IMF cuts global growth forecast assuming Strait of Hormuz opens mid-July, but Trump ends ceasefire

The International Monetary Fund (IMF) on Wednesday lowered its global growth forecast for 2026 by a marginal 10 basis points (bps) to 3% on the assumption that the Strait of Hormuz begins re-opening in mid-July and the situation broadly returns to prewar state by March 2027 – even as US President Donald Trump tore up the ceasefire with Iran.

Speaking in Ankara, Turkey, on Wednesday, Trump said the ceasefire was a “just a waste of time”. Hours earlier, the US hit over 80 Iranian military targets after merchant ships were attacked in the Strait of Hormuz, with Washington also revoking a license that authorized the sale of Iranian oil.

While released on Wednesday at 6:30pm India time, the IMF’s economic projections were prepared earlier.

“The most imminent risk to the baseline forecast stems from developments in the Middle East,” the IMF said in a quarterly update to its World Economic Outlook report.

“Renewed conflict would propagate through a further increase in commodity prices and extended volatility, supply shortages, and exchange rate pressures. The muted increase in oil prices and their contained impact on activity owe to the release of inventories, which are now getting closer to multiyear lows and could reach stress levels should supply disruptions persist or hoarding gather steam,” the multilateral agency added.

The tentative ceasefire helped placate markets across the world after the start of the conflict on February 27 led to a sharp rise in global energy prices following the closure of the key waterway, Strait of Hormuz. The price of India’s crude oil basket, which had surged 66% from February to $114.48 per barrel in April, has cooled sharply to $68.62 so far in July, according to petroleum ministry data.

However, the renewal of hostilities by the US has already begun to weigh heavy on financial markets and investors, with benchmark Indian equity indices slumping more than 2% on Wednesday.

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In line with the trimming of the global growth forecast, the IMF on Wednesday slightly lowered its projection for India’s GDP growth in 2026-27 – also by 10 bps – to 6.4%. This is lower than the Reserve Bank of India’s forecast of 6.6%.

“India remains among the fastest growing major economies, with growth projected at 6.4%, supported by strong momentum in private consumption and services activity,” the agency said, even as it raised the forecast for 2027-28 by 20 bps from April to 6.7%.

In calendar year 2026, the IMF sees India’s GDP growing 7%, before cooling to 6.4% in 2027.

China, meanwhile, got a 20-bps bump-up to 4.6% for 2026 and 10 bps for 2027 to 4.1%. Brazil, meanwhile, is seen growing half-a-percentage point faster than previously thought this year at 2.4%.

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In the West Asia region, the IMF expects Saudi Arabia’s economy to expand by 1.7% in 2026, down from its forecast of 3.1% in April.

“Iraq, Kuwait, and Qatar – commodity producers most affected by disruptions to energy output and transport – are projected to experience sharp contractions of their economies in 2026, followed by double-digit expansions in 2027.”

Iran’s economy is expected to shrink by 5.4% in its 2026 fiscal year.

War vs AI

According to the IMF, the world economy has, so far, weathered the shock from the US-Israel-Iran war “better than feared”. Global growth is seen slowing only modestly from 3.5% in 2024-2025 due to the hit from the conflict being “partly offset by accelerated demand-driven momentum in the global technology cycle thanks to advances in artificial intelligence (AI) and its adoption”.

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Commodity prices, however, remain elevated, the IMF said, with energy prices around 25% higher than prewar levels. This, along with higher inflation numbers, have raised inflation expectations.

The IMF expects global consumer prices to rise 4.7% in 2026, 30 bps more than the 4.4% estimated in April. In 2027, prices are seen 3.9% higher as against an increase of 3.7% forecast earlier.

On the tech front, the agency noted that the top-four net exporters of AI-related hardware – Taiwan, South Korea, Thailand, and Malaysia – had an average seasonally adjusted annualised growth surprise of 4.4 percentage points in the first three months of 2026.

In contrast, the surprise for the rest of the world was a negative 0.3 percentage point, with the IMF adding that the “AI hype” and exuberant financial markets could “sow the seeds of macrofinancial instability”.