## Chapter 1 — Global Prospects and Policies

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### The Sources of Resilience
- WEO forecasts have underestimated global growth since 2023 three years in a row, with small errors relative to recent shocks.
- Factors supporting resilience:
  - Household and corporate cash cushions from the pandemic fiscal response (see Chapter 1 of the April 2024 WEO).
  - Long period of low interest rates before the pandemic that facilitated shifts toward longer-maturity, fixed-rate private debt (see Chapter 2 of the April 2024 WEO).
  - Credibility of central banks keeping inflation expectations anchored and improvements in monetary, fiscal, and financial policy frameworks (see Chapter 2 of the October 2025 WEO).
  - In 2025: scaling back of originally announced tariff rates, private-sector adaptability to higher trade barriers, accommodative financial conditions, fiscal stimulus, and a marked pickup in AI-related technology investment (see Box 1.1 of the April 2026 WEO).

### Supply Flexibility and Reduced Dependence on Oil
- Short-run oil market adjustments and observed quantities:
  - About 20 million barrels of oil flowed daily through the Strait of Hormuz prior to the war, roughly a quarter of the world’s maritime oil trade.
  - Production outside the Gulf rose by 2 million barrels a day.
  - Release of global inventories supplied a further 4 million barrels.
  - Observed balancing implied demand compression of about 5 million barrels a day during the second quarter of 2026.
  - China reduced crude oil imports by 23 percent between March and June 2026 relative to the same period a year earlier.
- Longer-term energy trends:
  - Energy usage per dollar of global GDP has fallen by 32 percent over the past two decades.
  - Since 2010, renewables accounted for 60 percent of the total increase in electricity production.
  - The dependence of the global economy on oil has fallen steadily over time.
- Estimated impacts of a Strait of Hormuz closure on 2026 world GDP growth:
  - Initial loss, without flexibility: oil prices average about $110 a barrel for the year, reducing global growth in 2026 by 0.9 percentage point.
  - With flexible supply responses: implied average oil price of $85 a barrel for the year, lowering the hit to global growth by 0.5 percentage point to 0.4 percentage point.
  - The 20 percent reduction in oil intensity of world GDP since the mid-2010s likely reduced the estimated impact by an additional 0.1 percentage point, bringing the net toll to 0.3 percentage point.
- Caveats:
  - It is unclear whether the trend toward renewable electricity production will continue given demand pressures from AI data centers.
  - A closure without flexible responses would have caused a severe price increase and larger growth loss.

### An Agile Private Sector
- Corporate adaptation strategies:
  - Diversifying supply chains, regionalizing production, restructuring ownership, searching for alternative markets, and investing in operational flexibility (de Souza and others 2025; Andrews, Puhr, and Knill 2026; Yang 2026).
- Empirical signs:
  - Increased corporate references to resilience and adaptation in earnings calls.
  - Firms redirected trade toward alternative destinations, cushioning aggregate trade impacts of bilateral tariff shocks.
  - US farmers shifted from corn to soybeans and reduced acreage or fertilizer application in response to higher fertilizer prices, with more limited room to maneuver in poorer countries (Arita and others 2026; Kauffman and Kreitman 2026; USDA 2026).

### AI-Driven Momentum: Concentration, Productivity, and Uncertainty
- AI trade and concentration:
  - Taiwan Province of China and Korea source 62 percent of the net trade in computing hardware related to AI.
  - China and the United States are responsible for more than 75 percent of the net imports of AI-related computing hardware in 2025 and 57 percent of newly built data centers since 2024.
- Micro and macro productivity evidence:
  - Customer support productivity increases reported at 14–15 percent, with gains of 30–35 percent for less experienced workers (Brynjolfsson, Li, and Raymond 2025).
  - Software development output reported to increase by 26 percent (Cui and others 2026).
  - Experienced open-source developers can become 19 percent slower when using AI (Becker and others 2025).
  - Large surveys and administrative data show widespread adoption but limited effects on wages, hours worked, employment, or measured productivity (Humlum and Vestergaard 2026; Yotzov and others 2026).
  - Recent revisions to US employment and activity data—downward revisions to total payroll growth with robust GDP growth—may be an early indication of an AI-driven boost showing up in macro statistics (Brynjolfsson 2026).
- Explanations for muted aggregate effects:
  - Adoption frictions, inadequate training, organizational bottlenecks, and investments in intangible capital could delay translation of task-level gains into aggregate productivity, consistent with a “productivity J-curve” (Brynjolfsson, Rock, and Syverson 2021).

### Financial and Market Conditions Enabling Activity
- Market environment:
  - Financial markets have largely remained calm despite sequential large shocks.
- Possible reasons for calm:
  - AI-related exuberance.
  - Markets’ limited ability to price geopolitical tail risks or beliefs that policy support will cushion adverse outcomes (see Chapter 2 of the April 2025 Global Financial Stability Report).
  - Strong corporate earnings and resilience in emerging markets.
- Effects:
  - Accommodative financial conditions have sustained activity in jurisdictions benefiting from the technology cycle, with positive spillovers through investment, trade, wealth effects, and capital flows.

### Limits and Risks to Resilience
- AI investment boom risks and capacity constraints:
  - The boom is a large, front-loaded demand shock exposing capacity constraints across semiconductors, data centers, cloud infrastructure, electricity generation, grid connections, cooling systems, specialized real estate, construction services, land, energy, and skilled labor.
  - Contribution to inflationary pressures and financial fragility is ongoing; spillovers to core inflation in major economies appear limited so far, but capacity constraints could strengthen pass-through from headline to core inflation.
  - Rising technology stock valuations increase equity valuations and market concentration among AI-related firms (April 2026 Global Financial Stability Report).
- Energy market vulnerabilities:
  - Escalations in the Red Sea and the Black Sea threaten rerouting and non-Gulf production margins.
  - Depletion of global inventories pushes them closer to stress levels that could cause nonlinear price adjustments.
  - Trouble in energy markets could endanger the AI-led impetus because AI infrastructure and operations are energy-intensive.
- Trade and production costs:
  - Short-term reorientation of trade flows has mitigated damage from higher trade barriers, but duplication and higher operating costs may reduce long-term production efficiency.
- Fiscal constraints:
  - Historical experience shows global public debt tends to rise following major shocks.
  - Primary deficits during 2020–25 in the largest advanced and emerging market economies remained, on average, substantially larger than before the pandemic.
  - In most of these economies, with India an exception, stabilizing debt-to-GDP ratios at 2025 levels would require greater fiscal consolidation than currently envisaged under existing policies.

### United States — Outlook, Inflation, and Channels
- Growth projections:
  - IMF staff project growth in the United States at 2.3 percent in 2026 and 2.3 percent in 2027.
  - The 2027 projection is an upward revision of 0.2 percentage point relative to the April 2026 WEO; the 2026 projection is unchanged from April 2026 WEO.
- Inflation and policy assumptions:
  - Assumed inflation rates for the United States: 3.6 percent in 2026 and 2.8 percent in 2027.
  - IMF staff expect monetary policy to be "less supportive than assumed in April," with policy rates in the United States projected to increase in ex ante real terms.
  - Fiscal policy in advanced economies is expected to be "broadly neutral in 2026 before tightening later"; this general assumption applies to the United States within the advanced-economy group.
- Channels and exposures:
  - The United States is characterized as a "net energy exporter" and faces "only limited direct impact from the war."
  - Supportive channels: "robust private consumption"; "fiscal policy"; "accommodative financial conditions"; "continued technology-related business investment (net of its large import content) and productivity strength."
  - IMF staff project the average petroleum spot price index in 2026 at $96 a barrel and project energy prices to remain higher than before the war.

### Regional Growth Outlook
- Middle East and Central Asia:
  - Growth is projected to drop to −0.3 percent in 2026 before rebounding to 6.3 percent in 2027.
  - Relative to April projection: downward revision of 2.2 percentage points for 2026 and upward revision of 1.7 percentage points for 2027.
  - Bahrain, Iraq, Kuwait, and Qatar are projected to experience double-digit contractions in 2026, followed by double-digit expansions in 2027.
  - Saudi Arabia: contract 3.3 percent in 2026 and grow 7.9 percent in 2027.
- Sub-Saharan Africa:
  - Growth expected to remain stable at 4.5 percent in 2026.
  - Rest of region: 5.6 percent in 2025 to 5.5 percent in 2026 and 5.3 percent in 2027.
- Latin America and the Caribbean:
  - Growth projected to edge down to 2.3 percent in 2026 and pick up to 2.5 percent in 2027.
  - Brazil: 2.2 percent in 2026 to 1.9 percent in 2027.
  - Mexico: 1.5 percent in 2026 to 1.8 percent in 2027.
- Emerging and developing Europe:
  - Growth expected to slow from 2.0 percent in 2025 to 1.7 percent in 2026 and recover to 2.1 percent in 2027.

### Inflation Forecast and World Trade
- Inflation:
  - Headline inflation projected to rise from 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 4.1 percent in 2027.
  - Revision: 2026 forecast unchanged from the July WEO Update; 2027 forecast revised upward by 0.2 percentage point; cumulative revision vs April 2026 WEO is 0.7 percentage point.
  - Core inflation is expected to return to 2 percent only gradually in several major economies:
    - By the end of 2027 in Japan and the United Kingdom.
    - By mid-2028 in the euro area and the United States.
- World trade and imbalances:
  - World trade volume growth projected to slow from 5.0 percent in 2025 to 4.6 percent in 2026 and stabilize at 4.7 percent in 2027.
  - Global current account balances increased further in 2025 to about 3.8 percent of world GDP.
    - China’s surplus increased to about 0.6 percent of world GDP (3.7 percent of China’s GDP).
    - The United States had a current account deficit of about 1.0 percent of world GDP.
  - Early 2026 trade data indicate global imbalances are expected to increase slightly in 2026 and remain elevated in 2027.

### Medium-Term Outlook
- Global output projected to expand at an average annual pace of 3.2 percent in 2028–31, compared with the prepandemic (2000–19) historical average of 3.7 percent.
- Medium-term outlook has become increasingly uneven relative to January 2026, with downgrades concentrated among economies affected by the conflict in the Middle East and energy-importing EMDEs (excluding India).
- India shows upward revisions reflecting sustained momentum and growing evidence of stronger growth potential.
- Countries’ readiness to adopt AI and to reliably meet energy needs will be crucial for medium-term potential; the world’s poorest countries are likely to see productivity and growth momentum decelerate given gaps on both dimensions.

### Risks: Downside and Upside Scenarios
- Downside risks (tilted to the downside):
  - Persistent conflicts, cyber threats, and extreme weather events; prolonged escalation in the Middle East or Ukraine; natural gas inventories below seasonal norms in parts of Europe; financial market stress and fiscal vulnerabilities; renewed trade tensions and protectionism.
  - Bank holdings of government securities increased by about 25 percent in emerging market economies and 45 percent in low-income countries; greater holdings are correlated with lower lending to the private sector in high-debt emerging market economies and low-income countries.
- Upside risks:
  - Continued momentum in the technology cycle and faster productivity gains from AI could be more persistent than assumed.
    - A greater-than-expected AI build-out could increase world GDP by 0.6 percent by 2029.
    - Faster diffusion of AI technologies, with complementary investments, could increase global growth by as much as 0.3 percentage point in the near term and by 0.1–0.8 percentage point over the medium term.

### Trade Reconfiguration (Box 1.1)
- Bilateral and third-market movements (China–United States tariff episode):
  - Chinese exports to the United States fell 22 percent between February 2025 and January 2026.
  - US exports to China fell 25 percent between February 2025 and January 2026.
  - These bilateral declines subtracted 3.3 and 1.7 percentage points from China’s and the United States’ total export growth, respectively.
  - By January 2026, Chinese exports to third markets were 4.7 percentage points above trend; US exports to third markets were 2.6 percentage points above trend.
  - Total exports for both economies remained within about 1 percentage point of their pretariff trends by January 2026.
- Share of displaced trade redirected to third markets (within a year):
  - China: exports of products that lost US sales increased to 52 percent of the trade at risk; attributable to the tariff shock, reconfiguration amounts to 39 percent of trade at risk.
  - United States: exports of affected products to third markets increased by 17 percent of the trade at risk; attributable to the shock, increase is about 7 percent of trade at risk.
- Destination regions and sectors:
  - Emerging and advanced Asia together absorbed about half of the reallocated trade; the European Union absorbed close to one-fifth.
  - Electrical machinery accounted for the bulk of the increase to Asia; vehicles for the Middle East and Central Asia; special provisions for Europe.
- Interpretation:
  - Trade reconfiguration helped offset short-term losses, but persistent trade frictions may entail efficiency costs that could accumulate over time.

### Risk Assessment and Scenario Analysis (Box 1.2)
- G20 model confidence bands (comparison with April WEO):
  - Probability annual US growth < 1 percent in 2027: about 30 percent (April estimate: 35 percent).
  - Probability US headline inflation > 4 percent in 2027: about 30 percent (April estimate: 20 percent).
  - Probability global growth in 2027 < 2 percent: about 10 percent (April estimate: 20 percent).
  - Probability 2027 global headline inflation > 5 percent: about 35 percent (April estimate: 30 percent).
- Commodity-and-bond downside scenario (“Conflict and term‑premium”; G20 model) — key assumptions:
  - War in the Middle East persists through the end of June 2027; Straits of Hormuz and Bab el Mandeb largely closed to commercial shipping; oil production in OPEC is 10 and 22 percent lower than baseline in 2026 and 2027, respectively; oil prices reach $130 from Q4 2026 to Q1 2027; oil prices are 17 and 40 percent higher on average in 2026 and 2027, respectively.
  - Term premiums increase by 60 basis points in advanced economies and EMs excluding China starting Q4 2026; China’s term premium increases by 40 basis points.
  - Medium‑term inflation expectations de‑anchor moderately to about 30 basis points in advanced economies and 20 basis points in EMs excluding China by 2031.
- Commodity-and-bond scenario outcomes (selected quantitative impacts — percentage point deviation from baseline):
  - World — Impact on GDP Growth:
    - 2026: Conflict −0.2; Term Premium −0.1; Total −0.2
    - 2027: Conflict −0.4; Term Premium −0.2; Total −0.5
  - World — Impact on Headline Inflation:
    - 2026: Conflict 0.4; Term Premium 0.0; Total 0.4
    - 2027: Conflict 1.0; Term Premium 0.1; Total 1.1
  - Advanced economies — Impact on GDP Growth:
    - 2026: Conflict −0.1; Term Premium −0.1; Total −0.2
    - 2027: Conflict −0.3; Term Premium −0.2; Total −0.5
  - Advanced economies — Impact on Headline Inflation:
    - 2026: Conflict 0.4; Term Premium 0.1; Total 0.5
    - 2027: Conflict 1.1; Term Premium 0.1; Total 1.2
  - EMDEs — Impact on GDP Growth:
    - 2026: Conflict −0.2; Term Premium 0.0; Total −0.3
    - 2027: Conflict −0.5; Term Premium −0.1; Total −0.6
  - EMDEs — Impact on Headline Inflation:
    - 2026: Conflict 0.4; Term Premium 0.0; Total 0.4
    - 2027: Conflict 1.0; Term Premium 0.0; Total 1.0

### Artificial Intelligence Scenarios (GIMF model; Scenarios A, B, C)
- Common modeling assumptions:
  - Eight regions; monetary policy responds endogenously; floating exchange rates in most regions; automatic stabilizers on the fiscal side.
- Scenario A — Strong Payoffs (AI build‑out; baseline for comparisons):
  - Total US investment increases by 2029 by 4 percent relative to the baseline from the AI build‑out component alone; China’s investment increases by 1 percent.
  - Deployment of AI tools raises global TFP by 0.8 percent over 10 years relative to the baseline, with two‑thirds of gains in first five years.
  - Global output increases in the long term by close to 1 percent.
  - US GDP increases by 0.4 percent in 2027 and reaches 1.3 percent by 2031.
  - Asia excluding China: activity peaks at 0.8 percent of baseline by 2029.
  - China’s GDP increases by 0.7 percent by 2029.
  - US current account deficit widens by 0.4 percentage point of baseline GDP by 2029.
- Scenario B — Capacity Constraints:
  - Nominal AI spending equals Scenario A but supply responds slowly in Asia, triggering a significant increase in prices of high‑end technology goods.
  - Global GDP increases by just 0.2 percent by 2029, relative to baseline.
  - US inflation increases by 0.4 percentage point by 2028; US policy rates increase by about 70 basis points.
  - Export prices for Asia excluding China rise by 10 percent relative to baseline (40 percent for high‑end technology exporters).
  - US current account deficit widens by 0.8 percent of baseline by 2029.
  - Aggregate current account surplus in Asia excluding China increases by 2.5 percent of baseline GDP.
- Scenario C — Market Correction:
  - Productivity gains fail to materialize, triggering a sharp decline in investment in the technology sector concentrated in the United States.
  - Equity prices in the United States fall by 20 percent in 2026 and by 15 percent elsewhere.
  - Corporate risk premiums increase temporarily by 75 basis points in the United States, 50 basis points in other advanced economies and China, and 75–100 basis points in other emerging markets.
  - US investment reduced by 5 percent from the unwind layer alone; US GDP reduced by 0.8 percent from this layer alone.
  - Aggregate impacts by 2028: unwinding reduces global GDP by as much as 0.4 percent and investment by as much as 1.3 percent; combined effects reduce global output by 0.6 percent and investment by 1 percent, relative to baseline.
  - Net outcome by 2028: global activity is 1.1 percent lower than in the baseline; United States output is 1.8 percent lower; Asia output is 1.7 percent lower.

### Commodity Markets and Energy Price Developments (Commodity Special Feature)
- Primary commodity prices decreased by 6.3 percent between March 2026 and August 2026.
- Oil market developments and quantities/prices:
  - Strait of Hormuz disruption affected about 20 percent of global oil supply; oil prices peaked in late March at $126 a barrel; Dubai‑Brent spread widened to $54.
  - Early June supply deficit: 1.9 million barrels a day (mb/d) covered by rapidly depleting reserves.
  - Mid‑June memorandum of understanding between Iran and the United States led to release of about 90 million barrels, creating a temporary glut and price collapse to $68 a barrel.
  - Market stabilization in early June at about $100 a barrel.
  - Brent futures indicate a return to preconflict prices of $79 a barrel by the end of 2027.
  - Exports of crude from the Gulf in September averaged 16.7 mb/d or 88 percent of prewar levels, ending the month at 13.4 mb/d.
  - Refined product markets remain 70 percent to 95 percent above prewar levels; refinery outages and damage removed about 20 percent of international refined product supply.
- Natural gas and other commodities:
  - TTF prices increased by 18 percent between March 2026 and August 2026 to $20.9 a MMBtu.
  - Henry Hub prices fell by 9.2 percent to $2.8 a MMBtu between March and August 2026.
  - Futures: TTF prices average $19.8 a MMBtu in 2026, decreasing to $8.4 a MMBtu in 2031; Henry Hub prices increase from $3.1 a MMBtu in 2026 to $3.6 a MMBtu in 2031.
  - IMF metals price index declined 4.5 percent between March and August 2026.
  - Gold price lost 9.1 percent; silver decreased 17 percent.
  - Base metals price index increased 4.9 percent; futures suggest a modest increase of 2.3 percent in 2027.
  - IMF food and beverages price index increased by 0.8 percent between March and August 2026.
  - Wheat increased 22.7 percent; corn increased 3.8 percent; soybeans increased 5.3 percent.
  - Seafood: salmon prices declined 16.0 percent.
  - Beverages increased 19.2 percent; cocoa increased 83.6 percent; coffee increased 8.0 percent.
  - IMF fertilizer index declined 10.5 percent; phosphate up 22.4 percent; nitrogen-based fertilizers down 31.5 percent.
  - Food prices projected to increase 5.0 percent in 2026 and 2.4 percent in 2027; beverage prices projected to fall 21.5 percent in 2026.
- Commodity Price Tracker (high‑frequency SVAR) — methodology and findings:
  - Decomposes oil and European gas (TTF) price fluctuations into current demand, forward‑looking demand, current supply disruption, and forward‑looking supply disruption (geopolitical supply risk).
  - Sample coverage: June 1, 2007 (October 4, 2013 for gas) to May 29, 2026.
  - Impulse-response and aggregation evidence:
    - For oil‑importing advanced economies, a 1 percent increase in front‑month monthly oil prices from forward‑looking demand, current demand, or actual supply shocks increases consumer prices by roughly 0.06 percent after one year.
    - Geopolitical supply risk shock’s impact on inflation is short‑lived (prices back to preshock levels within six months to a year) and has no statistically significant impact on unemployment.
    - Negative actual supply shocks that increase front‑month oil prices by 1 percent increase unemployment by 0.04 percentage point one year after the shock.
  - Historical decompositions:
    - Russia–Ukraine (starting February 24, 2022): geopolitical supply risk contributed more than twice as much to oil price increases as actual supply; for gas, supply was the dominant driver.
    - Middle East (starting February 27, 2026): geopolitical supply risk and actual supply contributed roughly equally to oil price increases; for gas, geopolitical supply risk put substantial upward pressure followed by supply.

### Banks’ Average Holdings of Government Securities and Correlations
- Banks’ average holdings (Percent of total assets): 5; 25; 10; 15; 20
- Correlations between banks’ bond holdings and lending to private sector (Percentage points): −0.6; 0.2; −0.4; −0.2; 0
- Methodology:
  - Correlations are coefficients from bank-level regressions of the bond‑holdings‑to‑assets ratio on the loans‑to‑assets ratio.
  - Regressions control for bank- and country-level variables and include country, year, and bank fixed effects.
  - High- and low‑debt countries defined by whether government debt to GDP is above or below the 75th percentile of the sample distribution within each country group.
  - Bars denote point estimates; whiskers denote 90 percent confidence intervals.

### Annex: Summary of World Real per Capita Output (selected series, Annual percent change; in constant 2021 international dollars at PPP)
- World: 1.8 (Average 2008–17); 2.5 (2018); 1.8 (2019); –3.9 (2020); 5.7 (2021); 2.8 (2022); 2.3 (2023); 2.5 (2024); 2.6 (2025); 2.1 (2026); 2.5 (2027)
- Advanced Economies: 0.8; 1.9; 1.5; –4.4; 6.0; 2.5; 0.9; 1.4; 1.7; 1.9; 1.7
- United states: 0.8; 2.4; 2.1; –2.9; 5.9; 1.9; 2.1; 2.0; 1.8; 2.0; 2.0
- China: 7.7; 6.4; 5.7; 2.2; 8.5; 3.2; 5.5; 5.1; 5.2; 4.7; 4.2
- India: 5.3; 5.3; 2.8; –6.7; 8.8; 6.8; 6.4; 6.2; 6.9; 6.1; 6.1
- Emerging Market and Developing Economies: 3.3; 3.3; 2.5; –3.2; 5.9; 3.2; 3.4; 3.4; 3.5; 2.6; 3.4
- Memorandum groups:
  - European Union: 0.7; 2.1; 1.9; –5.7; 6.7; 3.5; 0.0; 1.1; 1.3; 1.3; 1.3
  - Emerging Market and Middle‑Income Economies: 3.6; 3.6; 2.7; –2.9; 6.6; 3.5; 3.8; 3.8; 3.8; 2.9; 3.7
  - Low‑Income Developing Countries: 2.7; 2.2; 2.2; –3.8; 1.4; 2.6; 1.8; 1.9; 2.5; 2.6; 2.6
- Note: Series are presented exactly as reported in Annex Table 1.1.6.

### Conclusion: Policy Implications and Tools
- Key takeaway:
  - Effective policy responses to energy‑related shocks require identifying the source of energy price movements in real time and distinguishing demand-driven price increases from supply disruptions and geopolitical supply risk.
  - Oil‑related geopolitical supply risk typically has only short‑lived effects on prices and no measurable effect on unemployment, whereas supply disruptions and forward‑looking demand shocks generate larger and more persistent macroeconomic effects.
- Policy recommendations:
  - Policymakers need real‑time tools (such as the Commodity Price Tracker) to decompose energy price movements and guide timely and effective macroeconomic and labor‑market policies.
  - Distinguishing among forward‑looking demand, current demand, supply, and geopolitical supply risk is central to choosing appropriate policy responses.

*International Monetary Fund, World Economic Outlook: Resilience Under Strain, October 2026 (Chapter 1 excerpts).*

### 2.5 to 5.0

### 2.5 to 5.0

### The Sources of Resilience
- WEO forecasts have underestimated global growth since 2023 three years in a row, with small errors relative to recent shocks.
- Factors supporting resilience:
  - Household and corporate cash cushions from the pandemic fiscal response (see Chapter 1 of the April 2024 WEO).
  - Long period of low interest rates before the pandemic that facilitated shifts toward longer-maturity, fixed-rate private debt (see Chapter 2 of the April 2024 WEO).
  - Credibility of central banks keeping inflation expectations anchored and improvements in monetary, fiscal, and financial policy frameworks (see Chapter 2 of the October 2025 WEO).
  - In 2025: scaling back of originally announced tariff rates, private-sector adaptability to higher trade barriers, accommodative financial conditions, fiscal stimulus, and a marked pickup in AI-related technology investment (see Box 1.1 of the April 2026 WEO).

### Supply Flexibility and Reduced Dependence on Oil
- Recent oil market developments and adjustments:
  - About 20 million barrels of oil flowed daily through the Strait of Hormuz prior to the war, roughly a quarter of the world’s maritime oil trade.
  - Persian Gulf producers redirected some supply to other ports.
  - Production outside the Gulf rose by 2 million barrels a day.
  - Release of global inventories supplied a further 4 million barrels.
  - Observed balancing implied demand compression of about 5 million barrels a day during the second quarter of 2026.
  - China reduced the volume of its crude oil imports by 23 percent between March and June 2026 relative to the same period a year earlier.
- Longer-term energy trends:
  - Energy usage per dollar of global GDP has fallen by 32 percent over the past two decades.
  - Since 2010, renewables accounted for 60 percent of the total increase in electricity production.
  - The dependence of the global economy on oil has fallen steadily over time.
- Estimated impacts of a Strait of Hormuz closure on 2026 world GDP growth:
  - Initial loss in oil supply without flexibility: oil prices average about $110 a barrel for the year, reducing global growth in 2026 by 0.9 percentage point.
  - With flexible supply responses (rerouting, increased non-Gulf production, inventories): implied average oil price of $85 a barrel for the year, lowering the hit to global growth by 0.5 percentage point to 0.4 percentage point.
  - The 20 percent reduction in oil intensity of world GDP since the mid-2010s likely reduced the estimated impact by an additional 0.1 percentage point, bringing the net toll to 0.3 percentage point.
- Caveats:
  - It is unclear whether the trend toward renewable electricity production will continue given demand pressures from AI data centers.
  - A closure without flexible responses would have caused a severe price increase and larger growth loss.

### An Agile Private Sector
- Firms use engagement and adaptation strategies to cope with geopolitical risks and policy shifts, including diversifying supply chains, regionalizing production, restructuring ownership, searching for alternative markets, and investing in operational flexibility (de Souza and others 2025; Andrews, Puhr, and Knill 2026; Yang 2026).
- Empirical signs of corporate adaptation:
  - Corporate references to resilience and adaptation have increased in earnings calls.
  - Firms redirected trade toward alternative destinations, cushioning aggregate trade impacts of bilateral tariff shocks.
  - US farmers shifted from corn to soybeans and reduced acreage or fertilizer application in response to higher fertilizer prices, with more limited room to maneuver in poorer countries (Arita and others 2026; Kauffman and Kreitman 2026; USDA 2026).

### An Offsetting Force: AI-Driven Momentum
- AI trade and concentration:
  - Net trade in AI hardware increased exponentially as a share of world GDP, driven by price effects rather than volumes.
  - Taiwan Province of China and Korea source 62 percent of the net trade in computing hardware related to AI.
  - China and the United States are responsible for more than 75 percent of the net imports of AI-related computing hardware in 2025 and 57 percent of newly built data centers since 2024.
- Short-term and long-term implications:
  - Short-term: increased exports, higher investment, and capital deepening.
  - Longer-term: broader AI adoption could potentially change productivity profiles, but timing and magnitude are unclear.
- Micro and macro evidence on productivity:
  - Customer support productivity increases reported at 14–15 percent, with gains of 30–35 percent for less experienced workers (Brynjolfsson, Li, and Raymond 2025).
  - Software development output reported to increase by 26 percent (Cui and others 2026).
  - Experienced open-source developers can become 19 percent slower when using AI (Becker and others 2025).
  - Large surveys and administrative data show widespread adoption but limited effects on wages, hours worked, employment, or measured productivity (Humlum and Vestergaard 2026; Yotzov and others 2026).
  - Recent revisions to US employment and activity data—downward revisions to total payroll growth with robust GDP growth—may be an early indication of an AI-driven boost showing up in macro statistics (Brynjolfsson 2026).
- Potential explanations for muted aggregate effects:
  - Adoption frictions, inadequate training, organizational bottlenecks, and investments in intangible capital could delay translation of task-level gains into aggregate productivity, consistent with a “productivity J-curve” (Brynjolfsson, Rock, and Syverson 2021).

### An Enabling Push: Financial and Market Conditions
- Financial markets have largely remained calm despite sequential large shocks.
- Possible reasons for market calm:
  - AI-related exuberance.
  - Markets’ limited ability to price geopolitical tail risks or beliefs that policy support will cushion adverse outcomes (see Chapter 2 of the April 2025 Global Financial Stability Report).
  - Strong corporate earnings and resilience in emerging markets.
- Accommodative financial conditions have sustained activity in jurisdictions benefiting from the technology cycle, with positive spillovers through investment, trade, wealth effects, and capital flows.

### The Limits of Resilience
- AI investment boom risks:
  - The boom is a large, front-loaded demand shock exposing capacity constraints across sectors: semiconductors, data centers, cloud infrastructure, electricity generation, grid connections, cooling systems, specialized real estate, construction services, land, energy, and skilled labor.
  - Contribution to inflationary pressures and financial fragility is ongoing; spillovers to core inflation in major economies appear limited so far, but capacity constraints could strengthen pass-through from headline to core inflation.
  - Rising technology stock valuations support demand but increase equity valuations and market concentration among AI-related firms (April 2026 Global Financial Stability Report).
- Energy market vulnerabilities:
  - Escalations in the Red Sea and the Black Sea threaten rerouting and non-Gulf production margins.
  - Depletion of global inventories pushes them closer to stress levels that could cause nonlinear price adjustments.
  - Trouble in energy markets could endanger the AI-led impetus because AI infrastructure and operations are energy-intensive.
- Trade and production costs:
  - Short-term reorientation of trade flows has mitigated damage from higher trade barriers, but duplication and higher operating costs may reduce long-term production efficiency.
- Fiscal constraints:
  - Historical experience shows global public debt tends to rise following major shocks.
  - Primary deficits during 2020–25 in the largest advanced and emerging market economies remained, on average, substantially larger than before the pandemic.
  - In most of these economies, with India an exception, stabilizing debt-to-GDP ratios at 2025 levels would require greater fiscal consolidation than currently envisaged under existing policies.

*Source: International Monetary Fund, Chapter 1 text excerpts.*

### 1. United States

### 1. United States

### Growth outlook
- IMF staff project growth in the United States at 2.3 percent in 2026 and 2.3 percent in 2027.
- The 2027 projection is an upward revision of 0.2 percentage point relative to the April 2026 WEO; the 2026 projection is unchanged from April 2026 WEO.
- Activity is described as being supported by:
  - "robust private consumption"
  - "fiscal policy"
  - "accommodative financial conditions"
  - "continued technology-related business investment (net of its large import content) and productivity strength"

### Inflation and monetary-fiscal assumptions
- The assumed inflation rates for the United States are 3.6 percent in 2026 and 2.8 percent in 2027.
- IMF staff expect monetary policy to be "less supportive than assumed in April," with policy rates in the United States projected to increase in ex ante real terms.
- Fiscal policy in advanced economies is expected to be "broadly neutral in 2026 before tightening later"; this general assumption applies to the United States within the advanced-economy group.

### Channels, exposures, and risks
- The United States is characterized as a "net energy exporter," and IMF staff state that the country faces "only limited direct impact from the war" because of that status.
- Key supportive channels for US activity include private consumption, fiscal policy, accommodative financial conditions, and technology-related investment, though investment has "large import content."
- Global assumptions that affect the United States include commodity price paths and elevated policy and geopolitical uncertainty through 2027; IMF staff project the average petroleum spot price index in 2026 at $96 a barrel and project energy prices to remain higher than before the war.

*Source: IMF staff projections and analysis in Chapter 1, World Economic Outlook: Resilience Under Strain, October 2026.*

### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs

### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs

### Regional Growth Outlook
- Middle East and Central Asia:
  - Growth is projected to drop to −0.3 percent in 2026 before rebounding to 6.3 percent in 2027.
  - Relative to the April projection, this is a downward revision of 2.2 percentage points for 2026 and an upward revision of 1.7 percentage points for 2027.
  - Bahrain, Iraq, Kuwait, and Qatar are projected to experience double-digit contractions in 2026, followed by double-digit expansions in 2027.
  - Saudi Arabia is projected to contract 3.3 percent in 2026 and grow 7.9 percent in 2027.
  - Growth in Iran in 2026 is revised downward amid resumed military exchanges, the reimposition of the naval blockade, and enhanced sanctions.
- Sub-Saharan Africa:
  - Growth is expected to remain stable at 4.5 percent in 2026, with substantial divergence across countries.
  - Growth in the rest of the region is expected to slow from 5.6 percent in 2025 to 5.5 percent in 2026 and 5.3 percent in 2027.
  - Nigeria is supported by improved macroeconomic stability and favorable terms-of-trade effects, though higher prices for essentials are expected to further aggravate poverty and food insecurity.
  - South Africa’s growth outlook is expected to remain stable in the near term and improve gradually over the medium term.
- Latin America and the Caribbean:
  - Growth is projected to edge down to 2.3 percent in 2026 and to pick up modestly to 2.5 percent in 2027.
  - Brazil is expected to slow from 2.2 percent in 2026 to 1.9 percent in 2027, reflecting still-restrictive monetary conditions, withdrawal of fiscal policy support, and global uncertainty.
  - Mexico is projected to accelerate modestly from 1.5 percent in 2026 to 1.8 percent in 2027 amid continued export support, including through AI value chains, and stabilizing investment.
- Emerging and developing Europe:
  - Growth is expected to slow from 2.0 percent in 2025 to 1.7 percent in 2026 and recover to 2.1 percent in 2027.
  - The regional outlook is shaped by higher energy costs, security-related uncertainty, tighter financing conditions, and reorientation of trade and investment patterns.

### Inflation Forecast
- Headline inflation is projected to rise from 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 4.1 percent in 2027.
- The 2026 inflation forecast is unchanged from the July WEO Update; the forecast is revised upward by 0.2 percentage point for 2027.
- The revision compared with the April 2026 WEO is a cumulative 0.7 percentage point.
- Core inflation is expected to return to 2 percent only gradually in several major economies:
  - By the end of 2027 in Japan and the United Kingdom.
  - By mid-2028 in the euro area and the United States.
- Inflation in China is expected to rise from low levels.

### World Trade and Global Imbalances
- World trade volume growth is projected to slow from 5.0 percent in 2025 to 4.6 percent in 2026 and stabilize at 4.7 percent in 2027.
- Global current account balances increased further in 2025 to about 3.8 percent of world GDP.
  - China’s surplus increased to about 0.6 percent of world GDP (3.7 percent of China’s GDP).
  - The United States had a current account deficit of about 1.0 percent of world GDP.
- Early 2026 trade data indicate global imbalances are expected to increase slightly in 2026 and are projected to remain elevated in 2027, with further increases in trade surpluses in China and other Asian exporters and weaker balances in the United States and the euro area.
- Persistent domestic saving-investment distortions in major economies and expansionary fiscal policy in some surplus economies are expected to contribute to the projected cyclical decline in surpluses; technology-driven business investment is expected to keep attracting capital to the United States.

### Medium-Term Outlook
- Global output is projected to expand at an average annual pace of 3.2 percent in 2028–31, compared with the prepandemic (2000–19) historical average of 3.7 percent.
- The medium-term outlook has become increasingly uneven relative to January 2026, with downgrades concentrated among economies affected by the conflict in the Middle East and energy-importing emerging market and developing economies (excluding India).
- India shows upward revisions reflecting sustained momentum and growing evidence of stronger growth potential.
- Countries’ readiness to adopt AI and to reliably meet energy needs will be crucial for medium-term potential; the world’s poorest countries are likely to see productivity and growth momentum decelerate given gaps on both dimensions.

### Risks: Downside and Upside Scenarios
- Downside risks (tilted to the downside):
  - Persistent conflicts, cyber threats, and extreme weather events could raise commodity price volatility, exacerbate inflationary pressures, and raise term premiums.
  - A prolonged escalation in the Middle East or Ukraine could further disrupt energy markets and transit routes; current backwardation in oil markets suggests markets treat supply disruptions as largely temporary.
  - Natural gas inventories below seasonal norms in parts of Europe leave markets vulnerable to adverse weather ahead of winter.
  - Ongoing conflicts could increase cyberattack risks affecting critical infrastructure and financial services, including those facilitated by AI models.
  - Extreme weather events and El Niño could put upward pressure on food and commodity prices and weigh on activity, especially in economies where food is a large share of the consumption basket.
  - Energy-importing emerging market and developing economies with limited fiscal space and external buffers would be particularly challenged: wider current account deficits, increased external financing needs, exchange rate pressures, and higher inflation could require tighter monetary policy and drag growth.
  - Financial market stress and fiscal vulnerabilities: a broad repricing of financial assets could widen sovereign spreads, cause exchange rate pressures, and tighten domestic financial conditions, interacting with elevated public debt and refinancing needs.
  - Bank holdings of government securities have increased by about 25 percent in emerging market economies and 45 percent in low-income countries; greater holdings are correlated with lower lending to the private sector, particularly in high-debt emerging market economies and low-income countries.
  - Renewed trade tensions and protectionist measures could further dampen global growth and amplify supply bottlenecks and inflationary pressures.
- Upside risks:
  - Continued momentum in the technology cycle and faster productivity gains from AI could be more persistent than assumed.
    - A greater-than-expected AI build-out could increase world GDP by 0.6 percent by 2029.
    - Faster diffusion of AI technologies, with complementary investments, could increase global growth by as much as 0.3 percentage point in the near term and by 0.1–0.8 percentage point over the medium term.
  - Reconfiguration of the international trading system and progress in trade arrangements could reduce trade costs, improve predictability, and support global activity.

*International Monetary Fund, World Economic Outlook: Resilience Under Strain, October 2026*

### 1. Banks’ Average Holdings of Government Securities

### 1. Banks’ Average Holdings of Government Securities

### Banks’ average holdings (Percent of total assets)
- Reported values: 5; 25; 10; 15; 20

### Correlations between banks’ bond holdings and lending to private sector (Percentage points)
- Reported coefficients: −0.6; 0.2; −0.4; −0.2; 0

### Methodology and definitions
- Correlations in panel 2 are coefficients from bank-level regressions of the bond-holdings-to-assets ratio on the loans-to-assets ratio.
- Regressions control for a set of bank- and country-level variables, as well as country, year, and bank fixed effects.
- High- and low-debt countries are defined based on whether government debt to GDP is above or below the 75th percentile of the sample distribution within each country group.
- Bars denote point estimates; whiskers denote 90 percent confidence intervals.
- Abbreviations: EMMIEs = emerging market and middle-income economies; LIDCs = low-income developing countries.

*International Monetary Fund | October 2026*

### CHAPTER 1 gLOBaL PROsPECTs aND POLICIEs

### CHAPTER 1 — Global Prospects and Policies (Boxes on Trade Reconfiguration and Risk Assessment)

### Trade reconfiguration and export resilience (Box 1.1)
- Authors: Hippolyte Balima and Monika Sztajerowska.
- Context: Tariffs introduced by the US administration in April 2025 and subsequent retaliatory measures altered bilateral China–United States trade patterns; literature refers to reallocation toward third-country destinations as “trade deflection” (Bown and Crowley 2007).
- Bilateral and third-market movements:
  - Chinese exports to the United States fell 22 percent between February 2025 and January 2026.
  - US exports to China fell 25 percent between February 2025 and January 2026.
  - These bilateral declines subtracted 3.3 and 1.7 percentage points from China’s and the United States’ total export growth, respectively.
  - By January 2026, Chinese exports to third markets were 4.7 percentage points above trend.
  - By January 2026, US exports to third markets were 2.6 percentage points above trend.
  - Total exports for both economies remained within about 1 percentage point of their pretariff trends by January 2026.
  - Third-market gains widened through May 2026 while bilateral China–US trade recovered part of its earlier decline.
- Share of displaced trade redirected to third markets:
  - Within a year, exports of Chinese products that lost US sales increased to 52 percent of the trade at risk (China’s preshock exports of the same products to the United States).
  - Attributable to the tariff shock (after accounting for preexisting trends), the reconfiguration for China amounts to 39 percent of trade at risk.
  - For the United States, within a year exports of affected products to third markets increased by 17 percent of the corresponding trade at risk.
  - Attributable to the shock for the United States, the increase is about 7 percent of trade at risk.
  - The asymmetry reflects, among other factors, that prior to tariff escalation the United States accounted for a substantially larger share of China’s exports than China did of US exports (15 percent versus 7 percent).
- Destination regions and sectoral composition:
  - Emerging and advanced Asia together absorbed about half of the reallocated trade.
  - The European Union absorbed close to one-fifth of the reallocated trade.
  - Smaller shares were absorbed by the Middle East and Central Asia, Africa, and the Western Hemisphere.
  - Relative to these destinations’ own imports of the affected products, the redirected trade remained modest, with the largest shares in Africa, Association of Southeast Asian Nations member countries, and the Middle East and Central Asia.
  - By product group: electrical machinery accounted for the bulk of the increase to Asia; vehicles accounted for the bulk of the increase to the Middle East and Central Asia; special provisions accounted for the bulk of the increase to Europe.
- Interpretation and caveats:
  - Trade reconfiguration helped offset losses experienced by China and the United States in the short term by redirecting a meaningful share of trade toward alternative destinations.
  - Possible underlying mechanisms include supply‑chain reconfiguration and rerouting, as well as broader supply and demand forces (Alfaro and Chor 2023; Freund and others 2024; Graziano, Sztajerowska, and Volpe Martincus 2026; Freund and others 2025; Iyoha and others 2025).
  - Disentangling the relative importance of these channels is an area for future work.
  - While reconfiguration enhanced short‑term resilience of trade flows, persistent trade frictions may entail efficiency costs that could accumulate over time.

### Risk assessment surrounding the baseline projection (Box 1.2)
- Authors: Jared Bebee, Benjamin Carton, Chris Jackson, Dirk Muir, and Rafael Portillo.
- Models used:
  - G20 model: to derive confidence bands around the WEO baseline and to produce a commodity-and-bond-market downside scenario.
  - GIMF model: to assess three AI‑centered scenarios (strong payoffs; capacity constraints; market correction).
- Confidence bands (G20 model; comparison with April WEO):
  - Probability that annual US growth will fall below 1 percent in 2027: about 30 percent (April estimate: 35 percent).
  - Probability that US headline inflation will increase above 4 percent in 2027: about 30 percent (April estimate: 20 percent).
  - Probability that global growth in 2027 will fall below 2 percent: about 10 percent (April estimate: 20 percent).
  - Probability that 2027 global headline inflation will rise above 5 percent: about 35 percent (April estimate: 30 percent).
- Commodity and bond markets downside scenario (“Conflict and term‑premium” scenario; G20 model):
  - Assumptions:
    - The war in the Middle East persists through the end of June 2027, keeping the Straits of Hormuz and Bab el Mandeb largely closed to commercial shipping, extending damages to oil infrastructures, and delaying recovery in oil supply to the end of 2027.
    - Oil production in OPEC is 10 and 22 percent lower than baseline in 2026 and 2027, respectively, and normalizes in 2028.
    - Oil prices reach $130 from the fourth quarter of 2026 to the first quarter of 2027 and return to baseline by the fourth quarter of 2027.
    - Oil prices are 17 and 40 percent higher on average in 2026 and 2027, respectively.
    - Natural gas benchmarks for Asia and Europe are 17 and 26 percent higher than in the baseline in 2026 and 2027, respectively; natural gas prices in the Americas do not increase.
    - Term premiums increase equally in advanced economies and emerging markets excluding China by 60 basis points relative to the baseline starting in the fourth quarter of 2026; China’s term premium increases by 40 basis points.
    - No additional fiscal consolidation is assumed over the WEO horizon relative to the baseline; policy is assumed to adjust beyond 2031 with debt stabilizing at a permanently higher level as a result of higher interest payments.
    - Medium‑term inflation expectations de‑anchor moderately, increasing gradually over the WEO horizon to about 30 basis points in advanced economies and 20 basis points in emerging markets excluding China by 2031; no upward drift is assumed for China.
  - Broad outcomes:
    - About two‑thirds of the global growth effect comes from disruption in oil and gas markets.
    - Higher energy costs account for most of the increase in global inflation.
    - Monetary policy tightening in the scenario: policy rates increase by 50 basis points in advanced economies in 2027 and by 25 basis points in emerging markets in 2027.
    - By 2031, the level of GDP in advanced economies falls by 0.7 percent relative to the baseline.
    - Public debt in advanced economies increases by more than 3 percentage points of GDP by 2031 (2 percentage points globally).
  - Quantitative impacts (Table 1.2.1 — percentage point deviation from baseline):
    - World — Impact on GDP Growth:
      - 2026: Conflict −0.2; Term Premium −0.1; Total −0.2
      - 2027: Conflict −0.4; Term Premium −0.2; Total −0.5
    - World — Impact on Headline Inflation:
      - 2026: Conflict 0.4; Term Premium 0.0; Total 0.4
      - 2027: Conflict 1.0; Term Premium 0.1; Total 1.1
    - Advanced economies (aEs) — Impact on GDP Growth:
      - 2026: Conflict −0.1; Term Premium −0.1; Total −0.2
      - 2027: Conflict −0.3; Term Premium −0.2; Total −0.5
    - Advanced economies — Impact on Headline Inflation:
      - 2026: Conflict 0.4; Term Premium 0.1; Total 0.5
      - 2027: Conflict 1.1; Term Premium 0.1; Total 1.2
    - Emerging market and developing economies (EMDEs) — Impact on GDP Growth:
      - 2026: Conflict −0.2; Term Premium 0.0; Total −0.3
      - 2027: Conflict −0.5; Term Premium −0.1; Total −0.6
    - EMDEs — Impact on Headline Inflation:
      - 2026: Conflict 0.4; Term Premium 0.0; Total 0.4
      - 2027: Conflict 1.0; Term Premium 0.0; Total 1.0
  - Additional notes:
    - Advanced economies are relatively more affected by higher premiums and inflation expectations because they are more sensitive to changes in financial conditions and see a larger increase in long‑term rates (100 basis points in advanced economies in 2027 versus 90 basis points in emerging markets).
    - A broader tightening in global financial conditions beyond term premiums would worsen the hit to global activity but is not considered in the scenario.
- Artificial intelligence scenarios (GIMF model; Scenarios A, B, C)
  - Common modelling assumptions:
    - Eight regions, including China, Japan, the rest of Asia, the euro area, and the United States.
    - Monetary policy responds endogenously, with floating exchange rates in most regions; China’s currency assumed to have some limited adjustment relative to the US dollar.
    - Automatic stabilizers operate on the fiscal side.
  - Scenario A — Strong Payoffs:
    - Additional AI‑related spending concentrated in the United States and to a lesser extent China.
    - Total US investment increases by 2029 by 4 percent relative to the baseline from the AI build‑out component alone.
    - China’s investment increases by 1 percent.
    - Deployment of AI tools raises global levels of total factor productivity by 0.8 percent over 10 years relative to the baseline, with two‑thirds of the gains occurring in the first five years (estimate based on the lower bound from Cerutti and others 2025).
    - AI‑related capital goods largely sourced from Asian economies (such as Korea), increasing import intensity of US investment and producing larger spillovers to Asia.
    - Assumes Asian producers have capacity to meet increased external demand, limiting the increase in Asia’s export prices.
    - The additional AI build‑out fades beyond the WEO horizon.
  - Scenario B — Capacity Constraints:
    - Nominal AI spending equals Scenario A but supply responds slowly in Asia, triggering a significant increase in prices of high‑end technology goods.
    - Exporters of high‑end technology goods in Asia experience a large temporary terms‑of‑trade improvement; major importers (e.g., United States) face a corresponding deterioration.
    - Productivity gains are more back‑loaded than in Scenario A; long‑term gains are the same but materialize only by the end of the WEO horizon.
    - Near‑term demand is strong; wealth effects similar to Scenario A.
    - Strong demand, higher import prices, and several years of above‑target inflation in the United States lead to a stronger inflation response (US Phillips curve steepens and shifts upward).
    - Financial conditions tighten moderately in emerging markets not involved in the AI boom; sovereign (corporate) premiums in emerging markets outside Asia increase by 25 (50) basis points for two years.
  - Scenario C — Market Correction:
    - Productivity gains from AI investment fail to materialize, triggering a sharp decline in investment in the technology sector concentrated in the United States.
    - The reappraisal triggers a sharp reduction in asset prices and tighter financial conditions:
      - Equity prices in the United States fall by 20 percent in 2026 and by 15 percent elsewhere.
      - Corporate risk premiums increase temporarily by 75 basis points in the United States, 50 basis points in other advanced economies and China, and 75–100 basis points in other emerging markets.
      - Sovereign bond markets see moderate temporary increases in term premiums of 30–50 basis points in advanced economies and 75–100 basis points in emerging markets.
    - The concentration of shocks in the United States reduces appetite for US assets and puts downward pressure on the US dollar.
    - Shocks fade over the WEO horizon.
  - Outcomes reported:
    - Figures 1.2.2 and 1.2.3 present scenario impacts on levels of GDP during 2027–31 for the world, the United States, China, Asia excluding China, and remaining countries, and show scenario effects on inflation, policy rates, real effective exchange rates, and current accounts (deviations from baseline).
    - (Quantitative scenario‑by‑region outcomes are presented in the figures referenced in the text.)

*International Monetary Fund | October 2026*

### 0.6 percent by 2029, relative to that in the baseline.

### ch1 - 0.6 percent by 2029, relative to that in the baseline.

### Impact of AI scenarios on GDP
- Global output increases in the long term by close to 1 percent.
- The impact is largest for the United States and Asia.
- US GDP increases by 0.4 percent in 2027 and keeps growing over the WEO horizon, reaching 1.3 percent by 2031.
- Asia excluding China: activity peaks at 0.8 percent of baseline by 2029, with most gains occurring in high-end technology exporters.
- China’s GDP increases by 0.7 percent by 2029.
- Long-term benefits:
  - United States: higher long-term impact due to exposure to automation and production of AI-related services (scenario assumes a permanent increase in demand).
  - Other advanced economies: highly exposed to productivity gains from AI but benefit less from increased demand for technology goods and services.
  - Asia: benefits from a persistent increase in demand for technology goods.
  - Other emerging markets: smallest increase in GDP where exposure to automation and technology industries is limited.

### Scenario A (AI build-out; baseline for comparisons)
- Global output increases in the long term by close to 1 percent.
- US direct impact: modest because a large part of the investment impulse goes to imports, but productivity gains are larger and more immediately visible than in other countries.
- US current account deficit widens by 0.4 percentage point of baseline GDP by 2029; small real depreciation of the US dollar.
- Asia excluding China: current account balance peaks at 0.7 percentage point of baseline GDP; appreciation of currencies (especially in technology-oriented economies); small increase in export prices.
- Global inflation impact: small, as productivity increases largely keep pace with demand increases; US policy rate does not increase relative to the baseline.
- Note: “Long-term” is at least 50 years ahead.

### Scenario B (Capacity Constraints)
- Global GDP increases by just 0.2 percent by 2029, relative to that in the baseline.
- Productivity gains are slower to materialize.
- Inflationary effects larger than in Scenario A, especially in the United States:
  - US inflation increases by 0.4 percentage point by 2028.
  - US policy rates increase by about 70 basis points.
- Technology goods price effects:
  - Export prices for Asia excluding China rise by 10 percent relative to the baseline (40 percent for high-end technology exporters), increasing imported inflation elsewhere.
- Regional outcomes:
  - Most economies: near-term GDP increase smaller than in Scenario A; some economies fall below the baseline.
  - Asia excluding China: similar activity increase to Scenario A because domestic demand benefits from a large, positive terms-of-trade shock despite smaller export volume increases.
- Global imbalances:
  - US current account deficit widens by 0.8 percent of baseline by 2029.
  - Aggregate current account surplus in Asia excluding China increases by 2.5 percent of baseline GDP.
  - Asian currency appreciation larger than in Scenario A; US dollar appreciates in response to US monetary tightening.

### Scenario C (Market Correction)
- AI-related investment unwinds:
  - US investment reduced by 5 percent from the unwind layer alone.
  - US GDP reduced by 0.8 percent from this layer alone.
- Asia: region’s GDP reduced by about 0.5 percent by 2029, relative to the baseline; losses concentrated in high-end technology exporters.
- Price effects for Asian exporters:
  - Asian technology exporters experience a 20 percent decline in export prices.
  - Other economies in the Asia region see a 4 percent decline.
- Aggregate impacts by 2028:
  - Unwinding reduces global GDP by as much as 0.4 percent and investment by as much as 1.3 percent.
  - Correction in asset prices and tightening financial conditions further reduce global consumption by 0.6 percent by 2028.
  - Combined effects reduce global output by 0.6 percent and investment by 1 percent, relative to the baseline.
- Spillovers and financial effects:
  - Spillovers to sovereign bond markets and demand for US assets subtract a further 0.3 percent from global output.
  - Output in emerging market economies is affected by increased term premiums.
  - United States: US dollar depreciates by about 6 percent supporting exports, while tighter financial conditions weigh on domestic demand.
  - China benefits in the short term from US dollar depreciation; other regions experience GDP decreases from lower external demand.
- Net outcome by 2028:
  - Global activity is 1.1 percent lower than in the baseline.
  - United States output is 1.8 percent lower than in the baseline.
  - Asia output is 1.7 percent lower than in the baseline.
- Inflation and policy rates: global and US inflation and policy rates are lower than in the baseline—with US policy rates lower despite the US dollar depreciation—and global imbalances narrow.

### Other key macroeconomic variables (scenario highlights)
- Inflation (percentage point deviations from baseline): modest effects under Scenario A; larger upward deviations in Scenario B (notably US +0.4 percentage point by 2028); lower inflation under Scenario C relative to the baseline.
- Policy rate (percentage point deviations from baseline): little change in Scenario A for the US; +70 basis points in Scenario B; lower in Scenario C.
- Real effective exchange rates and current account balances: scenarios produce regionally heterogeneous deviations, including appreciations for Asia excluding China in Scenarios A and B and widening US current account deficits in Scenarios A and B.

### Commodity market and energy price developments (Commodity Special Feature)
- Primary commodity prices decreased by 6.3 percent between March 2026 and August 2026.
- Oil market developments:
  - Strait of Hormuz disruption affected about 20 percent of global oil supply; oil prices peaked in late March at $126 a barrel; Dubai-Brent spread widened to $54.
  - Market adjustments: increased production outside the Persian Gulf (Brazil, Kazakhstan, the United States, Venezuela); drawdown of inventories including IEA emergency stocks and China’s stocks; demand compression from China.
  - Early June supply deficit: 1.9 million barrels a day (mb/d) covered by rapidly depleting reserves.
  - Mid-June memorandum of understanding between Iran and the United States led to a brief reopening of the Strait and the release of about 90 million barrels, creating a temporary glut and price collapse to $68 a barrel.
  - Market stabilization in early June at about $100 a barrel.
  - Brent futures indicate a return to preconflict prices of $79 a barrel by the end of 2027.
  - Exports of crude from the Gulf in September averaged 16.7 mb/d or 88 percent of prewar levels, ending the month at 13.4 mb/d.
  - Refined product markets remain 70 percent to 95 percent above prewar levels; refinery outages and damage in the Gulf and Russia removed about 20 percent of international refined product supply.
- Natural gas:
  - TTF prices increased by 18 percent between March 2026 and August 2026 to $20.9 a MMBtu.
  - Henry Hub prices fell by 9.2 percent to $2.8 a MMBtu between March and August 2026.
  - Futures: TTF prices average $19.8 a MMBtu in 2026, decreasing to $8.4 a MMBtu in 2031; Henry Hub prices increase from $3.1 a MMBtu in 2026 to $3.6 a MMBtu in 2031.
- Metals and agricultural prices:
  - IMF metals price index declined 4.5 percent between March and August 2026.
  - Gold price lost 9.1 percent; silver decreased 17 percent.
  - Base metals price index increased 4.9 percent; futures suggest a modest increase of 2.3 percent in 2027.
  - IMF food and beverages price index increased by 0.8 percent between March and August 2026.
  - Wheat increased 22.7 percent; corn increased 3.8 percent; soybeans increased 5.3 percent.
  - Seafood: salmon prices declined 16.0 percent; other fish and shrimp prices also moved lower.
  - Beverages increased 19.2 percent; cocoa increased 83.6 percent; coffee increased 8.0 percent.
  - IMF fertilizer index declined 10.5 percent; phosphate up 22.4 percent; nitrogen-based fertilizers down 31.5 percent.
  - Food prices projected to increase 5.0 percent in 2026 and 2.4 percent in 2027; beverage prices projected to fall 21.5 percent in 2026 (projection continues in source).

*Source: IMF staff estimates. International Monetary Fund | October 2026.*

### 3.2 percent in 2027 due to El Niño. Upside risks stem

### Pricing Geopolitical Risk: Real-Time Evidence from Oil and Gas Markets

### Motivation
- "3.2 percent in 2027 due to El Niño." Upside risks stem from elevated fertilizer prices ahead of the Southern Hemisphere planting season, which could reduce input use, lower yields, and tighten grain supplies in 2027. A stronger-than-expected El Niño event could further disrupt weather conditions in key producing regions, and tariffs and geopolitical tensions could put additional upward pressure on prices.
- In March 2026, the war in the Middle East effectively closed the Strait of Hormuz, stranding in the Persian Gulf oil and liquefied gas equal to about 20 percent of world consumption.
- Oil prices increased by about 10 percent in January and February 2026 amid rumors of an impending US attack on Iran.
- The Commodity Special Feature develops tools to distinguish energy price increases driven by stronger demand, actual supply disruptions, and geopolitical supply risk—the latter being the threat of potential future supply disruption that raises precautionary inventory demand and risk premiums.

### Analytical framework: Commodity Price Tracker (high-frequency SVAR)
- The Commodity Price Tracker is a high-frequency four-variable structural vector autoregression (SVAR) model that decomposes oil and European gas (TTF) price fluctuations into four shocks: current demand, forward-looking demand, current supply disruption, and forward-looking supply disruption (geopolitical supply risk).
- Sample coverage: June 1, 2007 (October 4, 2013, for gas) to May 29, 2026.
- Estimation: Bayesian methods using the European Central Bank’s BEAR toolbox.
- Daily variables in the SVAR:
  - adjusted front-month energy price,
  - 13-month futures price,
  - returns from an equity index (world index for oil; European index for gas),
  - newspaper-based Geopolitical Risk Threats (GPRT) index from Caldara and Iacoviello (2022).
- Identification:
  - Distinguishes realized supply disruptions from geopolitical supply risk in real time.
  - Uses instrument variables: VIX, OVX, gold prices, front-month oil prices; for gas, includes daily forecast temperature anomalies as instrument for current demand.
  - Employs parsimonious sign and relative magnitude restrictions based on economic theory.

### Transmission to financial markets and the macroeconomy
- Impulse-response evidence (shocks normalized to one standard deviation; sample: June 1, 2007, to May 29, 2026 for oil; October 4, 2013, to May 29, 2026 for gas):
  - Forward-looking demand and current demand increase front-month and futures energy prices and equities.
  - Current demand promotes backwardation (bigger increase of front-month than 13-month futures); forward-looking demand shifts the whole futures curve upward.
  - Current supply shocks promote backwardation and cause equities to fall.
  - Geopolitical supply risk raises energy prices but has equity responses not different from zero.
- Macroeconomic impacts (daily shocks aggregated to monthly; shocks scaled so front-month prices increase 1 percent on impact):
  - For oil-importing advanced economies:
    - Forward-looking demand, current demand, and actual supply shocks that increase front-month monthly oil prices by 1 percent all increase consumer prices by roughly 0.06 percent after one year.
    - The geopolitical supply risk shock’s impact on inflation is short-lived, with prices back to preshock levels within six months to a year.
    - Demand-driven oil shocks, especially forward-looking, decrease the unemployment rate persistently, with unemployment below preshock levels almost two years after the shock.
    - Negative supply shocks that increase front-month oil prices by 1 percent increase the unemployment rate by 0.04 percentage point one year after the shock.
    - The geopolitical supply risk shock has no statistically significant impact on the unemployment rate.
  - For Europe (gas shocks, five largest European economies; shocks normalized so TTF price increases 1 percent):
    - Forward-looking demand or supply shocks increase the price level by about 0.05 percent after one year.
    - Current demand and geopolitical supply risk shocks increase the price level by roughly 0.08 percent after one year.
    - Gas shocks, particularly geopolitical supply risk, have more persistent effects on inflation than comparable oil shocks.
    - Responses of unemployment to gas shocks are relatively muted.

### Revisit of historical episodes: Russia–Ukraine (2022) and Middle East (2026) wars
- Decompositions show:
  - Geopolitical supply risk exerted upward pressure on oil and gas prices before both conflicts, reflecting rising expectations of military escalation.
  - During Russia’s invasion of Ukraine (starting February 24, 2022), geopolitical supply risk contributed more than twice as much to oil price increases as actual supply; for gas, supply was the dominant driver, consistent with major European gas supply disruptions.
  - During the 2026 Middle East war (starting February 27, 2026), geopolitical supply risk and actual supply contributed roughly equally to oil price increases; for gas, geopolitical supply risk put substantial upward pressure followed by supply, consistent with elevated uncertainty, shipping disruptions from the Strait of Hormuz closure, and damage to Qatari facilities.
  - Demand contributed upward pressure on energy prices at the beginning of the 2026 war as refineries and electrical firms competed for scarce crude and liquefied natural gas; as the war continued, demand contribution diminished, signaling demand compression.
- Key takeaway: Even when realized supply disruptions occur, heightened geopolitical supply risk continues to exert upward pressure on energy prices; not all observed price increases during crises reflect physical scarcity—part reflects elevated risk premiums from uncertainty about future disruptions.

### Analytical and policy implications
- Disentangling geopolitical supply risk from actual supply disruptions is critical because:
  - Actual supply disruptions have larger and more persistent effects on inflation and unemployment than geopolitical supply risk shocks.
  - Geopolitical supply risk tends to have short-lived inflationary effects and muted impacts on unemployment, implying different monetary policy trade-offs than realized supply losses.
- The Commodity Price Tracker offers policymakers a real-time tool to assess the relative contributions of current and expected demand and supply shocks to energy price movements, informing more tailored policy responses.

*International Monetary Fund*

### Conclusion

### Conclusion

### Key takeaway
- Effective policy responses to energy-related shocks require identifying the source of energy price movements in real time.
- Policymakers should distinguish between price increases driven by demand shocks and those driven by supply shocks and, among the latter, between price increases as a result of geopolitical tensions and those caused by actual supply disruptions.
- Oil-related geopolitical supply risk typically has only short-lived effects on prices and no measurable effect on unemployment, whereas supply disruptions and forward-looking demand shocks generate larger and more persistent macroeconomic effects.
- Shocks often arise simultaneously; recent events in the Middle East show that energy prices often increase in anticipation of supply disruptions and that geopolitical risk continues to influence prices even when shortages have already occurred.
- Interpreting higher energy prices solely as evidence of physical scarcity can lead to inappropriate policy responses.

### Policy implications
- Policymakers need real-time tools to decompose energy price movements and to guide timely and effective policy responses.
- Distinguishing among types of shocks (forward-looking demand, current demand, supply, geopolitical supply risk) is central to choosing appropriate macroeconomic and labor-market policies.

### Commodity Price Tracker and methodology
- The Commodity Price Tracker offers a real-time framework for distinguishing among commodity price shocks, thereby supporting more timely and effective policy responses.
- Although the focus of the Commodity Special Feature is on oil and gas, the framework is flexible enough to be extended to other commodities in the future.
- The analysis uses variance decompositions of front-month energy prices estimated with four-variable structural vector autoregression models.
- "Front-month price" refers to the price of futures contracts for the nearest available maturity.
- Sources cited for data and methods include Bloomberg Finance L.P.; Caldara and Iacoviello 2022; and IMF staff calculations.

### Data and estimation notes
- Data used to estimate the models for oil are from June 2007 to May 29, 2026.
- Data used to estimate the models for natural gas are from October 4, 2013, to May 29, 2026.
- The figure presents front-month price decompositions around selected episodes, reported as "Percent change from value at beginning of period."

*Source: Commodity Special Feature, World Economic Outlook, International Monetary Fund.*

### Annex Table 1.1.6. Summary of World Real per Capita Output

### Annex Table 1.1.6. Summary of World Real per Capita Output

### Overview
- Series measured in "Annual percent change; in constant 2021 international dollars at purchasing power parity".
- Columns correspond to: Average 2008–17, 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026, 2027.
- World:
  - 1.8 (Average 2008–17)
  - 2.5 (2018)
  - 1.8 (2019)
  - –3.9 (2020)
  - 5.7 (2021)
  - 2.8 (2022)
  - 2.3 (2023)
  - 2.5 (2024)
  - 2.6 (2025)
  - 2.1 (2026)
  - 2.5 (2027)

### Advanced Economies
- Advanced Economies:
  - 0.8 (Average 2008–17)
  - 1.9 (2018)
  - 1.5 (2019)
  - –4.4 (2020)
  - 6.0 (2021)
  - 2.5 (2022)
  - 0.9 (2023)
  - 1.4 (2024)
  - 1.7 (2025)
  - 1.9 (2026)
  - 1.7 (2027)
- United states:
  - 0.8; 2.4; 2.1; –2.9; 5.9; 1.9; 2.1; 2.0; 1.8; 2.0; 2.0
- Euro area (calculated as sum of individual euro area countries):
  - 0.4; 1.6; 1.5; –6.3; 6.5; 3.4; –0.1; 0.8; 1.0; 1.0; 1.1
- Selected euro-area countries:
  - germany: 1.2; 1.1; 1.0; –3.9; 4.1; 1.2; –1.9; –0.3; 0.2; 1.6; 1.3
  - France: 0.3; 1.3; 1.7; –7.9; 6.4; 2.3; 1.3; 1.1; 0.6; 0.1; 0.5
  - Italy: –0.8; 1.0; 0.6; –8.6; 9.7; 5.2; 1.0; 0.8; 0.6; 0.9; 0.7
  - spain: 0.1; 1.8; 1.1; –11.1; 6.5; 5.0; 1.2; 2.6; 1.9; 1.5; 0.8
- Japan:
  - 0.6; 1.0; –0.1; –4.0; 3.9; 1.6; 1.4; 0.5; 1.7; 1.3; 1.2
- United Kingdom:
  - 0.6; 1.1; 0.9; –10.2; 8.1; 4.0; –0.9; 0.0; 0.9; 0.7; 0.9
- Canada:
  - 0.5; 1.3; 0.4; –6.1; 5.3; 2.9; –0.8; –0.9; 0.7; 1.5; 1.7
- Other advanced Economies (excludes the group of seven and euro area countries):
  - 1.7; 2.1; 1.3; –2.2; 6.0; 2.0; 0.6; 1.9; 2.8; 3.6; 2.3

### Emerging Market and Developing Economies
- Emerging Market and Developing Economies:
  - 3.3; 3.3; 2.5; –3.2; 5.9; 3.2; 3.4; 3.4; 3.5; 2.6; 3.4
- Emerging and Developing asia:
  - 6.1; 5.6; 4.5; –1.3; 7.1; 4.1; 5.1; 4.9; 5.1; 4.6; 4.4
- China:
  - 7.7; 6.4; 5.7; 2.2; 8.5; 3.2; 5.5; 5.1; 5.2; 4.7; 4.2
- India (see country-specific notes for India in the “Country Notes” section of the Online statistical appendix):
  - 5.3; 5.3; 2.8; –6.7; 8.8; 6.8; 6.4; 6.2; 6.9; 6.1; 6.1
- Emerging and Developing Europe:
  - 1.8; 3.4; 2.4; –1.9; 7.6; 1.7; 3.8; 4.3; 2.4; 1.9; 2.0
- Russia:
  - 1.0; 2.6; 2.1; –2.5; 6.3; –1.3; 4.2; 5.4; 1.6; 1.3; 1.2
- Latin america and the Caribbean:
  - 0.8; 0.0; –1.0; –8.0; 6.7; 3.6; 1.5; 1.6; 1.7; 1.6; 1.8
- Brazil:
  - 0.8; 1.1; 0.6; –3.9; 4.3; 2.6; 2.8; 3.0; 1.9; 1.8; 1.5
- Mexico:
  - 0.3; 1.0; –1.3; –9.1; 5.4; 2.9; 2.2; 0.6; –0.3; 0.7; 1.0
- Middle East and Central asia:
  - 1.1; 0.8; 0.3; –4.5; 3.0; 4.2; 0.5; 1.0; 1.9; –2.4; 4.3
- saudi arabia:
  - 0.5; 5.9; 2.1; –8.3; 9.2; 7.2; –4.0; –2.0; 2.5; –5.2; 5.8
- sub-saharan africa:
  - 1.5; 0.6; 0.3; –5.7; 1.4; 1.9; 1.3; 1.5; 2.0; 2.0; 2.0
- Nigeria (see country-specific notes for Nigeria in the “Country Notes” section of the Online statistical appendix):
  - 2.1; –0.4; 0.0; –8.3; –1.0; 2.2; 1.2; 1.9; 1.9; 2.1; 2.2
- south africa:
  - 0.2; 0.0; –1.3; –7.5; 3.8; 0.9; –0.5; –0.8; 1.0; –0.2; 0.1

### Memorandum groups and aggregates
- European Union:
  - 0.7; 2.1; 1.9; –5.7; 6.7; 3.5; 0.0; 1.1; 1.3; 1.3; 1.3
- asEaN-5 (Indonesia, Malaysia, the Philippines, singapore, and Thailand):
  - 3.5; 3.8; 3.2; –5.5; 3.4; 4.6; 3.1; 3.9; 3.6; 3.5; 3.5
- Middle East and North africa:
  - 0.7; 0.2; –0.1; –4.7; 3.1; 4.5; 0.4; 0.7; 1.6; –4.1; 5.0
- Emerging Market and Middle-Income Economies:
  - 3.6; 3.6; 2.7; –2.9; 6.6; 3.5; 3.8; 3.8; 3.8; 2.9; 3.7
- Low-Income Developing Countries:
  - 2.7; 2.2; 2.2; –3.8; 1.4; 2.6; 1.8; 1.9; 2.5; 2.6; 2.6

### Notes and source
- source: IMF staff estimates.
- Note: Data for some countries are based on fiscal years. Please refer to Online Table F in the Online statistical appendix for a list of economies with exceptional reporting periods.
- Footnotes included in the table:
  - 1 Data are calculated as the sum of data for individual euro area countries.
  - 2 Excludes the group of seven (Canada, France, germany, Italy, Japan, United Kingdom, United states) and euro area countries.
  - 3 see the country-specific notes for India and Nigeria in the “Country Notes” section of the Online statistical appendix.
  - 4 Indonesia, Malaysia, the Philippines, singapore, and Thailand.

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_Source: https://www.imf.org/-/media/files/publications/weo/2026/october/english/ch1.pdf_