According to the latest IMF forecast, under the baseline scenario of limited conflict, global economic growth will slow to 3.1% in 2026 and moderately rebound to 3.2% in 2027. This growth rate is not only lower than recent levels, but also significantly lower than the long-term average before the pandemic.

Regarding inflation, global inflation is expected to rebound slightly in 2026 before resuming its downward trend in 2027. However, the pressure will be highly concentrated in emerging markets and developing economies, especially those that rely on commodity imports and are already vulnerable to debt (this assessment is highly consistent with the "vulnerability concentration" trend warned by the IMF's Fiscal Monitor report, which showed that global public debt had risen to 95% of GDP in 2025, and financing costs in emerging markets were 4-6 percentage points higher than in developed economies).

Four core risks could significantly drag down growth:

First, the continued escalation or protracted conflict in the Middle East has exacerbated energy supply disruptions (IMF assessments show that the current conflict has already reduced global daily oil flows by 13% and liquefied natural gas flows by 20%, and if the Strait of Hormuz remains closed, the energy gap will double).

Second, the intensification of geopolitical divisions is driving up the cost of restructuring global supply chains ;

Third, the productivity gains driven by artificial intelligence are falling short of expectations and are unlikely to offset the weakening of traditional growth drivers.

Fourth, trade tensions have escalated again, further suppressing global investment and trade activities.


Furthermore, the structural problem of high global public debt continues to escalate—the IMF predicts that global public debt as a percentage of GDP will exceed 100% in 2029, and could reach 123% in an extreme scenario—coupled with shrinking policy buffers, significantly increasing the economy’s sensitivity to external shocks (which echoes IMF Managing Director Kristalina Georgieva’s assessment that “uncertainty will lead to businesses being unwilling to invest and households tending to save”).

It is worth noting that upside risks also exist: if the productivity dividend of artificial intelligence is rapidly released, or if major economies resolve trade disputes through negotiation, global economic activity is expected to receive a substantial boost.


(Source: IMF)

Macroeconomic trade-offs in defense spending: short-term stimulus versus medium- to long-term risks

Escalating geopolitical tensions are driving a new round of expansion in global defense spending.

IMF research shows that large-scale surges in defense spending have become increasingly frequent, particularly in emerging markets and developing economies.

During a typical period of soaring spending, defense spending will increase by 2.7 percentage points over GDP within two and a half years, with about two-thirds financed through fiscal deficits—a financing structure that closely matches the reality of "global military spending growing for ten consecutive years, reaching $2.72 trillion in 2024" as shown in the SIPRI 2025 report.

From a macroeconomic perspective, the expansion of defense spending presents a significant trade-off between short-term benefits and medium- to long-term costs: in the short term, military procurement and related industrial activities can boost economic growth to a certain extent, with an average expenditure multiplier close to 1.

However, this will temporarily increase inflationary pressures, especially given the tight supply chains in the energy and defense industries.

In the medium term, fiscal sustainability will face severe challenges: the fiscal deficit as a percentage of GDP will worsen by 2.6 percentage points within three years, public debt will increase by about 7 percentage points, and the balance of payments will also be under pressure.

If war breaks out, the cost will be even more severe—the surge in defense spending during wartime will lead to a 14 percentage point increase in public debt and significantly crowd out social spending such as education and healthcare (Japan's 9 trillion yen defense budget for fiscal year 2026 has already sparked widespread criticism domestically about the "crowding out of people's livelihood spending").

It is worth emphasizing that the actual effects of defense spending vary significantly, depending on the financing method (deficit financing vs. tax financing), expenditure structure (domestic procurement vs. imported equipment), and institutional environment. Economies that are highly dependent on imported weapons will face greater pressure on their balance of payments.

Long-term economic trauma and recovery path of conflict

In addition to causing heavy humanitarian costs, armed conflict will also have a profound and lasting impact on the macroeconomy.

Analysis by the IMF based on global conflict data since World War II shows that the output losses caused by conflict are not only enormous (exceeding the impact of financial crises and major natural disasters), but also have significant long-term traumatic effects. Even if the conflict ends and peace is maintained, the economic recovery will still be slow and uneven, mainly relying on a partial recovery of labor input, while the problems of capital stock damage and productivity decline will persist for a long time.

The macroeconomic trade-offs brought about by the conflict are extremely severe: on the monetary level, high inflation and increased exchange rate volatility; on the fiscal level, war spending and declining tax revenues have led to a widening deficit.

At the external sector level, rising energy import costs and impaired export capacity are creating dual pressures.

The spillover effects of these shocks will also spread globally through trade, energy, and finance, particularly dragging down European and Southeast Asian economies that are highly dependent on Middle Eastern energy imports (the 2026 growth forecast for the six ASEAN countries has been lowered by 0.3 percentage points as a result).

Achieving an effective recovery requires comprehensive policy measures: First, stabilize the macroeconomic order as soon as possible and control inflation and exchange rate fluctuations;

Second, timely and orderly debt restructuring should be implemented for economies with excessive debt burdens (the lessons learned from Argentina's multiple debt crises show that relying solely on external financing is insufficient to solve structural debt problems).

Third, strengthen international cooperation and help conflict-affected economies rebuild their infrastructure and institutional capacity through aid and technical support; fourth, implement structural reforms centered on rebuilding capital stock and improving productivity.

The IMF specifically emphasized that global policy coordination is crucial – jointly reducing geopolitical uncertainty and maintaining open trade and stable energy markets will generate significant positive externalities and accelerate the global economic recovery process.

Of particular concern is that geopolitically driven expansion of defense spending and escalation of conflict could create a negative "security-economy" cycle: defense spending crowds out social spending, leading to public discontent and exacerbating social unrest.

The turmoil further increases the need for defense spending, ultimately undermining long-term growth potential.

Therefore, countries must fully weigh the economic costs when formulating security policies and regard maintaining peace and stability as a prerequisite for achieving sustainable growth—this is not only the core conclusion of the IMF's current outlook, but also the key to addressing the current global economic predicament.