Global economic growth under stress

The Middle East conflict is being underestimated 

The International Monetary Fund recently released the July edition of its flagship ‘World Economic Outlook’ (WEO) report. The first thing to notice is that while the Report indicated ‘The impact varies widely based on countries’ exposure to the war and position in the technology value chain. Energy exporters outside the conflict zone benefit from favorable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers. In contrast, activity weakens for energy importers with limited participation in the technology value chain, a group that includes many low-income countries’ yet by indicating the overall impact on growth globally to be in the ‘modest’ range– IMF estimated a downward revision of economic growth for 2026 by one percent from its April edition of WEO report, to stand at 3 percent in the July WEO– the Report over-simplified the economic consequences of Middle East conflict by not highlighting the disaggregated impact of economic growth.

This is because overall global growth being indicated to receive a ‘modest’ impact of the conflict, due to meaningful counter-surge from artificial intelligence, is highly unrepresentative of the likely immense impact received by countries closer to the conflict, especially net oil importers. The report pointed out in this regard ‘Global growth is projected to be 3.0 percent in 2026 and 3.4 percent in 2027… The modest slowdown reflects the effects of the war in the Middle East being partly offset by accelerated demand-driven momentum in the global technology cycle thanks to advances in artificial intelligence (AI) and its adoption.’ 

Also, the Report should have indicated the serious lack of precision the growth estimates likely suffer, given it will take time for the Middle East conflict’s impact to be clearer in the coming months, since it has not been long since the conflict stopped. This is all the more important given the Report is rightfully mindful of a restarting of the conflict, where the WEO report pointed out ‘Risks to the outlook are more balanced than in April but still tilted to the downside. The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions. Trade fragmentation could accelerate, possibly hurting output and increasing prices.’

Restart of the ME conflict during the last few days, in turn, left a lot wanting in the Report in terms of highlighting these concerns in a more emphasized way when indicating the likely impact on global economic growth. Here, it would have made sense to present more than one growth scenario, on the lines IMF indicated in its April edition of WEO, where that Report had indicated ‘given the fluidity of the situation, the report complements the global reference forecast with scenarios in which the conflict lasts longer or expands. The likelihood of these scenarios materializing rises progressively as hostilities and associated disruptions continue. Under the reference forecast, global growth is projected to be 3.1 percent in 2026 and 3.2 percent in 2027… Under an adverse scenario with larger and more persistent increases in energy prices, global growth would slow further to 2.5 percent in 2026… Under a more severe scenario in which there is more damage to energy infrastructure in the conflict region, the impact would be even larger: Global growth would be cut to only about 2 percent in 2026…’ Sadly, revised estimates for these scenarios were not provided in the wake of more information since the publishing of the April WEO report.

It is strange that the July edition of WEO has no change in terms of economic growth estimates for Pakistan, from its April WEO report, whereby economic growth estimates stayed the same for FY2025-26 at 3.6 percent, and for FY2026-27 at 3.5 percent respectively. This is because of factors like Pakistan being a neighbour of Iran, a net oil importing country, and also likely greater impact being witnessed by the economy since the April report, all most likely would have led to a probable downward revision in economic growth.

Here, it needs to be pointed out that while the downward revision from April is ‘modest’ as per the WEO report, the slowdown is quite deep when compared with average of 2024-25, where as per the Report the current estimated economic growth was ‘down from the average of 3.5 percent observed in 2024–25’. A July 8, a New York Times published article ‘Global economy, hit by Iran War and inflation, faces sharp slowdown’ pointed out ‘The global economy is set to slow sharply in 2026 after the war with Iran disrupted energy supply chains and triggered a fresh bout of inflation, the International Monetary Fund warned on Wednesday. The forecasts reflect the damaging toll from the decision by the United States and Israel to attack Iran this year. Those attacks spurred Iranian retaliation on energy infrastructure in the region, destabilizing a world economy that had already been rocked by the Covid-19 pandemic and Russia’s war in Ukraine. …The forecasts remain subject to considerable uncertainty. Attacks on tankers trying to transit the Strait of Hormuz this week have raised doubts about the durability of the recent cease-fire between the United States and Iran, and on Tuesday the United States rescinded a waiver on sanctions that would have allowed more Iranian oil to be sold on global markets.’

It is strange that the July edition of WEO has no change in terms of economic growth estimates for Pakistan, from its April WEO report, whereby economic growth estimates stayed the same for FY2025-26 at 3.6 percent, and for FY2026-27 at 3.5 percent respectively. This is because of factors like Pakistan being a neighbour of Iran, a net oil importing country, and also likely greater impact being witnessed by the economy since the April report, all most likely would have led to a probable downward revision in economic growth.