October World Economic Outlook: 'Resilience shown again, but balance elusive'

First-half activity held up better than expected despite prolonged Middle East war; global economy increasingly polarized

Downside risks seen outweighing upside; South Korea's forecast sharply upgraded on semiconductor demand

The International Monetary Fund. [Reuters]
The International Monetary Fund. [Reuters]

The International Monetary Fund has nudged up its global growth forecast for this year, saying the world economy is once again showing resilience.

In its World Economic Outlook report released Monday (local time), the IMF projected global economic growth at 3.1% for this year — 0.1 percentage point above its July forecast. The fund's outlook for this year had started at 3.3% in January before being cut twice in a row, to 3.1% in April following the outbreak of the Iran war and then to 3.0% in July, making this month's revision a modest recovery.

The growth forecast for next year was held steady at 3.4%, unchanged from July.

"The global economy is showing resilience again, but it is not balanced, and the room for adjustment is narrowing rapidly in the near term," the IMF said, adding that economic activity in the first half of 2026 had held up better than expected despite sustained pressure from the prolonged Middle East war and trade tensions.

On the drivers behind the slight upgrade, the IMF said the technology cycle had "injected demand stimulus through strong investment in AI," and credited countries' "flexible supply responses, rerouting of shipping lanes, drawdowns of inventories, fiscal support, and energy intensity that is lower than in decades past" with helping cushion the economic blow from the war.

However, the IMF said the global economy had become increasingly polarized: while favorable terms of trade and technology-related exports and investment had provided a buffer for some countries, others faced rising import costs and weakening demand. Private firms had continuously adapted to recurring shocks — including geopolitical risks and shifts in trade policy — but the IMF added that such capacity for adjustment was not unlimited.

The fund said "risks are tilted to the downside," judging that growth was more likely to undershoot the forecast than exceed it. Factors it identified as potential drags on global growth included a prolonged stalemate in the Middle East and further escalation, additional disruptions to energy infrastructure, cyberattacks, extreme weather events, and a pullback in investment triggered by a reassessment of AI profitability and productivity prospects.

The IMF acknowledged that upside risks were also present, noting that AI-related investment could prove more durable than expected, productivity gains could materialize faster than assumed, new trade agreements could boost predictability and resilience, and rising fossil fuel prices could accelerate investment in energy security.

Looking at individual economies, the IMF kept its US growth forecast for this year unchanged from July at 2.3%. The outlook for next year was nudged up to 2.3% from 2.2% in July.

The eurozone was projected to grow 1.1% this year, up 0.2 percentage points from the July forecast of 0.9%, which the IMF attributed to a very strong recovery in Ireland and continued growth momentum in Spain. The eurozone's growth forecast for next year was held at 1.2%, in line with July.

Japan was expected to grow 0.7% this year, slightly above the July forecast of 0.6%, and 0.7% next year.

South Korea's growth forecast was sharply upgraded, with the IMF projecting 3.3% growth this year and 2.8% next year — up significantly from July's forecasts of 2.6% and 2.5%, respectively. The fund cited "strong external demand for semiconductors that is overwhelming the negative effects of the war" as the reason for the upgrade.

Emerging market and developing economies were projected to slow to 3.7% growth this year before recovering to 4.4% next year, with both figures down 0.1 percentage point from July. China was expected to grow 4.5% this year, down 0.1 percentage point from the July forecast.

The Middle East and Central Asia, which bore the direct brunt of the war, was projected to contract 0.3% this year before rebounding sharply by 6.3% next year. The IMF said the Strait of Hormuz blockade had lasted longer than initially expected, with a larger rebound anticipated once the strait reopens — leading to a 2.2 percentage point downward revision to this year's growth forecast compared with April and a 1.7 percentage point upward revision for next year.

Iraq, Kuwait and Qatar — the countries hardest hit by disruptions to energy production and transport — were expected to suffer double-digit economic contractions this year before posting double-digit growth next year as production, exports and logistics normalize.

The global inflation forecast for this year was held at 4.7%, matching July, and was expected to ease to 4.1% next year. Global trade volume growth was projected to slow from 5.0% last year to 4.6% this year before stabilizing at 4.7% next year.

In the report, the IMF said the urgency of rebuilding fiscal buffers was growing, given high debt levels, rising government bond yields and pressing spending needs. It recommended that countries "implement credible fiscal adjustment plans that combine revenue mobilization and expenditure rationalization, underpinned by institutional improvements."


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