IMF warns world economy nears limits of its resilience

Dubai: The International Monetary Fund warned on October 12 that the global economy is nearing the limits of its resilience. Energy shocks from the Middle East war, thin policy buffers and heavy reliance on AI investment leave little room for another blow.

The fund laid out its case in the October World Economic Outlook, titled “Resilience Under Strain, Urgent Choices.” It presented the report at the IMF-World Bank Annual Meetings in Bangkok. IMF Chief Economist Silvana Tenreyro framed the central message quite plainly stating, “the global economy has been resilient, but that resilience is under strain,” she said. Risks to growth tilt to the downside.

Economies absorbed the energy shock partly by drawing down oil reserves and redirecting supplies. Those options are finite. In a blog post, Tenreyro notes that without rebuilding supply capacity and policy buffers, the world could soon “test the limits of resilience.” 

The report describes a fragmented world economy, shaped by the Iran war and the AI technology boom. It says policymakers fear dwindling energy reserves, mounting debt and growing reliance on AI, that could leave the world more exposed.

The Fund notes that inflation has remained stubborn. It projects global headline inflation at 4.7% this year, easing to 4.1% in 2027. The fund urges fiscal restraint to contain demand pressures. It advises central banks to keep policy sufficiently restrictive, preventing second-round inflation effects and anchoring long-term expectations.

A prolonged war would hit energy importers and low-income countries hardest, the IMF warns. It could also revive inflation and strain fiscal and external positions. Tenreyro says all countries need to act urgently.

Global growth slows to 3.1 per cent in 2026 from 3.5 per cent in 2025. The fund nudged that figure up slightly from its July forecast. Output recovers to 3.4 per cent in 2027, unchanged from the earlier estimate. Advanced economies expand 2.1 per cent this year and 1.8 per cent next.

The US holds at 2.3 per cent across 2025, 2026 and 2027. Euro Area growth reaches 1.1 per cent in 2026 and 1.2 per cent in 2027. Germany rebounds to 1.3 per cent from 0.2 per cent, while France slows to 0.4 per cent. Italy manages 0.8 per cent and Spain 2.5 per cent. Japan is expected to grow at 0.7 per cent, the UK at 1.3 per cent and Canada at 1.1 per cent.

Emerging and developing economies  are projected to slow to 3.7 per cent in 2026, down from 4.5 per cent, then pick up to 4.4 per cent in 2027. The Middle East and Central Asia contracts 0.3 per cent this year before surging 6.3 per cent in 2027.

Saudi Arabia could shrink to 3.3 per cent in 2026 and rebound to 7.9 per cent next year. The Fund projects that the UAE economy will contract 3.9 per cent in 2026 and rebound 7.7 percent in 2027, the rebound is conditional on shipping routes normalizing and the Strait of Hormuz reopening.

India is expected to grow at 7 per cent on a fiscal-year basis, or 7.4 per cent on a calendar-year basis. Sub-Saharan Africa holds at 4.5 per cent in both years, and low-income developing countries at 4.8 per cent.