IMF growth forecast holds as AI offsets war drag in Asia

The IMF growth forecast stayed near April's view as AI-linked exports cushioned war shocks. Inflation and Middle East risks still darken the outlook.

The International Monetary Fund said Wednesday that it now expects the world economy to expand 3% in 2026, down from the 3.1% estimate it issued in April. The figure also marks a cooling from the 3.5% average growth rate recorded over the previous two years, according to the fund's World Economic Outlook update.

AI cushions war damage

The IMF framed the forecast as a balance between two forces: demand tied to artificial intelligence and the economic strain from conflict in the Middle East. In the update, the fund said global activity has been shaped by pressures that are pulling in opposite directions and hitting countries unevenly.

The fund said the world economy has coped better than expected with the war shock so far. But it kept a cautious tone, saying risks are "still tilted to the downside" as renewed regional tensions, trade fragmentation and a possible reset in AI expectations threaten the baseline.

Petya Koeva Brooks, deputy director of the IMF's research department, said in an interview that the latest overnight developments showed uncertainty remained high. "Risks are very high," she said, adding that escalation in the conflict is a "primary driver" of the negative risks around the forecast.

Inflation progress stalls

The fund also raised its global inflation projection, saying consumer prices are expected to increase 4.7% this year instead of the 4.4% it projected earlier. The IMF attributed the upgrade mainly to energy and food costs, two channels that can transmit war-related disruption quickly into household budgets and central bank decisions.

The update was completed before the latest flare-up between the US and Iran described in the source material. US President Donald Trump said Wednesday that a tentative ceasefire with Iran had ended from his perspective and that further US strikes on Iran were probable, raising the risk that energy markets could face another shock.

The regional damage is most visible in the Middle East projections. The IMF cut Saudi Arabia's 2026 growth estimate by 1.4 percentage points to 1.7%, from 3.1% in April, while leaving its US forecast unchanged at 2.3%.

Asia rides hardware demand

The brighter side of the report is concentrated in Asian economies tied closely to AI-related production. The IMF said exporters of related hardware exceeded expectations even with exposure to energy imports and trade disruption.

South Korea stood out in the fund's update. Its economy expanded at an annualized 7.5% rate in the first quarter, more than four times the 1.8% rate the IMF had projected in April, despite the country's reliance on imported energy from the Middle East.

Thailand, Malaysia and Taiwan also beat the fund's earlier expectations because of demand for AI equipment. The IMF raised Thailand's growth forecast for this year to 1.9% from 1.5%, citing emergency fiscal measures along with technology-linked exports and investment, while Malaysia was described as benefiting from data center activity.

For the global economy, the report points to a narrower expansion than the AI boom might suggest on its own. The fund lifted its 2027 global growth outlook to 3.4% from 3.2%, but that improvement depends on conflict risks not overpowering the trade and investment gains flowing through technology supply chains.

If Middle East hostilities remain contained, lower risk premiums in energy markets could help inflation ease, allowing the IMF's global baseline to hold while AI-exposed economies keep drawing investment. If the conflict instead widens, higher food and energy costs could squeeze consumers, weaken Saudi Arabia's already downgraded outlook and pressure manufacturers across the Asian hardware chain.

A third path rests on AI demand itself. If spending on chips, servers and data centers remains strong, South Korea, Taiwan, Malaysia and Thailand could keep offsetting part of the war drag; if expectations unravel, the sector that helped stabilize the forecast would become another source of weakness for trade, investment and global growth.