Iran war fallout has ‘abruptly darkened’ global economic outlook, IMF says – National

The fallout from the Middle East conflict sparked by the war with Iran has “abruptly darkened” the global economic outlook, the International Monetary Fund said Tuesday while warning of lower growth compared with 2025.

The IMF downgraded its forecast for global growth to 3.1 per cent in 2026 from the 3.3 per cent it had forecast in January. That’s also down from the 3.4 per cent expansion seen last year.

That modest 0.2 per cent downgrade is based on the assumption of “a short-lived conflict,” IMF economic counsellor Pierre-Olivier Gourinchas wrote in the report.

“The global outlook has abruptly darkened following the outbreak of war in the Middle East” more than a month ago, he said, which “interrupted what had been a steady growth trajectory” and upended a planned upgrade to the IMF forecast.

“The duration and scale of the conflict and the time it will take for energy production and transit to normalize after the end of hostilities will determine the ultimate size of the shock to the global economy,” Gourinchas added.

Although a fragile two-week ceasefire remains in effect, negotiations to end the war have not yet yielded a peace agreement, raising fears attacks could resume.

U.S. and Israeli strikes on Iran — and Tehran’s closing of the Strait of Hormuz and retaliatory strikes on oil refineries and other energy infrastructure in neighbouring countries — have driven oil and gas prices sharply higher around the world.

As a result, the IMF marked up its expectation for global inflation this year to 4.4 per cent from 4.1 per cent in 2025 and from the 3.8 per cent it had forecast for this year in January.

The souring outlook from the IMF comes less than two weeks after Deloitte Canada also downgraded its growth forecast for the Canadian economy to 1.2 per cent for 2026 — down from the 1.5 per cent estimated in January, as well as last year’s 1.7 per cent gain.

The IMF forecast for Canada is more optimistic, predicting 1.5 per cent growth this year, down just 0.1 percentage points from its January forecast. Both the January report and Tuesday’s update predict a 1.9 per cent expansion in 2027.

Prime Minister Mark Carney on Tuesday noted the report nevertheless predicts Canada will be see the second-highest rate of GDP growth among members of the G7.

Statistics Canada has reported Canada returned to mild growth in the first two months of this year after a slight contraction at the end of 2025, Carney added.

That’s despite the “enormous shock” in the global economy created by the Iran war, he said, which proves the government’s economic strategy is on the right track.

“If there is a unifying theme in our economic strategy, it’s strength and independence,” Carney told reporters. “So we’ll continue to do that, and that becomes self-reinforcing. … It compounds to the benefit of Canadians over time, and that’s why we’re sticking with it.”

The United States economy is expected to grow by 2.3 per cent in 2026, which the IMF says is due to fiscal policies and interest rate cuts last year.

That forecast is also downgraded 0.1 percentage points from January, reflecting what the report calls a “small net negative effect” from the war with Iran, given the U.S. exports more oil and gas than it brings in from overseas markets compared to other nations.

Still, the IMF notes that inflation remains above the U.S. Federal Reserve’s target of two per cent, sitting above three per cent in the most recent data.

“I think that they probably overreacted, but we’ll see,” U.S. Treasury Secretary Scott Bessent told reporters about the IMF report.

He said he was confident that the U.S. would cycle through higher prices very quickly, unlike countries that were implementing subsidies that could increase borrowings or lengthen the duration of inflationary impacts.

The IMF report was more pessimistic in downgrading its forecast for the emerging market and developing economies to 3.9 per cent from its view of 4.2 per cent in January.

The report cited higher food and energy prices that will have a greater impact on those countries, which include much of Asia, Latin America and Africa, and even large economies like China and India.

One winner that’s emerging from the Middle East conflict is Russia, an energy exporter that stands to benefit from higher prices. The IMF upgraded its forecast for the Russian economy, hard hit by sanctions following the invasion of Ukraine in 2022, to a still-modest 1.1 per cent from 0.8 per cent in January.

Gourinchas told a news conference Tuesday that the 3.1 per cent global growth projection is a reference forecast that is “not quite yet” irrelevant, but warned that could change if the Middle East war drags on.

“I would say that we are somewhere in between the reference scenario and the adverse scenario” of weaker 2.5 per cent global growth in 2026, he said.

“And of course, every day that passes and every day that we have more disruption in energy, we are drifting closer towards the adverse scenario.”

The IMF is a 191-nation lending organization that works to promote economic growth and financial stability and to reduce global poverty.

One chapter of the IMF report, which was previewed last week, warned of medium-term economic costs for countries that are boosting defence spending.

Canada and other NATO allies have increased their military budgets in response to growing global conflicts and pressure from U.S. President Donald Trump.

Ottawa injected an additional $9 billion into defence last year, pushing its military spend to $63 billion and finally meeting NATO’s two per cent GDP target.

Canada has already committed to NATO’s new target of 3.5 per cent on core defence by 2035, part of a broader five per cent goal that nearly all other allies have pledged to meet.

The IMF report studied past military buildups dating back to 1946 and found that on average, fiscal deficits worsened by about 2.6 percentage points of GDP within three years after the start of a defence spending increase.

Public debt also increased by about seven percentage points during that same timeframe.

The report said economic support could be found in prioritizing domestic suppliers for military contracts — a strategy Prime Minister Mark Carney is pursuing with his defence industrial strategy — but also warned buildups need to be closely coordinated with monetary policy.

About two-thirds of past military buildups the IMF studied were financed by higher deficits, which increased inflation and created medium-term challenges, while about one-quarter of those buildups saw reprioritized spending that often lead to a sharp decline in social program funding.

The Liberals’ federal budget tabled last fall, which was finally enshrined into law in March, predicted the deficit will rise to $78.3 billion for this fiscal year.

— with files from The Associated Press and Reuters