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Research Paper

A Split World Economy: War, AI and the IMF's October 2026 Outlook

MER/26/D09 · Meridian Research Team ·

A Split World Economy: War, AI and the IMF's October 2026 Outlook

The International Monetary Fund's World Economic Outlook of October 2026 projects global growth of 3.1% in 2026, down from 3.5% in 2025, and a rebound to 3.4% in 2027. The headline looks stable, but it is the sum of two opposing shocks: an energy supply shock from the war in the Middle East and the closure of the Strait of Hormuz, and a demand boom driven by investment in artificial intelligence (AI). The Organisation for Economic Co-operation and Development (OECD) reached a similar diagnosis in September. This paper sets out the evidence, the assumptions behind the forecasts and the risks for the year ahead.

Key points

  • The IMF projects world growth of 3.1% in 2026 and 3.4% in 2027, and global headline inflation rising from 4.1% in 2025 to 4.7% in 2026 before easing to 4.1% in 2027 [1; 2].
  • Growth is more concentrated: 32 economies now account for 95% of global growth, compared with 54 economies in the IMF's April 2026 forecast [2].
  • The Middle East and Central Asia region is projected to contract by 0.3% in 2026 and to grow by 6.3% in 2027; Saudi Arabia is projected to contract by 3.3% and then grow by 7.9% [2].
  • The forecast assumes the reopening of the Strait of Hormuz resumes in March 2027, with a broad return to pre-war conditions by October 2027 [2].
  • In an IMF downside scenario in which the conflict lasts until the end of June 2027, world growth is 0.5 percentage points lower in 2027 and global inflation 1.1 points higher than in the baseline [2].

1. The problem

The IMF published its October World Economic Outlook (WEO) on 13 October and presented it at a press briefing in Bangkok the same day [1; 3]. Its chief economist, Silvana Tenreyro, described the outlook as the net result of two forces: higher energy and commodity prices triggered by the war, "akin to a negative global supply shock", and a technology boom, mostly driven by AI, acting as "a positive demand shock" [3].

The question for policymakers and for international stability is not only how fast the world economy grows, but who bears the costs of the energy shock and who gains from the technology cycle. The IMF's own answer is a "bifurcated outlook": economies with limited exposure to the energy shock and strong participation in technology value chains are holding up, while energy importers with little connection to those chains face higher import bills, weaker real incomes and fewer offsetting gains. Many low-income and vulnerable countries fall into, or close to, that last group [2].

2. The evidence

The global picture. The IMF projects that world growth will slow from 3.5% in 2025 to 3.1% in 2026, unchanged from its April forecast, before recovering to 3.4% in 2027, an upward revision of 0.2 percentage points [2]. Advanced economies are projected to grow by 2.1% in 2026 and 1.8% in 2027, and emerging market and developing economies by 3.7% and 4.4% [2]. The OECD's September Interim Economic Outlook projected slightly lower global growth, 2.9% in 2026 and 3.0% in 2027, after 3.4% in 2025 [4]. The two sets of projections were prepared at different dates and with different methods; both describe resilience under strain.

Energy. Before the war, about 20 million barrels of oil a day, roughly a quarter of the world's maritime oil trade, passed through the Strait of Hormuz [2]. According to the IMF, supply proved more flexible than feared: production outside the Gulf rose by 2 million barrels a day and global inventories supplied a further 4 million, but balancing the market still required demand compression of about 5 million barrels a day in the second quarter of 2026 [2]. China, the world's largest oil importer, cut its crude imports by 23% between March and June 2026 compared with a year earlier [2]. The IMF assumes an average crude oil price of USD 95.74 a barrel in 2026 and USD 87.39 in 2027, against USD 67.74 in 2025 [2]. It also expects fertiliser prices to rise by 10% and food prices by 5% in 2026 [2]. The OECD notes that shipping through the Strait of Hormuz has remained at very low levels [4].

Regional divergence. The outlook differs sharply by region. The IMF projects growth in the Middle East and Central Asia of −0.3% in 2026, a downward revision of 2.2 percentage points from April, followed by 6.3% in 2027 [2]. Bahrain, Iraq, Kuwait and Qatar, the commodity producers most affected by disruption to energy output and transport, are projected to contract by double digits in 2026 and to expand by double digits in 2027 [2]. Saudi Arabia, which the IMF describes as somewhat less affected because it has more diversified export routes, is projected to contract by 3.3% in 2026 and to grow by 7.9% in 2027 [2]. The OECD projects a 1.8% contraction for Saudi Arabia in 2026 [5]. Elsewhere, China's growth is projected to slow to 4.5% in 2026, while India is projected to grow by 7.0%; growth in sub-Saharan Africa is projected to remain at 4.5% [2].

Real GDP growth projections for 2026 (%)World3.1%Advanced economies2.1%United States2.3%Euro area1.1%China4.5%India7.0%Sub-Saharan Africa4.5%Middle East & Central Asia−0.3%Saudi Arabia−3.3%
Figure 1. IMF projections of real GDP growth in 2026, annual percentage change (India on a fiscal-year basis). Source: International Monetary Fund, World Economic Outlook, October 2026, Chapter 1, Table 1.1 [2]. Chart drawn by Meridian from the published figures; data © International Monetary Fund.

Technology. In the IMF's analysis, the AI-related investment boom shows up most strikingly in trade flows [2]. World trade volume is projected to grow by 4.6% in 2026 and 4.7% in 2027, after 5.0% in 2025, reflecting the drag from tariffs alongside brisk growth in technology-related trade [2]. The OECD likewise reports that AI-related goods shipments remained a major support for merchandise trade, particularly in Asian economies [4].

Inflation, interest rates and debt. The OECD projects G20 headline inflation rising from 3.4% in 2025 to 4.1% in 2026 and easing to 3.6% in 2027 [4]. It reports that long-term sovereign bond yields are at their highest levels in 15 years or more in most major advanced economies, and expects policy rates to rise in many economies [4]. The IMF projects public debt in advanced economies rising from 108% of GDP in 2025 to 115% in 2031, and in emerging market and developing economies from 74% to 84% [2]. Over 2028–31, the IMF expects global growth to average 3.2% a year, below the 2000–19 average of 3.7% [2].

3. Analysis

The following assessments are Meridian analysis based on the evidence above.

First, the stable headline hides a concentration of risk. That 32 economies now account for 95% of global growth, against 54 in April [2], means that the world economy depends on fewer engines. Those engines are largely tied to the technology cycle, whose profitability the IMF and the OECD both identify as a source of downside risk [2; 4].

Second, the forecast is a geopolitical assumption as much as an economic one. The baseline rests on a reopening of the Strait of Hormuz from March 2027 [2]. The IMF's downside scenario, in which the conflict persists to the end of June 2027 and the Straits of Hormuz and Bab el-Mandeb remain largely closed to commercial shipping, sends oil prices to USD 130 a barrel from the fourth quarter of 2026 to the first quarter of 2027 [2]. In that case world growth would be 0.2 percentage points lower in 2026 and 0.5 points lower in 2027, and global inflation 0.4 and 1.1 points higher [2]. The OECD similarly treats a durable resolution of the conflict as the main upside risk and further disruption as the main downside risk [4].

Third, the costs fall unevenly. Energy importers without a stake in technology supply chains face the hardest combination of higher import bills, weaker currencies and tighter financing [2]. Both institutions also point to a strong El Niño as an added risk to food prices; the OECD cites a United States National Oceanic and Atmospheric Administration estimate of a 95% probability of a very strong El Niño in October–December 2026 [4]. For low-income countries, the IMF warns that declining official development assistance leaves fewer resources to cushion such shocks [2]. These pressures connect directly to the food and aid trends examined in earlier Meridian papers (MER/26/D03 and MER/26/D08).

Fourth, fiscal room is shrinking as demands grow. Rising debt ratios and higher long-term yields [2; 4] reduce governments' capacity to respond to a further shock, at a time when the IMF expects pressure for higher spending, including on defence [2].

4. Assessment

  • The world economy has absorbed a major energy shock better than many expected, but its resilience now rests on a narrower base and on assumptions about the course of a war [1; 2; 4].
  • The balance of risks is to the downside: a longer conflict, a reassessment of AI expectations, and higher bond yields [2; 4].
  • The IMF puts the probability of global growth falling below 2% in 2027 at about 10%, and the probability of global inflation exceeding 5% at about 35% [2].
  • Indicators to watch: shipping volumes through the Strait of Hormuz; oil and fertiliser prices; long-term government bond yields in major economies; and the IMF's January 2027 WEO Update.

References

  1. International Monetary Fund, World Economic Outlook, October 2026: Resilience Under Strain, Urgent Choices, overview page, 13 October 2026. https://www.imf.org/en/publications/weo/issues/2026/10/13/world-economic-outlook-october-2026 (accessed 30 October 2026).
  2. International Monetary Fund, World Economic Outlook, October 2026, Chapter 1: Global Prospects and Policies, Washington, DC, 2026. https://www.imf.org/-/media/files/publications/weo/2026/october/english/ch1.pdf (accessed 30 October 2026).
  3. International Monetary Fund, "IMF World Economic Outlook Press Briefing", IMF Media Center, 14 October 2026. https://mediacenter.imf.org/news/imf-world-economic-output-press-briefing/s/85df82f1-2ffe-44b3-91c4-a7a0e01042ae (accessed 30 October 2026).
  4. OECD, OECD Economic Outlook, Interim Report September 2026: Weathering Successive Shocks, Paris, 23 September 2026. https://www.oecd.org/en/publications/oecd-economic-outlook-interim-report-september-2026_f751d02b-en/full-report.html (accessed 30 October 2026).
  5. OECD, "Weathering Successive Shocks", Interim Economic Outlook presentation, September 2026. https://www.oecd.org/content/dam/oecd/en/publications/support-materials/2026/09/interim-economic-outlook/IEO120_PPT_Weathering_Successive_Shocks.pdf (accessed 30 October 2026).