The International Monetary Fund (IMF) released its January 2026 World Economic Outlook (WEO) Update on January 17, revising global growth projections upward from its April 2025 forecast but warning of persistent volatility amid shifting trade policies, geopolitical tensions, and uneven inflation dynamics across major economies. The report highlights a delicate balancing act for central banks as they aim to sustain growth while anchoring inflation expectations, with emerging markets and developing economies (EMDEs) expected to drive most of the global expansion in the coming years.
Global Growth Trajectory: Resilience Amid Policy Shifts
The IMF now projects global growth to slow from 3.3 percent in 2024 to 3.2 percent in 2025 and 3.1 percent in 2026, a slight upward revision from its April 2025 estimate but still below pre-policy-shift forecasts. The revision reflects temporary factors that supported activity in the first half of 2025, including front-loading of trade amid tariff uncertainties and supply-chain adjustments, though these tailwinds are fading as the global economy adjusts to new policy measures.
Advanced economies are expected to grow by around 1.5 percent in 2026, with the United States projected to expand by 1.8 percent, the Eurozone by 1.5 percent, and the United Kingdom by 1.4 percent. Japan, despite full employment and fiscal support, is set to be the worst-performing advanced economy, with growth falling below 1 percent due to monetary tightening and the impact of U.S. tariffs. EMDEs, by contrast, are forecast to grow just above 4 percent, driven by resilient domestic demand and improving external conditions in some regions.
Inflation Dynamics: Divergence Across Regions
Inflation has moderated in most countries but remains above central bank targets in several advanced economies, creating divergent policy paths. In the United States, headline inflation is projected to remain around 2.7 percent in 2026, with core inflation at 2.6 percent, as tariffs and strong domestic demand keep price pressures elevated. The Eurozone has seen more progress, with inflation expected to fall to 2.1 percent, while the UK continues to grapple with higher inflation at 3.4 percent.
In EMDEs, inflation has generally eased due to tighter monetary policy and lower commodity prices, though food and energy inflation remains a concern in some regions. The IMF notes that while higher tariff rates contributed to a modest rise in global inflation, subsequent trade deals and policy resets have tempered some of the extremes, helping to stabilize price expectations.
Trade and Geopolitical Risks: Lingering Uncertainties
Trade tensions remain a key risk to the global outlook, with the IMF warning that prolonged uncertainty could reduce growth and disrupt supply chains. While some tariff hikes have been softened by bilateral agreements, the overall environment remains volatile, with the U.S. set to formally withdraw from the Paris Agreement on January 27, 2026, and ongoing disputes over technology transfer and intellectual property rights.
Geopolitical conflicts, including the war in Ukraine and tensions in the Middle East, continue to weigh on global energy markets and business confidence. The recent escalation of attacks on Ukraine’s energy infrastructure has disrupted energy supplies and contributed to higher energy prices, though the impact has been mitigated by increased production from OPEC+ and strategic reserves releases.
Monetary and Fiscal Policy: A Delicate Balancing Act
Central banks are navigating a challenging environment, with the need to maintain price stability while supporting growth. The U.S. Federal Reserve is expected to keep interest rates in the 3.5%-3.75% range in 2026, though political pressure from the Trump administration to cut rates more aggressively remains a wildcard. The European Central Bank and Bank of England are also likely to maintain a cautious stance, with gradual rate cuts expected only once inflation is firmly on a downward path.
Fiscal policy is playing a more active role in supporting growth, particularly in EMDEs. China has implemented additional fiscal stimulus to counter the ongoing property sector slump, while other countries in East Asia and the Pacific have increased public investment to boost domestic demand. However, the IMF warns that fiscal vulnerabilities remain, with high debt levels limiting the scope for further stimulus in some economies.
Sectoral Developments: Technology and Real Estate
The technology sector continues to be a bright spot, with AI-related investment driving growth in semiconductor manufacturing and digital services. NVIDIA, which saw its share price rise by almost 40% in 2025, has announced plans to deliver its latest Rubin chip later this year, which promises faster AI tasks with lower power consumption. However, the sector also faces challenges, including regulatory scrutiny and supply-chain constraints for critical components.
The real estate sector remains a drag on growth in several major economies, particularly China, where a prolonged slump has reduced investment and consumer confidence. In the U.S., the housing market has shown signs of stabilization, with new home sales and construction activity picking up, though high mortgage rates continue to limit affordability. The IMF notes that addressing supply-demand imbalances in the real estate sector is critical for supporting long-term growth.
Outlook and Risks
The IMF’s baseline forecast assumes that trade tensions will ease gradually, inflation will continue to moderate, and central banks will avoid overly aggressive policy tightening. However, risks are tilted to the downside, including a renewed rise in trade tensions, tighter financial conditions, and political instability in some regions. A more severe slowdown in China or a sharp escalation of geopolitical conflicts could have significant spillover effects on the global economy, underscoring the need for coordinated policy action and enhanced international cooperation.
As the global economy enters a critical phase of adjustment, policymakers face the challenge of balancing short-term growth with long-term stability. The IMF emphasizes the importance of credible, transparent, and sustainable policies to restore confidence, rebuild fiscal buffers, and preserve central bank independence, which remain essential for supporting a resilient and inclusive recovery.
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