rate hike; Power Banking and blackout-resilient banking solutions preserved business continuity.
    - Phase 2 (2023 onward): four-year IMF Extended Fund Facility (EFF) program beginning in March 2023; $130 billion in external financing secured for the program period; fiscal policy moved to nondefense budget discipline and domestic revenue mobilization; monetary financing fully phased out; NBU transitioned to a managed exchange rate and conditions-based phase-out of FX controls.
  - Growth and inflation signals:
    - Second quarter of 2023 registered 19.3 percent growth year over year.
    - Inflation eased amid cessation of monetary financing, receding supply shocks, and a favorable harvest.
  - Early disbursement: first $2.7 billion disbursed (as noted in the timeline).
- Rwanda and Côte d’Ivoire (selected postconflict lessons)
  - Rwanda (1994 genocide):
    - At end of genocide, real GDP contracted by 42 percent; inflation surged to 42 percent; public debt increased to 171 percent of GDP from 60 percent of GDP in 1993.
    - Five years later: economic growth recovered to about 3 percent; subsequently accelerated to between 6 percent and 9 percent annually; inflation returned to 2 percent; public debt declined to 78 percent of GDP.
    - Domestic reforms: tax-to-GDP ratio increased from 9 percent to 13 percent; establishment of the Rwanda Revenue Authority and introduction of a value-added tax.
    - Net inflows of official development assistance surged to about 95 percent of gross national income in 1994 and remained elevated at 15–20 percent of gross national income thereafter.
  - Côte d’Ivoire (2010–11 postelectoral crisis):
    - Output contracted by about 5 percent during the crisis.
    - Inflation rose from 1.2 percent in 2010 to 4.9 percent in 2011 before returning to an average of about 1.4 percent three years later.
    - Public debt increased from 46 percent in 2009 to about 50 percent of GDP in 2011; within five years, economic growth accelerated to about 7 percent and public debt declined to 31 percent of GDP.
    - Domestic reforms: tax-to-GDP ratio increased from 10 percent to 13 percent; increased tax compliance and digitalized revenue collection.
  - Common elements: rapid restoration of supply, credible nominal anchors, substantial external support, emergency grants and strict expenditure controls followed by debt relief, and program-backed reforms catalyzing donor confidence and sustained external financing.

### Policy recommendations (synthesized from chapter findings)
- Prioritize a comprehensive, coordinated policy package that:
  - Reduces uncertainty rapidly (confidence restoration and credible nominal anchors).
  - Rebuilds the capital stock early, including public investment paired with improvements in public investment efficiency.
  - Mobilizes financing through a mix of domestic revenue mobilization, concessional donor financing, and timely debt restructuring.
  - Addresses human capital losses by facilitating return migration and reintegration (housing, security, basic services, labor market policies).
- Sequence and complementarity:
  - Combine macroeconomic stabilization (including IMF-supported programs) with capacity development, governance reforms, and debt restructuring to maximize recovery gains.
  - Ensure high public investment quality before scaling up investment to avoid increasing sovereign risk.
- International community roles:
  - Provide timely concessional financing and capacity development to constrained conflict-affected economies that have limited fiscal space and market access.
  - Coordinate aid surges with fiscal and monetary authorities to manage macroeconomic effects without undermining stability.

*Source: IMF staff analysis in Chapter 3, “The Macroeconomics of Conflicts and Recovery,” Annex 3.9 and related boxes (World Economic Outlook: Global Economy in the Shadow of War, April 2026).*

### Box 3.3. Policies for Refugees’ Return and Integration

### Box 3.3. Policies for Refugees’ Return and Integration

### Key findings shown in the figure
- Panel 1 (Refugee Dynamics): local projections difference-in-differences estimates of refugee stocks following conflict onset and (with an opposite sign) termination. Numeric markers and axes as presented: 0, 150, 50, 100, 012345 (Years after conflict onset/termination).
- Panel 2 (Correlates of Return Intention): regression estimates of likelihood (scale 0–1) with numeric axis markers shown as 0, 0.4, 0.1, 0.2, 0.3.  
- Lines and markers denote point estimates; shaded areas and whiskers show 90 percent confidence intervals.
- Variables/labels appearing in the figure: HousingSecurityWork, sup. reint.; Bas. serv. edu./heal. (basic services, education, and health); Work, sup. reint. (work and support for reintegration).

### Data and methods
- Data sources: United Nations High Commissioner for Refugees (UNHCR) Intention Surveys for refugees from Nigeria (September 2021), South Sudan (November 2021), and Ukraine (August 2024); and IMF staff calculations.
- Panel 1 methodology: local projections difference-in-differences estimates of refugee stocks following conflict onset and termination (similar patterns observed using data on refugee flows and returnees).
- Panel 2 methodology: regression controls for socioeconomic characteristics and fixed effects for country of origin, country (or region) of asylum, and legal status. Reported outcome: likelihood of return intention (0–1).

### Analytical takeaways (as presented)
- Refugee stocks exhibit pronounced responses after conflict onset and an opposite-signed response after conflict termination (Panel 1, local projections DID estimates).
- Return intentions are statistically estimated as functions of socioeconomic characteristics, legal status, and contextual fixed effects; specific correlates shown include access to basic services, education, health, housing, security, and work/support for reintegration (Panel 2).
- Uncertainty around point estimates is reported with 90 percent confidence intervals.

*Sources: United Nations High Commissioner for Refugees (UNHCR) Intention Surveys for refugees from Nigeria (September 2021), South Sudan (November 2021), and Ukraine (August 2024); and IMF staff calculations.*

### Appendix 1.1 of the April 2008 WEO, Box A2 of the April

### Appendix 1.1 of the April 2008 WEO, Box A2 of the April

### Composite construction and weighting conventions
- Composites for fiscal data are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated.
- Composite unemployment rates and employment growth are weighted by labor force as a share of group labor force.
- Composites relating to external sector statistics are sums of individual country data after conversion to US dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in currencies other than US dollars.
- Composites of changes in foreign trade volumes and prices are arithmetic averages of percent changes for individual countries weighted by the US dollar value of exports or imports as a share of total world or group exports or imports (in the preceding year).
- Unless noted otherwise, group composites are computed if 90 percent or more of the share of group weights is represented.
- Data refer to calendar years, except in the case of a few countries that use fiscal years; Table F lists the economies with exceptional reporting periods for national accounts and government finance data.
- For some countries, the figures for 2025 and earlier are based on estimates rather than actual outturns; Table G lists the date of the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments for each country.

### Data vintage, estimates, projections, and reporting conventions
- For some countries, specific years’ figures (notably 2025 and earlier) may be estimates rather than actual outturns; projections for later years may be omitted where uncertainty is unusually high.
- National reporting changes and rebasing are reflected where applied (see country notes for details).
- Currency conversion rules vary by statistic type (average market exchange rates for fiscal and balance of payments flows; end-of-year market exchange rates for non-US-dollar debt).

### Country notes — selected entries and special treatments
- Afghanistan:
  - Data for 2021–25 are reported for selected indicators, with estimates for fiscal data.
  - GDP growth for 2025 is an estimate.
  - Projections for 2026–31 are omitted because of an unusually high degree of uncertainty, given that the IMF has paused its engagement with Afghanistan owing to a lack of clarity within the international community regarding the recognition of a government in the country.
  - Data reported in the WEO include a structural break in 2021 as a result of the change from calendar year to solar year reporting; the actual reported GDP growth rate for solar year 2021 is –20.7 percent.
- Algeria:
  - Total government expenditure and net lending/borrowing include net lending by the government, which mostly reflects support to the pension system and other public sector entities.
- Argentina:
  - The official national consumer price index (CPI) starts in December 2016.
  - For earlier periods, CPI data reflect the Greater Buenos Aires Area CPI (prior to December 2013); the national CPI (IPCNu, December 2013 to October 2015); the City of Buenos Aires CPI (November 2015 to April 2016); and the Greater Buenos Aires Area CPI (May 2016 to December 2016).
  - Given limited comparability of these series because of differences in geographic coverage, weights, sampling, and methodology, the WEO does not report average CPI inflation for 2014–16 and end-of-period inflation for 2015–16.
  - Argentina discontinued the publication of labor market data starting in the fourth quarter of 2015, and new series became available starting in the second quarter of 2016.
- Benin:
  - Fiscal and debt data from 2021 through 2024 have been revised.
  - Revised data were prepared in collaboration with the authorities, who have confirmed the accuracy and completeness of the data revisions, pending official publication.
- Bolivia:
  - Projections for 2027–31 have been omitted owing to significant uncertainty regarding the economic outlook.
- Costa Rica:
  - The central government definition was expanded as of January 1, 2021, to include 51 public entities in accordance with Law 9524.
  - Data back to 2019 are adjusted for comparability.
- Dominican Republic:
  - The fiscal series have the following coverage: Public debt, debt service, and the cyclically adjusted/structural balances are for the consolidated public sector (which includes the central government, the rest of the nonfinancial public sector, and the central bank); the remaining fiscal series are for the central government.
- Ecuador:
  - Fiscal projections for 2026–31 are excluded from publication because of ongoing program discussions.
- Eritrea:
  - Data and projections for 2020–31 are excluded from the database because of constraints in data reporting.
- India:
  - Real GDP growth rates are calculated in accordance with national accounts with base year 2022/23.
- Iran, Islamic Republic of:
  - Historical figures for nominal GDP in US dollars are computed using the official exchange rate up to 2017.
  - From 2018 onward, the NIMA (the country’s domestic Forex Management Integrated System) transfer rate is used to convert nominal rial GDP figures to US dollars.
  - The IMF staff has assessed that the NIMA transfer rate better reflects the transaction-value-weighted exchange rate in the economy over that period of time.
- Israel:
  - Projections are based on the assumption that the latest conflict persists for several weeks, followed by a recovery as hostilities ease.
- Lebanon:
  - Fiscal and national accounts data for 2022–25, as well as debt data for 2023–25, are IMF staff estimates.
  - Estimates and projections for 2026–31 are omitted owing to an unusually high degree of uncertainty.
- Libya:
  - Actual data and projections are subject to high uncertainty due to frequent data revisions by the authorities.
  - Fiscal and debt data for 2025 are IMF staff estimates based on information from the Central Bank of Libya.
  - National accounts data for 2020–25 are IMF staff estimates.
- Nigeria:
  - National accounts data have been revised and rebased, with 2019 as the new base year.
  - This replaces the 2010 benchmark and aligns national accounts statistics with updated international standards, including the SNA 2008, BPM6, and GFSM 2014.
  - The rebasing entailed broader sectoral and data coverage capturing previously unrecorded activities such as the digital economy, parts of the informal economy (particularly in the agriculture sector), pension and health insurance schemes, social insurance trust funds, household firms, quarrying and other minerals and modular oil refining.
  - The rebasing drew on National Commercial Census and Survey of Businesses and Industries, National Agricultural Sample Census, and 2019 and 2023 Nigeria’s Living Standard Surveys.
  - The rebasing exercise resulted in an upward revision of the nominal GDP for 2019 by 40.8 percent.
- Sierra Leone:
  - Although the currency was redenominated on July 1, 2022, local currency data are expressed in the old leone for the April 2026 WEO.
- Sri Lanka:
  - Data and projections for 2025–31 are excluded from publication owing to ongoing discussions on restructuring of sovereign debt.
- Sudan:
  - Projections reflect the IMF staff’s analysis based on the assumption that the ongoing conflict will terminate by the end of 2026 and that reengagement and reconstruction will commence shortly thereafter.
  - Data for 2011 exclude South Sudan after July 9; data for 2012 and onward pertain to the current Sudan.
- Syria:
  - Data are excluded from 2011 onward because of a lack of adequate data.
- Timor-Leste:
  - Published data for real GDP refer to non-oil real GDP, while published data for nominal GDP refer to total nominal GDP.
  - Non-oil GDP and total GDP are equal for both real and nominal GDP from 2026 onward.
- Turkmenistan:
  - Real GDP data are IMF staff estimates compiled in line with international methodologies (SNA), using official estimates and sources as well as United Nations and World Bank databases.
  - Estimates of and projections for the fiscal balance exclude receipts from domestic bond issuances as well as those from privatization operations, in line with GFSM 2014.
  - The authorities’ official estimates for fiscal accounts, which are compiled using domestic statistical methodologies, include bond issuance and privatization proceeds as part of government revenues.
- Ukraine:
  - SNA 2008 National Accounts data are available from 2000 on an annual basis.
  - The data exclude Crimea, Sevastopol, and occupied territories in Donetsk and Luhansk from 2014–21.
  - From 2022 onward, data exclude areas that are occupied or affected by ongoing military actions for the duration of such occupation or actions.
  - Data before 2000 are IMF staff estimates based on SNA 1993 data provided by the State Statistics Service of Ukraine.
- Uruguay:
  - In December 2020, the authorities began reporting national accounts data according to the SNA 2008, with base year 2016.

*Appendix 1.1 of the April 2008 WEO, Box A2 of the April (text provided).*

### 2016. Data prior to 2016 reflect the IMF staff ’s best

### text - 2016. Data prior to 2016 reflect the IMF staff ’s best

### Data notes and country-specific reporting issues
- Uruguay
  - Starting in October 2018, Uruguay’s public pension system received transfers in the context of Law 19,590 of 2017; these funds are recorded as revenues, consistent with the IMF’s methodology. See IMF Country Report 19/64 for further details.
  - Coverage of fiscal data changed from consolidated public sector to nonfinancial public sector with the October 2019 WEO. Under the nonfinancial public sector perimeter (central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado), assets and liabilities for which the counterpart is the central bank are not netted out in debt figures; capitalization bonds issued in the past by the government to the central bank are now part of the nonfinancial public sector debt.
  - The disclaimer about the public pension system applies only to the revenues and net lending/borrowing series.

- Venezuela
  - Projecting the economic outlook is rendered difficult by lack of discussions with the authorities (the most recent Article IV consultation took place in 2004), incomplete metadata for limited reported statistics, and difficulties reconciling reported indicators with economic developments.
  - Fiscal accounts include the budgetary central government; social security; FOGADE; and a reduced set of public enterprises, including Petróleos de Venezuela, S.A.
  - Following methodological upgrades to achieve a more robust nominal GDP, historical data and indicators expressed as a percentage of GDP have been revised from 2012 onward.
  - For most indicators, data for 2018–25 are IMF staff estimates.
  - Effects of hyperinflation, paucity of reported data, and uncertainty mean IMF staff estimates and projections should be interpreted with caution.
  - Venezuela’s consumer prices are excluded from all WEO group composites.

- West Bank and Gaza
  - Estimates and projections for 2025–31 are excluded from publication owing to unusually high uncertainty.
  - Latest actual annual data: consumer prices, population, and government finances are for 2025. Annual unemployment rate data are available up to 2022.

- Yemen
  - Revised data reflect the territory under control of the Internationally Recognized Government (IRG).

- Zimbabwe
  - Authorities redenominated national accounts statistics mid-2025 following introduction on April 5, 2024, of a new national currency, the Zimbabwe gold, replacing the Zimbabwe dollar. Use of the Zimbabwe dollar ceased on April 30, 2024.

- General
  - Data prior to 2016 reflect the IMF staff’s best effort to preserve previously reported data and avoid structural breaks.
  - Country coverage choices: some economies (for example, Cuba and the Democratic People’s Republic of Korea) are not IMF members and are not monitored in the WEO.

### Classification of economies and group aggregates
- High-level grouping
  - The WEO divides the world into two major groups: Advanced Economies and Emerging Market and Developing Economies.
  - Advanced Economies: 43 economies.
  - Emerging Market and Developing Economies: 154 economies.
- Regional breakdowns for Emerging Market and Developing Economies
  - Emerging and Developing Asia; Emerging and Developing Europe; Latin America and the Caribbean; Middle East and Central Asia; Sub-Saharan Africa.
- Analytical groupings and criteria
  - Source of export earnings: economies categorized as fuel, nonfuel, or nonfuel primary-product exporters if their main source of export earnings exceeded 50 percent of total exports on average between 2020 and 2024 (SITC classifications used).
  - External financing and income criteria: net creditor vs net debtor economies; heavily indebted poor countries (HIPCs); low-income developing countries (LIDCs); emerging market and middle-income economies (EMMIEs).
  - Net debtor classification: latest net international investment position < 0 or current account balance accumulations from 1972 (or earliest available) to 2024 were negative.
  - During 2020–24, 41 economies incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements (group referred to as economies with arrears and/or rescheduling during 2020–24).

### Key headline aggregate numbers and tables (selected exact series as presented)
- World (Table A1, Summary of World Output — annual percent change, series as printed)
  - World3.63.03.0–2.76.73.83.33.43.43.13.23.1
  - Advanced Economies1.32.31.9–3.96.13.11.71.81.91.81.71.5
  - Emerging Market and Developing Economies5.04.63.8–1.87.04.34.44.54.43.94.24.0
  - Regional example: Emerging and Developing Asia7.26.45.4–0.57.84.75.65.45.54.94.84.5
- World medium-term reference forecast (Table A15 — series as printed)
  - World Real GDP3.33.13.43.43.13.23.33.1
- Classification summary (Table A, top-line entries as printed)
  - Advanced Economies43100.039.4100.061.4100.013.9
  - Emerging Market and Developing Economies154100.060.1100.038.8100.086.1
- Consumer price and inflation summary (selected aggregates as printed)
  - Summary of Inflation (Table A5, headline lines as printed):
    - Advanced Economies1.31.71.51.73.35.84.32.92.72.52.21.9
    - Emerging Market and Developing Economies5.74.95.25.35.99.78.28.05.25.54.63.9
- Fiscal aggregates (major advanced economies; Table A8 top-line entries as printed)
  - Major Advanced Economies Net Lending/borrowing–5.5–3.4–3.8–11.7–8.9–3.7–6.2–6.1–5.3–5.8–5.7–5.5
  - United States Net Debt 72.779.981.695.995.291.394.095.796.798.5101.3115.4
  - Euro Area Net Debt70.270.268.578.276.373.872.873.274.174.975.978.3

### Assumptions underpinning projections (Box A1 — fiscal and monetary policy assumptions; selected verbatim points and examples)
- Fiscal policy assumptions (general)
  - Short-term fiscal policy assumptions are normally based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions and projected fiscal outturns.
  - When no official budget has been announced, projections incorporate policy measures judged likely to be implemented.
  - Medium-term fiscal projections are based on judgment about the policies’ most likely path.
  - If IMF staff has insufficient information to assess authorities’ budget intentions and prospects for policy implementation, an unchanged structural primary balance is assumed unless indicated otherwise.
- Selected country-specific fiscal assumption notes and exact references
  - France: Projections for 2026 onward are based on the 2026 budget and other measures in the authorities’ 2023–27 multiannual budget programming bill, adjusted for differences in assumptions and consistent with the 0.5 percent of GDP minimum structural adjustment under the EU’s Excessive Deficit Procedure.
  - India: General government data cover only central and state governments; state government data are incorporated with a lag of up to two years; starting with FY2020/21 data, expenditure includes the off-budget component of food subsidies.
  - China: Projections incorporate the 2025 budget as well as estimates of off-budget financing.
  - United States: Fiscal projections are based on the February 2026 Congressional Budget Office baseline, adjusted for the IMF staff’s policy and macroeconomic assumptions; projections incorporate the effects of the One Big Beautiful Bill Act (OBBBA).
  - Puerto Rico: Fiscal projections informed by the Certified Fiscal Plan for the Commonwealth prepared in October 2024 and certified by the Financial Oversight and Management Board.
- Monetary policy assumptions (general)
  - Based on the established policy framework in each economy; in most cases implies a nonaccommodative stance over the business cycle (rates adjusted to keep inflation within targets and respond to output gaps).
  - See Assumptions section at the beginning of the Statistical Appendix for interest-rate assumptions.
- Selected country-specific monetary assumptions (verbatim highlights)
  - Canada: Projections reflect the gradual unwinding of monetary policy tightening by the Bank of Canada as inflation slowly returns to its midrange target of 2 percent by the end of 2026.
  - Denmark: Monetary policy is to maintain the peg to the euro.
  - Russia: Monetary policy projections assume that the Central Bank of the Russian Federation is adopting a tight monetary policy stance.
  - Saudi Arabia: Monetary policy projections are based on continuation of the exchange rate peg to the US dollar.
  - United States: IMF staff expects the Federal Open Market Committee to continue to adjust the federal funds target rate in line with the broader macroeconomic outlook.
  - Korea: Projections assume that the policy rate will evolve in line with the Bank of Korea’s forward guidance.

### Methodology and documentation highlights
- Key data documentation and vintage notes (Table G and related notes)
  - Table G provides country-by-country documentation for National Accounts, Prices (CPI), Government Finance, and Balance of Payments: historical data source, latest actual annual data year, system of national accounts in use, base-year information, subsectors coverage, accounting practice.
  - Exceptional reporting periods for national accounts and government finance are listed (Table F).
  - Many country notes reference specific years for latest actual annual data (examples in Table G entries such as NSO2025, MoF2024/25, Cb2024, etc.).
- Aggregation and identity links (Table A14 summary)
  - Net lending/net borrowing equals the current account balance plus the capital account balance. The WEO presents gross national savings and investment as percent of GDP alongside current account and net lending/net borrowing aggregates.

*Italic: Source — World Economic Outlook: Global Economy in the Shadow of War, Statistical Appendix (April 2026), text - 2016. Data prior to 2016 reflect the IMF staff ’s best.*

### Annex 1.SF.1

### Annex 1.SF.1

### Global outlook, risks, and scenarios
- Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities.
- The war in the Middle East is a significant headwind to the global economy—particularly for the conflict region, energy-importing and lower-income countries and Fragile and Conflict-Affected States—through higher commodity prices, inflation expectations, and tighter financial conditions.
- Given the highly uncertain outlook, Directors appreciated the reference forecast and downside scenarios as a useful analytical framework to support preparedness across a range of possible outcomes, while helping to clarify transmission channels and spillovers, heterogeneous impacts and policy tradeoffs, and appropriate policy responses.
- Directors stressed that the likelihood of downside scenarios materializing depends critically on the duration, intensity and scope of the conflict.
- Overall risks to the global outlook are tilted to the downside and could be amplified through interactions with each other and with pre-existing vulnerabilities.
- Downside risks highlighted include:
  - further escalation of geopolitical tensions and supply chain disruptions;
  - rising fiscal and financial vulnerabilities;
  - potential fragilities linked to the AI investment boom;
  - erosion of institutions.
- Upside risks noted were productivity gains from AI and possible renewed momentum in structural reforms, but Directors considered downside risks to dominate.
- A reassessment of expectations regarding AI could lead to a decline in investment and trigger an abrupt financial market correction.

### Monetary policy, inflation expectations, and exchange rate management
- Directors underscored the importance of preserving price stability.
- Central banks should be ready to act decisively in line with their mandates to prevent prolonged supply shocks from destabilizing medium-to-long-term inflation expectations, while reserving the option to look through shocks if they prove transitory and the monetary policy stance is already properly calibrated.
- Transparent communication and strong central bank independence are critical for credibility.
- Transmission of shocks will differ across countries, reflecting exposure to commodity markets and the region, anchoring of inflation expectations, and extent of foreign exchange depreciation.
- Where negative demand shocks emerge and activity falls below potential, a reduction in policy rates may be appropriate but only if risks to price stability remain contained.
- If imminent risk of excessive or disorderly exchange rate movements emerges, temporary foreign exchange intervention and capital flow management measures may be warranted, alongside appropriate monetary and fiscal policy stances.

### Financial stability and supervisory priorities
- Financial stability risks remain elevated, reflecting:
  - high debt levels and greater rollover risks in core sovereign bond markets;
  - a more price-sensitive investor base;
  - a buildup of leverage across nonbank financial intermediaries (NBFIs) and derivative products;
  - rising interconnectedness between banks and NBFIs;
  - vulnerabilities in private credit;
  - growing market concentration risk in AI-related sectors.
- Increasingly uneven, debt-heavy capital flows and a strengthened sovereign-bank nexus are also risks to stability in EMDEs.
- Directors called on financial supervisors to enhance readiness by:
  - ensuring robust prudential oversight;
  - adopting scenario analysis;
  - strengthening stress testing;
  - closing data gaps;
  - maintaining adequate capital, liquidity, and reserve buffers in line with international regulatory standards.

### Fiscal policy, buffers, and social protection
- Directors agreed on the urgency of rebuilding fiscal buffers and strengthening sustainability amid high debt and rising risks that could weaken growth and revenues and add to pressures on fiscal balances.
- When support is needed to protect vulnerable households from extreme external shocks, it should be:
  - temporary;
  - targeted;
  - preferably delivered through existing social safety nets;
  - within existing resource envelopes;
  - while avoiding price distortions and broad-based measures that are costly and difficult to unwind.
- Many countries will need credible medium-term fiscal plans including stronger medium-term anchors, supported by revenue mobilization and improvements in spending efficiency, to ensure sustainability while creating space for long-term spending needs, including defense.
- For countries facing tighter financing conditions, credible consolidation and predictable rules remain essential for regaining market confidence.
- Directors underscored the importance for low-income developing countries of domestic revenue mobilization and safeguarding critical social and development spending in the face of declining aid flows.

### Structural reforms, investment, and trade
- Directors acknowledged the importance of structural reforms to strengthen medium-term growth and resilience.
- Policies and actions emphasized include:
  - investment in AI and digitalization to accelerate productivity and growth;
  - measures to upskill the labor force and increase participation;
  - improve the business climate, streamline regulations, enhance competition, and strengthen supply chain resilience;
  - accelerating energy transition to support energy diversification and security.
- Directors noted the importance of addressing domestic saving-investment imbalances that give rise to excessive external imbalances.
- Actions aimed at removing domestic distortions—through fiscal, structural, and targeted industrial policies—can simultaneously narrow imbalances while enhancing global output.

### International cooperation and the Fund’s role
- Directors highlighted that international cooperation is essential to address both the immediate threats from the Middle East conflict and longer-term challenges to growth and sustainability.
- They called on governments to cooperate to reduce trade policy uncertainty by re-anchoring trade in clear, predictable rules, including by reducing tariff and non-tariff barriers.
- Directors welcomed the Fund’s cooperation with the World Bank and the International Energy Agency for assessment of the impact and policy responses to the crisis.
- They stressed the key role of a well-resourced Fund in assisting member countries—especially those most affected by the shock from the war, including Fragile and Conflict-Affected States—through tailored policy advice, lending, and capacity development assistance, drawing on lessons from the handling of recent crises.
- Directors reaffirmed the role of the Fund in promoting multilateral solutions in an evenhanded manner, and noted the Fund’s role in supporting member countries’ climate strategies.
- Directors called for continued efforts to strengthen the G20 Common Framework for Debt Treatments.

*The following remarks were made by the Chair at the conclusion of the Executive Board’s discussion of the Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on April 6, 2026.*

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_Source: https://www.imf.org/-/media/files/publications/weo/2026/april/english/text.pdf_