By Reshma Kapadia

The International Monetary Fund on Tuesday cut its expected global economic growth target to 3.1% this year, citing the Iran War, and warned the projection could drop to 2% if there are prolonged energy disruptions.

In January, the IMF had projected global growth of 3.3% in 2026 and 3.2% in 2027.

The downgraded growth target Tuesday comes alongside an expectation the disinflationary trend of the last couple of years will give way to higher inflation, even if the conflict ends soon.

The IMF's latest world economic outlook, unveiled at a gathering of finance ministers and policymakers in Washington, D.C. for the annual spring meetings of the IMF/World Bank, underscored the level of uncertainty facing policymakers and investors as the war continues. It also reflects a continuing reassessment of alliances and trade relationships at a time when the post-World War II global economic order has been upended.

The IMF's baseline, or "reference" forecast, is for the global economy to grow at a pace of 3.1% if the conflict is short-lived. In this scenario, the IMF sees energy commodity price increases of just 19% this year and headline inflation rising to 4.4%. In this scenario, the IMF keeps its earlier target of 3.2% growth for next year steady.

If the Strait of Hormuz is shut down longer and drilling and refining facilities sustain more damage, the IMF assumes global growth falls to 2.5 percent this year and inflation rises to 5.4 percent.

The situation will worsen if energy supply dislocations extend into next year, inflation expectations become markedly less anchored, and financial conditions tighten sharply. In that scenario, global growth would decline to 2% this year and inflation would exceed 6%.

These downgraded growth targets are in contrast to what the IMF had expected before the Iran war: Raising the growth target to 3.4% amid strong momentum from technology and AI investment.

The global outlook underplays the economic pain for some economies close to the conflict or that depend heavily on energy and chemical imports.

In its worst case scenario where global growth is cut to 2% this year, the hit to emerging markets and developing economies would be almost double that felt by advanced economies. The IMF said its GDP growth expectations for the Middle East and North Africa for this year were cut by about two percentage points versus the IMF's January outlook.

In a blog post accompanying the forecast, IMF Chief Economist Pierre-Olivier Gourinchas noted that the closing of the Strait of Hormuz and damage to critical energy infrastructure risked the prospect of a major energy crisis if the conflict continues. He called on policymakers to seek "right policies and stronger global cooperation" to contain the damage.

Many countries, especially in emerging Asia, that are heavily dependent on the Gulf region for chemicals and energy have implemented price caps, subsidies and other interventions to deal with the shortages as a result of the disruption in the Strait of Hormuz.

But IMF economists caution against these measures, which they describe as typically poorly designed and costly. With many countries already facing elevated budget deficits and rising public debt, they called on policymakers to take a narrow and temporary approach to such support, suggesting direct transfers to households most at risk.

The economists also cautioned that fiscal stimulus against a backdrop where inflation is rising could put central bankers in a difficult position as they thread the needle between inflation and growth. Their concern: Price controls and export restrictions could backfire with rationing and spillover to other countries.

"Too often, this lesson was missed in 2022; countries should do better this time," IMF economists said in their outlook.

While the disruption created by Russia's invasion of Ukraine in 2022 and the sharp spike in inflation in the U.S. and elsewhere is a frequent frame of reference for this conflict, IMF economists highlighted that inflation pressures were already high in 2022 on the back of Covid-related disruptions.

Going into the Iran war, labor markets had been weakening and central bankers had started to normalize balance sheets. If the energy shock this time is modest, inflation could be more in check. One big caveat from the IMF team: Consumers still wear the scars from the last two crises, making them much more sensitive to any new price increases.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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April 14, 2026 09:00 ET (13:00 GMT)

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