Global growth forecast lowered for second consecutive time

Middle East conflict and AI demand pull in opposite directions

China one of few major economies to see an upward revision

High-tech manufacturing and exports provide the underlying support

(Reported by Wan Ge, Tokyo) The International Monetary Fund (IMF) released an update to its World Economic Outlook on July 8, projecting that the global economy will grow by 3.0% in 2026 — a downward revision of 0.1 percentage point from its April forecast. This marks the second consecutive downgrade of the full-year growth outlook, following a 0.2-point cut made in April. Global growth is expected to recover to 3.4% in 2027, though this would still fall short of the average 3.5% growth rate seen in 2024 and 2025.

Behind the Downgrade: War and Technology Pulling in Different Directions

According to the IMF, this latest downgrade mainly reflects the continued fallout from the conflict in the Middle East. In its April report, the IMF had assumed that the confrontation between the United States and Iran would end within a few weeks, but the fighting has dragged on longer than expected. Energy prices are now roughly 25% higher than they were before the conflict broke out on February 28, and are expected to remain elevated.

Even so, the global economy has not slowed by more than that. The IMF’s research department notes that demand-driven growth in the global technology sector is accelerating, powered by the development and adoption of artificial intelligence, which has offset part of the damage from the conflict. The IMF’s report describes this dynamic as “a crossing point of war and technology” — energy-importing countries and more vulnerable economies are bearing the brunt of the conflict, while countries integrated into global technology value chains are benefiting from a boost in AI-related demand.

Regional Divergence: A Sharp Drop in the Middle East, Resilience in the US, China Bucking the Trend

This round of regional growth forecasts shows striking divergence:

• The Middle East and Central Asia region saw the largest cut of any region, down 1.2 percentage points to 0.7%, driven mainly by damaged energy infrastructure and stalled exports.
• The eurozone was revised down by 0.2 point to 0.9%.
• Japan was revised down slightly to 0.6%.
• The United States was left unchanged at 2.3% — supported by resilient AI investment, and, as an energy exporter itself, relatively limited exposure to the turmoil in the Middle East.
• China was revised up by 0.2 point to 4.6%.

Against a backdrop of broadly lower global growth expectations, China stands out as one of the few major economies to receive an upward revision. The IMF noted that China’s economy performed faster than expected in the first quarter of 2026, driven mainly by front-loaded public infrastructure investment, growth in high-tech manufacturing, and rising exports. The report specifically highlighted the strong performance of China’s high-tech manufacturing sector, noting that related exports gave the economy a significant boost.

Inflation and Trade: A “Second Wave” Warning and Slowing Trade Growth

On inflation, the IMF raised its forecast for 2026 global headline inflation by 0.3 percentage point from its April estimate, to 4.7%, with a decline to 3.9% expected in 2027. Energy and food prices are the main drivers pushing inflation higher. Some analysts say the alarm has effectively already been sounded on a “second wave” of inflation.

Global trade growth is expected to slow from 5% in 2025 to 3.5% in 2026, before recovering to 4.3% in 2027. The strong growth rate in 2025 mainly reflected businesses stocking up heavily ahead of the implementation of U.S. tariffs.

The IMF warned that the global economy still faces three major downside risks:

First is the risk of renewed escalation in conflict. If the Middle East peace agreement were to collapse and fighting resume, the global economy would find itself in an even more fragile position than when the conflict first broke out — many countries have already drawn down their strategic reserves substantially, leaving markedly less policy room to absorb any further shocks.

Second is the fragmentation of global trade. Rising protectionism and the restructuring of supply chains could further weigh on global trade growth.

Third is the risk of a correction in market expectations around AI. Should market sentiment on the outlook for AI shift, it could trigger volatility in financial markets.