## Chapter 3 of October 2025 WEO

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---

### Summary of recent outturns and surprises
- Several economies proved more resilient than expected to higher energy prices, aided by fiscal support and robust domestic demand.
- Positive surprises concentrated in economies well integrated into the global technology value chain:
  - Top four net exporters of AI-related hardware (Taiwan Province of China, Korea, Thailand, and Malaysia) had an average seasonally adjusted annualized surprise of 4.4 percentage points.
  - The surprise for the world’s remaining countries was –0.3 percentage point.
- Country-specific outturns:
  - Korea recorded 7.5 percent growth, compared with 1.8 percent projected in April.
  - China expanded at 8.1 percent (based on IMF staff’s seasonally adjusted estimates).
  - Japan grew by 1.8 percent, with strong net trade and export contributions and a pickup in private consumption.
  - Germany expanded by 1.4 percent, versus the April 2026 WEO projection of 0.7 percent.
  - United States GDP increased at an annualized rate of 2.1 percent in Q1 2026, compared with 2.5 percent projected in April; business investment in equipment and intellectual property products was a strong contributor.

### Key assumptions underlying the outlook
- Reopening of the Strait of Hormuz is assumed to begin in mid-July, with conditions broadly returning to the prewar state by March 2027.
- Commodity price projections use market pricing as of June 10; assumptions consistent with the war timeline.
- Monetary policy:
  - Policy rates in the euro area and the United States are assumed to be held largely steady in ex-ante real terms.
  - Policy rate in Japan is expected to gradually move toward a neutral setting.
- Fiscal policy:
  - Advanced economies: broadly neutral in 2026 before tightening later.
  - Emerging market and developing economies: expected to tighten gradually.
- Current trade policies (including measures presented as temporary) are assumed maintained through the forecast horizon.
- Policy and geopolitical uncertainty assumed to remain elevated through 2027.
- The AI-driven global technology cycle is assumed to moderate; no exogenous boost to productivity growth is assumed.

### Commodity price and inflation assumptions (exact figures)
- Average petroleum spot price index projected at $89 per barrel, 9 percent higher than assumed under the April 2026 WEO reference forecast.
- Natural gas prices (based on Dutch Title Transfer Facility futures) projected at $15, 5 percent higher than the April reference forecast.
- These correspond to increases of:
  - 32 percent in crude oil prices in 2026, relative to 2025.
  - 22 percent in natural gas prices in 2026, relative to 2025.
- Fertilizer prices projected to rise by 26 percent.
- Food prices expected to increase by 8 percent.
- Note: Prices paid for commodities in various countries may deviate from global benchmarks.

### Global and regional growth projections (exact figures)
- Global:
  - 2026: 3.0 percent
  - 2027: 3.4 percent
- World trade volume growth:
  - 2025: 5.0 percent
  - 2026: 3.5 percent
  - 2027: 4.3 percent
- Advanced economies (AEs):
  - 2026: 1.7 percent
  - 2027: 1.8 percent
- United States:
  - 2026: 2.3 percent
  - 2027: 2.2 percent
- Euro area:
  - 2026: 0.9 percent (0.2 percentage point lower than April WEO)
  - 2027: 1.2 percent
- United Kingdom:
  - 2026: 1.0 percent
  - 2027: 1.3 percent
- Japan:
  - 2026: 0.6 percent
  - 2027: 0.7 percent
- Korea:
  - 2026: 2.6 percent
  - 2027: 2.5 percent
- Canada:
  - 2026: 1.1 percent
  - 2027: 1.7 percent
- Emerging market and developing economies (EMDEs):
  - 2026: 3.8 percent
  - 2027: 4.5 percent
- Selected EMDEs:
  - China 2026: 4.6 percent
  - India 2026: 6.4 percent
  - Malaysia 2026: 4.7 percent
  - Thailand 2026: 1.9 percent (2026 projection revised upward by 0.4 percentage point)
  - Vietnam 2026: 7.5 percent (2026 projection revised upward by 0.4 percentage point)
- Middle East and Central Asia:
  - 2026: 0.7 percent (downward revision of 1.2 percentage point for 2026)
  - 2027: 6.5 percent (upward revision of 1.9 percentage points for 2027)
  - Saudi Arabia: 2026: 1.7 percent; 2027: 5.5 percent
  - Iran: 2026: –5.4 percent (revised upward by 0.7 percentage point relative to April; 2027 revised downward by 0.3 percentage point)
  - Iraq, Kuwait, and Qatar: projected sharp contractions in 2026 followed by double-digit expansions in 2027.
- Sub-Saharan Africa:
  - 2026: 4.3 percent (broadly stable), with divergence across countries; rest of region growth expected to slow from 5.6 percent in 2025 to 5.2 percent in 2026 and 2027.
- Latin America and the Caribbean:
  - 2026: 2.4 percent
  - 2027: 2.7 percent
- Emerging and developing Europe:
  - About 2.0 percent
  - Russia: 1.1 percent

### Distributional and cross-country notes
- Upgrades concentrated among energy exporters and economies integrated into the global technology value chain, including some dependent on the Strait of Hormuz for energy.
- Downgrades concentrated among commodity importers not well positioned to benefit from AI-driven activity.
- Net energy exporters benefit from favorable terms-of-trade effects; net energy importers face a more pronounced drag from higher energy prices unless offset by technology-related activity.
- Small island developing states face slower growth due to higher energy costs, weaker tourism, and remittances.
- Divergence driven by commodity dependence, geographic exposure, remittances and tourism receipts, sensitivity to financial conditions, and position in the global technology value chain.

### Inflation outlook and drivers
- Global headline inflation forecast: rise from 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 3.9 percent in 2027.
- The increase for 2026 is driven mainly by higher energy and food prices.
- Forecast revisions: 2026 revised upward by 0.3 percentage point from the April 2026 WEO; 2027 revised upward by 0.2 percentage point.
- Inflation dynamics expected to remain uneven across countries due to exchange rate pass-through, persistence of services price inflation, labor market conditions, and growing importance of country-specific factors.
- Core inflation return-to-target timelines (major economies):
  - United Kingdom: by mid-2027.
  - Japan: by the end of 2027.
  - United States: by the end of 2027.
  - Euro area: only in 2028.
- Inflation in China: expected to rise from low levels.

### Risks to the baseline
- Most imminent risk: developments in the Middle East.
  - Reescalation of geopolitical tensions would hurt growth and compound inflationary pressures.
  - If the reopening of the Strait of Hormuz goes more smoothly than assumed and commodity prices are lower than in the baseline, growth could be higher and inflation lower.
- Short-term upside activity risks:
  - Continued exceptionally strong AI-related capital spending.
  - Easing financial conditions offsetting headwinds from geopolitical tensions, trade fragmentation, and weak policy buffers.
- Macrofinancial downside from AI hype and exuberant financial markets: could sow seeds of macrofinancial instability.
- Renewed conflict transmission channels:
  - Further increase in commodity prices, extended volatility, supply shortages, and exchange rate pressures.
  - Inventories are now getting closer to multiyear lows and could reach stress levels if supply disruptions persist or hoarding gathers steam.
  - Country actions to secure domestic supply and replenish inventories could amplify global price pressures.
- Food insecurity risks: could worsen materially if disruptions in fertilizer and energy markets intensify or linger, especially in low-income countries in South Asia and sub-Saharan Africa reliant on smallholder farmers.
- External and financial vulnerabilities:
  - Countries with limited reserves and constrained policy space could see wider external imbalances and higher likelihood of balance of payments stress.
  - Higher food and energy prices could heighten the risk of social unrest and domestic political instability, especially in vulnerable economies in sub-Saharan Africa or in countries with upcoming elections.
  - Increased global risk aversion and greater frictions in cross-border finance could trigger capital outflows and abrupt asset repricing in emerging markets with weaker fundamentals.
- Broader conflict scenarios:
  - Persistently elevated geopolitical tensions could raise military expenditure (temporary support to aggregate demand in some cases) but divert resources from more productive uses.
  - Should tensions broaden into open war, human and physical losses would dominate any short-lived demand effects.
- Trade tensions and fragmentation:
  - Trade diversion or unbalanced trade could prompt tariff increases and nontariff restrictions, weighing on growth.
  - Measures targeting upstream sectors or critical intermediate inputs could generate supply bottlenecks with large effects on output and prices; retaliatory measures would amplify costs and disrupt global supply chains.
- Eroded policy buffers as an amplification mechanism:
  - Elevated public debt in several major economies leaves sovereign markets exposed to reassessments of fiscal sustainability if other shocks materialize in tandem.
  - Any resulting repricing could lift sovereign yields, tighten global financial conditions, and intensify refinancing pressures, particularly in highly indebted developing economies.
  - Declining official development assistance could complicate fiscal adjustments in many low-income countries, weakening health, education, and social protection systems amid looming hazards (Ebola public health emergency of international concern; high probability of extreme weather events driven by an extraordinarily strong El Niño).
  - Under renewed inflationary pressures, perceptions of political pressure on independent central banks could weaken policy credibility and de-anchor inflation expectations, requiring monetary policy to remain tighter for longer.
  - Higher term premiums, persistently elevated funding costs, and capital outflows would weigh on activity, particularly in economies markets already perceive as vulnerable.
- Technology/AI shock risks (two-sided):
  - Upside: Rapid broad-based deployment and efficiency gains from AI-related investment could strengthen medium-term growth, especially with policies easing energy and infrastructure constraints, increasing access to critical inputs, and facilitating labor reallocation; low-income countries would need to close gaps in electricity supply, digital infrastructure, and skills.
  - Downside: Expectations regarding AI-related profitability and productivity gains could be revised downward; investment could retrench, frothy equity valuations in AI-exporting economies could correct sharply, tighter global financial conditions and balance sheet pressures could follow; AI could amplify cybersecurity risks to digital infrastructure, disrupting financial intermediation and payment systems.
- Global cooperation and structural upside:
  - Global growth could rise above baseline if durable peace agreements restore trade routes and supply chains; trade pacts lower tariffs and revive delayed investment; cooperation extends beyond goods to services and FDI; structural reforms address fragmentation and demographics and support transformative technological change.

### Policy guidance and recommendations
- Overall prescription: nimble and credible policies tailored to country-specific inflation dynamics, fiscal space, and financial vulnerabilities, alongside renewed international cooperation.
- Monetary policy:
  - Should remain focused on preserving price stability.
  - Appropriate responses depend on country-specific effects of higher commodity prices and technology-driven demand and spillovers to inflation expectations.
  - Where inflationary pressures are visible but judged temporary and inflation expectations anchored, central banks should keep real rates broadly constant over a reasonable horizon, which may imply raising nominal policy rates.
  - If higher inflation is paired with higher demand pressures from a technology-led upturn, central banks may need to do more to avoid overheating.
  - Where inflation was still above target when the war started, credibility is weaker, exchange rate pass-through is greater, or second-round effects appear more likely, policy may need to remain tighter for longer—or be tightened further—to prevent de-anchoring.
  - If negative demand shocks materialize and inflationary pressures recede, scope for easing could emerge but must remain consistent with restoring price stability.
  - Under elevated uncertainty, communication is a policy tool: central banks should state clearly how incoming data alter the balance of risks.
  - Preserving legal and operational independence is essential; shielding monetary policy from political pressures and fiscal dominance is necessary.
- Exchange rate and financial stability policy:
  - For countries with inflation targets or other nominal anchors, exchange rates should generally remain the preferred option to absorb external shocks and preserve relative price adjustment.
  - Where market conditions become disorderly and depreciation amplifies inflation risks or balance sheet stress, temporary foreign exchange intervention or targeted capital flow measures may complement the macroeconomic policy mix, consistent with the IMF’s Integrated Policy Framework.
  - Central banks and supervisors should intensify surveillance of sovereign, bank, and nonbank exposures; assess liquidity and funding risks under adverse scenarios; and ensure capital, liquidity, and reserve buffers remain adequate so they can be released in a timely manner if financial conditions deteriorate abruptly and trigger macrofinancial feedback loops.
- Fiscal policy:
  - Energy-related fiscal support, especially price-distorting measures, should be removed as the energy shock abates to preserve fiscal buffers.
  - Fiscal policy should avoid broad-based subsidies, tax cuts, and price controls; if support is necessary, it should be temporary, tightly targeted to vulnerable households, and embedded in a macroeconomic policy mix consistent with price stability.
  - Support for firms should be high-bar: only for viable, energy-intensive firms, conditional on energy efficiency improvements.
  - Measures should preserve price signals and include clear sunset clauses, transparent eligibility criteria, and well-identified offsets, especially where fiscal space is limited.
  - Reforms to build systems for delivering targeted transfers in advance would allow more effective use of scarce fiscal resources.
  - Economies benefiting from commodity windfalls and the global technology upturn should avoid procyclical spending and save or redeploy gains within a credible medium-term fiscal framework anchored in debt sustainability.
  - Rebuilding fiscal space is essential given elevated debt, higher borrowing costs, and heightened external uncertainty; credible medium-term consolidation should rest on durable revenue measures, stronger tax administration, greater spending efficiency, and reallocation toward infrastructure, skills, and well-targeted social protection.
  - In high-debt economies, adjustment may require deeper spending rationalization and active management of interest rate and refinancing risks.
- Structural reforms and international rules:
  - Priorities include enhancing business dynamism, faster adoption of renewable and energy-efficient technologies, investment in skills, energy, and digital infrastructure, and robust governance for data and cybersecurity.
  - Correcting domestic imbalances: further rebalancing in China, credible fiscal consolidation in the United States, and deeper single-market integration in the European Union.
  - Trade frameworks should be transparent, predictable, mutually beneficial; trade rules should be modernized to reflect the growing role of services and emphasis on supply chain resilience; regional and plurilateral arrangements can help if they minimize distortive provisions.
- International cooperation:
  - Remains critical to manage spillovers, including commodity market pressures, refugee flows, and debt vulnerabilities.
  - Export bans should be avoided as they exacerbate supply shortages and increase global price volatility and distort domestic resource allocation.
  - IMF lending can provide an important backstop to liquidity strains; countries facing debt distress may require timely and orderly debt resolution, supported by continued progress under the Group of Twenty Common Framework and the Global Sovereign Debt Roundtable.

### Global financial markets update — headline findings
- Strong corporate earnings and a resilient global economy have helped cushion the financial system from the effects of the Middle East conflict.
- Financial conditions: remain accommodative and have eased further on prospects of conflict de-escalation, as corporate bond spreads remain historically tight and equity markets have strengthened since the April 2026 Global Financial Stability Report (GFSR), despite higher market-implied policy rates.
- Corporate earnings: More than 80 percent of firms in the S&P 500 index beat their earnings estimates in the first quarter of 2026, keeping the average price-to-earnings ratio broadly constant at a historically high level.
- Equity concentration and performance: Markets with sizable AI exposures—Japan, Korea, Taiwan Province of China, and the United States—are outperforming others so far in the second quarter of 2026.
- Policy-rate and yield dynamics: The possibility of second-round effects of higher energy prices has raised expected policy rate paths through 2026; longer-term yields are also higher globally.
- Emerging-market policy repricing: Policy rate repricing in emerging markets has varied considerably, with crude-oil-importing Asian emerging markets seeing sharper upward repricing of expected policy paths.
- Portfolio flows and issuance: Portfolio flows to emerging markets have stabilized following the sharp retrenchment at the immediate onset of the conflict; investor appetite for hard-currency debt remains robust.

### Key statistics and tabulated forecasts (selected exact figures)
- World Output growth (annual): 3.5 (2024), 3.5 (2025), 3.0 (2026), 3.4 (2027).
- World Consumer Prices (annual): 5.8 (2024), 4.1 (2025), 4.7 (2026), 3.9 (2027).
- Advanced Economies growth (annual): 1.9 (2024), 1.9 (2025), 1.7 (2026), 1.8 (2027).
- United States growth (annual): 2.8 (2024), 2.1 (2025), 2.3 (2026), 2.2 (2027).
- China growth (annual): 5.0 (2024), 5.0 (2025), 4.6 (2026), 4.1 (2027).
- India growth (fiscal year basis): 7.1 (FY 2024/25), 7.7 (FY 2025/26), 6.4 (FY 2026/27), 6.7 (FY 2027/28).
- Oil (commodity price change): –1.8 (2024), –14.4 (2025), 31.8 (2026), –11.8 (2027).
- Nonfuel (average): 3.7 (2024), 9.9 (2025), 18.6 (2026), 1.3 (2027).

### Additional headline figures and assumptions (selected)
- Global growth: "7.0 percent for 2026 and 6.4 percent for 2027 based on calendar years."
- Oil price assumption (average assumed price of oil in US dollars a barrel, based on futures markets as of June 10, 2026): "$89.27 for 2026 and $78.70 for 2027."
- Inflation assumptions (selected economies):
  - Euro area: "2.9 percent for 2026 and 2.3 percent for 2027."
  - Japan: "2.3 percent for 2026 and 2.5 percent for 2027."
  - United States: "3.6 percent for 2026 and 2.4 percent for 2027."
- Selected economies (examples from projections table):
  - Argentina: "–1.3 4.4 3.5 4.0 0.0 0.0"
  - Australia: "1.0 2.0 1.9 1.7 –0.1 0.0"
  - Brazil: "3.4 2.3 2.4 2.2 0.5 0.2"
  - Canada: "2.0 1.9 1.1 1.7 –0.4 –0.2"
  - China: "5.0 5.0 4.6 4.1 0.2 0.1"
  - India: "7.1 7.7 6.4 6.7 –0.1 0.2"
  - Indonesia: "5.0 5.1 5.0 5.1 0.0 0.0"
  - Japan: "–0.2 1.1 0.6 0.7 –0.1 0.1"
  - Korea: "2.2 1.1 2.6 2.5 0.7 0.4"
  - Malaysia: "5.2 5.2 4.7 4.3 0.0 0.0"
  - Philippines: "5.7 4.4 3.9 5.5 –0.2 –0.3"
  - Saudi Arabia: "2.6 4.6 1.7 5.5 –1.4 1.0"
  - United States: "2.8 2.1 2.3 2.2 0.0 0.1"

*International Monetary Fund | World Economic Outlook Update, July 2026 (text excerpt).*

### Chapter 3 of October 2025 WEO), making

### Chapter 3 of October 2025 WEO

### Summary of recent outturns and surprises
- Several economies proved more resilient than expected to higher energy prices, aided by fiscal support and robust domestic demand.
- Much of the positive surprise was concentrated in economies well integrated into the global technology value chain:
  - The top four net exporters of AI-related hardware (Taiwan Province of China, Korea, Thailand, and Malaysia) had an average seasonally adjusted annualized surprise of 4.4 percentage points.
  - The surprise for the world’s remaining countries was –0.3 percentage point.
- Country-specific outturns:
  - Korea recorded 7.5 percent growth, compared with 1.8 percent projected in April.
  - China expanded at 8.1 percent (based on IMF staff’s seasonally adjusted estimates).
  - Japan grew by 1.8 percent, with strong net trade and export contributions and a pickup in private consumption.
  - Germany expanded by 1.4 percent, versus the April 2026 WEO projection of 0.7 percent.
  - United States GDP increased at an annualized rate of 2.1 percent in Q1 2026, compared with 2.5 percent projected in April; business investment in equipment and intellectual property products was a strong contributor.

### Key assumptions underlying the outlook
- Reopening of the Strait of Hormuz is assumed to begin in mid-July, with conditions broadly returning to the prewar state by March 2027.
- Commodity price projections use market pricing as of June 10; assumptions consistent with the war timeline.
- Monetary policy is expected to be less supportive given inflationary pressures and a muted slowdown in activity:
  - Policy rates in the euro area and the United States are assumed to be held largely steady in ex-ante real terms.
  - Policy rate in Japan is expected to gradually move toward a neutral setting.
- Fiscal policy:
  - Advanced economies: broadly neutral in 2026 before tightening later.
  - Emerging market and developing economies: expected to tighten gradually.
- Current trade policies (including measures presented as temporary) are assumed maintained through the forecast horizon.
- Policy and geopolitical uncertainty assumed to remain elevated through 2027.
- The AI-driven global technology cycle is assumed to moderate; no exogenous boost to productivity growth is assumed.

### Commodity price and inflation assumptions (exact figures)
- Average petroleum spot price index projected at $89 per barrel, 9 percent higher than assumed under the April 2026 WEO reference forecast.
- Natural gas prices (based on Dutch Title Transfer Facility futures) projected at $15, 5 percent higher than the April reference forecast.
- These correspond to increases of:
  - 32 percent in crude oil prices in 2026, relative to 2025.
  - 22 percent in natural gas prices in 2026, relative to 2025.
- Fertilizer prices projected to rise by 26 percent.
- Food prices expected to increase by 8 percent.
- Note: Prices paid for commodities in various countries may deviate from global benchmarks.

### Global and regional growth projections (exact figures)
- Global:
  - 2026: 3.0 percent
  - 2027: 3.4 percent
- World trade volume growth:
  - 2025: 5.0 percent
  - 2026: 3.5 percent
  - 2027: 4.3 percent
- Advanced economies (AEs):
  - 2026: 1.7 percent
  - 2027: 1.8 percent
- United States:
  - 2026: 2.3 percent
  - 2027: 2.2 percent
- Euro area:
  - 2026: 0.9 percent (0.2 percentage point lower than April WEO)
  - 2027: 1.2 percent
- United Kingdom:
  - 2026: 1.0 percent
  - 2027: 1.3 percent
- Japan:
  - 2026: 0.6 percent
  - 2027: 0.7 percent
- Korea:
  - 2026: 2.6 percent
  - 2027: 2.5 percent
- Canada:
  - 2026: 1.1 percent
  - 2027: 1.7 percent

- Emerging market and developing economies (EMDEs):
  - 2026: 3.8 percent
  - 2027: 4.5 percent
- Selected EMDEs:
  - China 2026: 4.6 percent
  - India 2026: 6.4 percent
  - Malaysia 2026: 4.7 percent
  - Thailand 2026: 1.9 percent (2026 projection revised upward by 0.4 percentage point)
  - Vietnam 2026: 7.5 percent (2026 projection revised upward by 0.4 percentage point)
- Middle East and Central Asia:
  - 2026: 0.7 percent (downward revision of 1.2 percentage point for 2026)
  - 2027: 6.5 percent (upward revision of 1.9 percentage points for 2027)
  - Saudi Arabia: 2026: 1.7 percent; 2027: 5.5 percent
  - Iran: 2026: –5.4 percent (revised upward by 0.7 percentage point relative to April; 2027 revised downward by 0.3 percentage point)
  - Iraq, Kuwait, and Qatar: projected sharp contractions in 2026 followed by double-digit expansions in 2027.
- Sub-Saharan Africa:
  - 2026: 4.3 percent (broadly stable), with divergence across countries; rest of region growth expected to slow from 5.6 percent in 2025 to 5.2 percent in 2026 and 2027.
- Latin America and the Caribbean:
  - 2026: 2.4 percent
  - 2027: 2.7 percent
- Emerging and developing Europe:
  - About 2.0 percent
  - Russia: 1.1 percent

### Distributional and cross-country notes
- Upgrades concentrated among energy exporters and economies integrated into the global technology value chain, including some dependent on the Strait of Hormuz for energy.
- Downgrades concentrated among commodity importers not well positioned to benefit from AI-driven activity.
- Net energy exporters benefit from favorable terms-of-trade effects; net energy importers face a more pronounced drag from higher energy prices unless offset by technology-related activity.
- Small island developing states face slower growth due to higher energy costs, weaker tourism, and remittances.
- Divergence driven by commodity dependence, geographic exposure, remittances and tourism receipts, sensitivity to financial conditions, and position in the global technology value chain.

*Source: Chapter 3 of October 2025 World Economic Outlook (text provided).*

### 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 3.9 percent in 2027, with the increase

### 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 3.9 percent in 2027, with the increase

### Inflation outlook and drivers
- Global headline inflation forecast: rise from 4.1 percent in 2025 to 4.7 percent in 2026 before easing to 3.9 percent in 2027.
- The increase for 2026 is driven mainly by higher energy and food prices.
- Forecast revisions: 2026 revised upward by 0.3 percentage point from the April 2026 WEO; 2027 revised upward by 0.2 percentage point.
- Inflation dynamics expected to remain uneven across countries due to exchange rate pass-through, persistence of services price inflation, labor market conditions, and growing importance of country-specific factors.
- Core inflation return-to-target timelines (major economies):
  - United Kingdom: by mid-2027.
  - Japan: by the end of 2027.
  - United States: by the end of 2027.
  - Euro area: only in 2028.
- Inflation in China: expected to rise from low levels.

### Risks to the baseline
- Most imminent risk: developments in the Middle East.
  - Reescalation of geopolitical tensions would hurt growth and compound inflationary pressures.
  - If the reopening of the Strait of Hormuz goes more smoothly than assumed and commodity prices are lower than in the baseline, growth could be higher and inflation lower.
- Short-term upside activity risks:
  - Continued exceptionally strong AI-related capital spending.
  - Easing financial conditions offsetting headwinds from geopolitical tensions, trade fragmentation, and weak policy buffers.
- Macrofinancial downside from AI hype and exuberant financial markets: could sow seeds of macrofinancial instability.
- Renewed conflict transmission channels:
  - Further increase in commodity prices, extended volatility, supply shortages, and exchange rate pressures.
  - Current muted oil-price increase and contained impact on activity owe to release of inventories; inventories are now getting closer to multiyear lows and could reach stress levels if supply disruptions persist or hoarding gathers steam.
  - Even absent depletion, perceptions of repeat or permanent shocks could reduce willingness to draw down inventories, producing potentially nonlinear price dynamics.
  - Country actions to secure domestic supply and replenish inventories could amplify global price pressures.
- Food insecurity risks: could worsen materially if disruptions in fertilizer and energy markets intensify or linger, especially in low-income countries in South Asia and sub-Saharan Africa reliant on smallholder farmers.
- External and financial vulnerabilities:
  - Countries with limited reserves and constrained policy space could see wider external imbalances and higher likelihood of balance of payments stress.
  - Higher food and energy prices could heighten the risk of social unrest and domestic political instability, especially in vulnerable economies in sub-Saharan Africa or in countries with upcoming elections.
  - Increased global risk aversion and greater frictions in cross-border finance could trigger capital outflows and abrupt asset repricing in emerging markets with weaker fundamentals.
- Broader conflict scenarios:
  - Persistently elevated geopolitical tensions could raise military expenditure (temporary support to aggregate demand in some cases) but divert resources from more productive uses.
  - Should tensions broaden into open war, human and physical losses would dominate any short-lived demand effects.
- Trade tensions and fragmentation:
  - Trade diversion or unbalanced trade could prompt tariff increases and nontariff restrictions, weighing on growth.
  - Measures targeting upstream sectors or critical intermediate inputs could generate supply bottlenecks with large effects on output and prices; retaliatory measures would amplify costs and disrupt global supply chains.
- Eroded policy buffers as an amplification mechanism:
  - Elevated public debt in several major economies leaves sovereign markets exposed to reassessments of fiscal sustainability if other shocks materialize in tandem.
  - Any resulting repricing could lift sovereign yields, tighten global financial conditions, and intensify refinancing pressures, particularly in highly indebted developing economies.
  - Declining official development assistance could complicate fiscal adjustments in many low-income countries, weakening health, education, and social protection systems amid looming hazards (Ebola public health emergency of international concern; high probability of extreme weather events driven by an extraordinarily strong El Niño).
  - Under renewed inflationary pressures, perceptions of political pressure on independent central banks could weaken policy credibility and de-anchor inflation expectations, requiring monetary policy to remain tighter for longer.
  - Higher term premiums, persistently elevated funding costs, and capital outflows would weigh on activity, particularly in economies markets already perceive as vulnerable.
- Technology/A I shock risks (two-sided):
  - Upside: Rapid broad-based deployment and efficiency gains from AI-related investment could strengthen medium-term growth, especially with policies easing energy and infrastructure constraints, increasing access to critical inputs, and facilitating labor reallocation; low-income countries would need to close gaps in electricity supply, digital infrastructure, and skills.
  - Downside: Expectations regarding AI-related profitability and productivity gains could be revised downward; investment could retrench, frothy equity valuations in AI-exporting economies could correct sharply, tighter global financial conditions and balance sheet pressures could follow; AI could amplify cybersecurity risks to digital infrastructure, disrupting financial intermediation and payment systems.
- Global cooperation and structural upside:
  - Global growth could rise above baseline if durable peace agreements restore trade routes and supply chains; trade pacts lower tariffs and revive delayed investment; cooperation extends beyond goods to services and FDI; structural reforms address fragmentation and demographics and support transformative technological change.

### Policy guidance and recommendations
- Overall prescription: nimble and credible policies tailored to country-specific inflation dynamics, fiscal space, and financial vulnerabilities, alongside renewed international cooperation.
- Monetary policy:
  - Should remain focused on preserving price stability.
  - Appropriate responses depend on country-specific effects of higher commodity prices and technology-driven demand and spillovers to inflation expectations.
  - Where inflationary pressures are visible but judged temporary and inflation expectations anchored, central banks should keep real rates broadly constant over a reasonable horizon, which may imply raising nominal policy rates.
  - If higher inflation is paired with higher demand pressures from a technology-led upturn, central banks may need to do more to avoid overheating.
  - Where inflation was still above target when the war started, credibility is weaker, exchange rate pass-through is greater, or second-round effects appear more likely, policy may need to remain tighter for longer—or be tightened further—to prevent de-anchoring.
  - If negative demand shocks materialize and inflationary pressures recede, scope for easing could emerge but must remain consistent with restoring price stability.
  - Under elevated uncertainty, communication is a policy tool: central banks should state clearly how incoming data alter the balance of risks.
  - Preserving legal and operational independence is essential; shielding monetary policy from political pressures and fiscal dominance is necessary.
- Exchange rate and financial stability policy:
  - For countries with inflation targets or other nominal anchors, exchange rates should generally remain the preferred option to absorb external shocks and preserve relative price adjustment.
  - Where market conditions become disorderly and depreciation amplifies inflation risks or balance sheet stress, temporary foreign exchange intervention or targeted capital flow measures may complement the macroeconomic policy mix, consistent with the IMF’s Integrated Policy Framework.
  - Central banks and supervisors should intensify surveillance of sovereign, bank, and nonbank exposures; assess liquidity and funding risks under adverse scenarios; and ensure capital, liquidity, and reserve buffers remain adequate so they can be released in a timely manner if financial conditions deteriorate abruptly and trigger macrofinancial feedback loops.
- Fiscal policy:
  - Many countries have resorted to fiscal tools in response to the Middle East war.
  - Energy-related fiscal support, especially price-distorting measures, should be removed as the energy shock abates to preserve fiscal buffers.
  - Fiscal policy should avoid broad-based subsidies, tax cuts, and price controls; if support is necessary, it should be temporary, tightly targeted to vulnerable households, and embedded in a macroeconomic policy mix consistent with price stability.
  - Support for firms should be high-bar: only for viable, energy-intensive firms, conditional on energy efficiency improvements.
  - Measures should preserve price signals and include clear sunset clauses, transparent eligibility criteria, and well-identified offsets, especially where fiscal space is limited.
  - Reforms to build systems for delivering targeted transfers in advance would allow more effective use of scarce fiscal resources.
  - Economies benefiting from commodity windfalls and the global technology upturn should avoid procyclical spending and save or redeploy gains within a credible medium-term fiscal framework anchored in debt sustainability.
  - Rebuilding fiscal space is essential given elevated debt, higher borrowing costs, and heightened external uncertainty; credible medium-term consolidation should rest on durable revenue measures, stronger tax administration, greater spending efficiency, and reallocation toward infrastructure, skills, and well-targeted social protection.
  - In high-debt economies, adjustment may require deeper spending rationalization and active management of interest rate and refinancing risks.
- Structural reforms and international rules:
  - Priorities include enhancing business dynamism, faster adoption of renewable and energy-efficient technologies, investment in skills, energy, and digital infrastructure, and robust governance for data and cybersecurity.
  - Correcting domestic imbalances: further rebalancing in China, credible fiscal consolidation in the United States, and deeper single-market integration in the European Union.
  - Trade frameworks should be transparent, predictable, mutually beneficial; trade rules should be modernized to reflect the growing role of services and emphasis on supply chain resilience; regional and plurilateral arrangements can help if they minimize distortive provisions.
- International cooperation:
  - Remains critical to manage spillovers, including commodity market pressures, refugee flows, and debt vulnerabilities.
  - Export bans should be avoided as they exacerbate supply shortages and increase global price volatility and distort domestic resource allocation.
  - IMF lending can provide an important backstop to liquidity strains; countries facing debt distress may require timely and orderly debt resolution, supported by continued progress under the Group of Twenty Common Framework and the Global Sovereign Debt Roundtable.

### Key statistics and tabulated forecasts (selected exact figures from the source)
- World Output growth (annual): 3.5 (2024), 3.5 (2025), 3.0 (2026), 3.4 (2027).
- World Consumer Prices (annual): 5.8 (2024), 4.1 (2025), 4.7 (2026), 3.9 (2027).
- Advanced Economies growth (annual): 1.9 (2024), 1.9 (2025), 1.7 (2026), 1.8 (2027).
- United States growth (annual): 2.8 (2024), 2.1 (2025), 2.3 (2026), 2.2 (2027).
- China growth (annual): 5.0 (2024), 5.0 (2025), 4.6 (2026), 4.1 (2027).
- India growth (fiscal year basis): 7.1 (FY 2024/25), 7.7 (FY 2025/26), 6.4 (FY 2026/27), 6.7 (FY 2027/28).
- Oil (commodity price change): –1.8 (2024), –14.4 (2025), 31.8 (2026), –11.8 (2027).
- Nonfuel (average): 3.7 (2024), 9.9 (2025), 18.6 (2026), 1.3 (2027).

*International Monetary Fund | World Economic Outlook Update, July 2026 (text excerpt).*

### 7.0 percent for 2026 and 6.4 percent for 2027 based on calendar years.

### 7.0 percent for 2026 and 6.4 percent for 2027 based on calendar years

### Key projection assumptions and headline figures
- Global growth: "7.0 percent for 2026 and 6.4 percent for 2027 based on calendar years."
- Oil price assumption (average assumed price of oil in US dollars a barrel, based on futures markets as of June 10, 2026): "$89.27 for 2026 and $78.70 for 2027." (Simple average of prices of UK Brent, Dubai Fateh, and West Texas Intermediate crude oil.) 7/
- Trade volumes assumption: "Simple average of growth rates for export and import volumes (goods and services)." 7/
- Country grouping: "Indonesia, Malaysia, Philippines, Singapore, Thailand. ASEAN = Association of Southeast Asian Nations." 6/
- Coverage note: "Excludes Venezuela." 9/

### Inflation assumptions (selected economies)
- Euro area: "2.9 percent for 2026 and 2.3 percent for 2027." 10/
- Japan: "2.3 percent for 2026 and 2.5 percent for 2027." 10/
- United States: "3.6 percent for 2026 and 2.4 percent for 2027." 10/

### Global financial markets update — headline findings
- "Strong corporate earnings and a resilient global economy have helped cushion the financial system from the effects of the Middle East conflict."
- Financial conditions: "remain accommodative and have eased further on prospects of conflict de-escalation, as corporate bond spreads remain historically tight and equity markets have strengthened since the April 2026 Global Financial Stability Report (GFSR), despite higher market-implied policy rates."
- Corporate earnings: "More than 80 percent of firms in the S&P 500 index beat their earnings estimates in the first quarter of 2026, keeping the average price-to-earnings ratio broadly constant at a historically high level, with interest-rate- and energy-sensitive sectors experiencing little revision to earnings estimates."
- Equity concentration and performance: "The concentration of equity markets in artificial intelligence (AI) stocks... has continued to intensify, and stock markets with sizable AI exposures—Japan, Korea, Taiwan Province of China, and the United States—are outperforming others so far in the second quarter of 2026."
- Policy-rate and yield dynamics: "The possibility of second-round effects of higher energy prices has raised expected policy rate paths through 2026, despite crude oil prices falling from earlier highs... Longer-term yields are also higher globally, and inflation uncertainty could compound fiscal vulnerabilities."
- Emerging-market policy repricing: "Policy rate repricing in emerging markets has varied considerably, reflecting differences in energy dependence... In crude-oil-importing Asian emerging markets, deterioration in the terms of trade has worsened the inflation outlook and put pressure on exchange rates, prompting a sharper upward repricing of expected policy paths. Energy exporters outside the Middle East, by contrast, have seen stronger currency performances, which have helped contain inflation expectations and risk premiums."
- Portfolio flows and issuance: "Portfolio flows to emerging markets have stabilized following the sharp retrenchment at the immediate onset of the conflict. Investor appetite for hard-currency debt remains robust, with several high-yield emerging markets and frontier economies successfully issuing internationally."

### Selected economies: Real GDP growth (Annex highlights)
- Note: "The selected economies account for approximately 83 percent of world output. WEO = World Economic Outlook."
- Projections table excerpt (percent change) includes selected entries (2024–2027 and differences from April 2026 WEO projections). Examples as presented:
  - Argentina: "–1.3 4.4 3.5 4.0 0.0 0.0"
  - Australia: "1.0 2.0 1.9 1.7 –0.1 0.0"
  - Brazil: "3.4 2.3 2.4 2.2 0.5 0.2"
  - Canada: "2.0 1.9 1.1 1.7 –0.4 –0.2"
  - China: "5.0 5.0 4.6 4.1 0.2 0.1"
  - India: "7.1 7.7 6.4 6.7 –0.1 0.2"
  - Indonesia: "5.0 5.1 5.0 5.1 0.0 0.0"
  - Japan: "–0.2 1.1 0.6 0.7 –0.1 0.1"
  - Korea: "2.2 1.1 2.6 2.5 0.7 0.4"
  - Malaysia: "5.2 5.2 4.7 4.3 0.0 0.0"
  - Philippines: "5.7 4.4 3.9 5.5 –0.2 –0.3"
  - Saudi Arabia: "2.6 4.6 1.7 5.5 –1.4 1.0"
  - United States: "2.8 2.1 2.3 2.2 0.0 0.1"
- Source and notes: "Source: IMF staff calculations. Note: The selected economies account for approximately 83 percent of world output. WEO = World Economic Outlook. 1/ Difference based on rounded figures for the current and April 2026 WEO forecasts. 2/ Data and forecasts are presented on a fiscal year basis. 3/ The Iran forecast is subject to unusually high uncertainty given geopolitical and sanctions dynamics."

*Source: IMF staff calculations; World Economic Outlook Update, July 2026 (excerpt).*

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