IMF cuts outlook, warns of potential global recession

The International Monetary Fund has cut its growth outlook due to Iran war-driven energy price spikes and supply disruptions and warned that the global economy would teeter on ‌the brink of recession if the conflict worsens and oil stays above $US100 per barrel throughout 2027.

The IMF also revised down its economic growth projections for Australia slightly from what it had forecast in January.

Australia’s national GDP growth rate is now expected to come in at 2 per cent in 2026, compared to the the 2.1 per cent previously forecast, and 1.7 per cent in 2027, down from 2.2 per cent.

But Australia's inflation outlook was revised significantly higher, with consumer price growth of 4 per cent in 2026 exceeding most advanced economies, including the US, the UK and New Zealand.

IMF’s 3 possible scenarios for global economy

With massive uncertainty over the Middle East conflict gripping finance officials gathering for IMF and World Bank meetings in Washington DC, the IMF presented three growth scenarios: weaker, worse and severe - depending on how the ‌war unfolds.

The World Economic Outlook's most optimistic "reference scenario" assumes a short-lived Iran war and forecasts 3.1 per cent real GDP growth for 2026, down 0.2 percentage point from its previous forecast in January.

Under this scenario, oil prices average $US82 per barrel for all of 2026, a decline from recent levels of about $US100 for the Brent benchmark futures ‌price.

Without the Middle East conflict, the IMF said it would have upgraded its growth outlook by 0.1 percentage point to 3.4 per cent, due to a continued technology investment boom, lower interest rates, less-severe US tariffs and fiscal support in some countries.

But the war has created a far bigger risk to the global economy than US President Donald Trump's initial wave of steep tariffs did a year ago, IMF chief economist Pierre-Olivier Gourinchas told Reuters in an interview.

"What's happening in the Gulf is potentially much, much larger, and that's what our scenarios are kind of documenting," he said.

What happens if oil stays high or rises?

Under an "adverse scenario" of a longer conflict that keeps oil prices at about $US100 per barrel this year and $US75 in 2027, the IMF predicts global GDP growth would fall to 2.5 per cent this year.

The IMF in January had forecast that oil would decline to about $US62 in 2026.

And the IMF's worst-case "severe scenario" assumes an extended and deepening conflict and much higher oil ‌prices that prompt major financial market dislocations ‌and tighter financial conditions, slashing global growth to ⁠2 per cent.

"This would mean a close call for a global recession," the IMF said, adding that growth has been below that level only four times since 1980 - with the last two severe recessions in 2009, following the financial crisis, and in 2020 as the COVID-19 pandemic raged.

The inflation and recession risks

Gourinchas said that a number of countries would be in outright recessions under this scenario, with oil prices averaging $US110 per barrel in 2026 and $US125 in 2027.

Prices at this level for an extended time would also increase expectations "that inflation is here to stay," prompting wider price increases and wage hike demands.

"That change in inflation expectations is going to require central banks to step on the brakes and try to bring inflation back down," he said, adding that this may require more pain than in 2022.

The IMF said, however, that central banks may be able to "look through" a short-lived energy price surge and hold rates steady amid weaker activity, which would be a de facto monetary easing, but only if inflation expectations remain anchored.

Global inflation for 2026 would top 6 per cent in the severe scenario, compared to 4.4 per cent in the most-optimistic reference scenario, ⁠which is the assumption for the IMF's country and regional growth forecasts.

The IMF said that governments will be tempted to implement fiscal measures to ease the pain of higher energy prices including price caps, fuel subsidies or tax cuts but cautioned against these urges amid still-elevated budget deficits and rising public debt.

Gourinchas said it was "perfectly legitimate" to want to protect the most vulnerable but subsidies ⁠in one country could lead to fuel shortages in others that cannot afford them.