The International Monetary Fund (IMF) has downgraded its 2026 global economic growth forecast to 3%, down from 3.5% posted in 2025 with the impact of the Iran war expected to negate gains made by the ongoing AI boom. According to the IMF, oil prices will average ~32% higher in the current year compared to the previous year while global consumer prices are set to jump 4.7%, halting two years of cooling inflation. However, the AI investment boom is expected to provide one of the few bright spots, with productivity gains helping limit the damage from higher energy prices, particularly in developed economies.
The U.S. economy is projected to expand 2.3% in 2026, slightly faster than the 2.1% GDP growth recorded in 2025 with favorable fiscal policies coupled with AI-led investments continuing to yield robust productivity gains.
As a net energy exporter, the United States is less vulnerable than most major economies to overseas supply disruptions and higher oil prices. At the same time, the delayed effects of the 2025 tax cuts, continued AI investment and strong corporate profits are supporting equity markets and helping sustain consumer spending.
In contrast, the Eurozone economy is projected to expand by an anemic 0.9%, down from 1.4% in 2025 in large part due to high energy costs.
The Eurozone remains heavily exposed to energy price swings because it imports much of the oil and gas it consumes. Higher energy costs are pushing inflation higher, squeezing household incomes and forcing governments to spend more on debt servicing, defense and support for households and businesses.
Meanwhile, the labor market is expected to cool down, with employment growth expected to come in at just 0.3%, ending the long-term decline in unemployment.
China’s economy is projected to grow 4.6%, with the domestic property crash and energy woes balanced out by public works spending, booming exports, and advanced tech manufacturing, while India’s is expected to grow 6.4%, slower than last year’s 7.7%, with robust domestic consumer spending maintaining the country’s rank as the fastest-growing major economy across the globe.
By Alex Kimani for Oilprice.com
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