Countries must move from coping to rebuilding, restoring fiscal space and supply-side resilience to enhance their ability to grow sustainably
October 13, 2026/IMFBlog
By Silvana Tenreyro
In less than seven years, the global economy has been subjected to an exceptional sequence of events. The pandemic and the ensuing disruptions to global supply chains; wars in Ukraine and the Middle East, with the consequent sharp increases in the prices of energy and other commodities; and significant changes in trade barriers and trading relations have tested the resilience of households, firms, financial markets, and governments. Individually, each of these major developments would have been considered unlikely. Their confluence over such a short period of time is even more extraordinary.
Yet, despite this barrage of shocks, the global economy has held up. Labor markets have remained unexpectedly strong, financial systems have broadly withstood the shocks and the sharpest monetary tightening in almost half a century, and inflation has receded from its peaks in many economies, although it remains persistent in several cases.
This resilience is reflected in our latest global growth forecast, which remains broadly unchanged from April, despite a more persistent energy market disruption than anticipated. Global activity is projected to grow at 3.1 percent in 2026 and 3.4 percent in 2027 as we detail in our latest World Economic Outlook. Global headline inflation is forecast to rise to 4.7 percent this year, primarily reflecting higher commodity prices, and to fall back to 4.1 percent next year. Core inflation is projected at 3.9 and 3.7 percent for 2026 and 2027, respectively.
Two main sets of factors helped the global economy withstand this latest shock.
- First, the rerouting of energy supplies, increased energy production in other countries, inventory drawdowns, substitution to other sources of energy, including renewables, and higher energy efficiency have all helped cushion the impact on energy markets. Without these margins of adjustment, the oil disruption alone would have significantly reduced global growth in 2026.
- Second, the artificial intelligence-driven investment boom boosted global activity and supported international trade. Investment has continued to rise in anticipation of higher expected returns and real incomes (reflected in stock valuations).
However, this resilience is under strain. Without shoring up supply capacity and replenishing policy buffers, the global economy could soon test the limits of resilience. Dwindling energy inventories could allow geopolitical shocks to transmit even more forcefully to energy prices. Other commodity markets also face risks. Low-income countries and households remain especially vulnerable to higher food prices from transport disruptions, higher fertilizer costs, export restrictions, and extreme weather events. Technology-related investment, while an important boon against the energy shock, is concentrating risks – making the global expansion heavily reliant on a small number of firms, sectors, and economies. More generally, resilience has been uneven, varying noticeably with economies’ exposure to the war and the AI boom, and causing divergent outcomes.
Policy constraints are also more binding now. Borrowing costs have risen sharply in major advanced economies, owing to both supply- and demand-driven price pressures, along with fiscal risks.
Public debt is high in many economies, and fiscal buffers have been used to help absorb the various shocks. The interaction of higher financing costs with elevated debt levels exposes a vulnerability. Strong and deliberate actions are required to rebuild buffers and shore up the capacity to withstand future shocks—new or the same.
Fiscal policy must be restrained and help contain demand pressures at a time of heightened inflationary risks. While monetary policy tightened significantly after the pandemic, primary deficits have remained elevated and, in many countries, are significantly higher than before. Importantly, the increase in borrowing costs and its implications for fiscal sustainability make the need for fiscal adjustment all the more urgent.
Our analysis considers a risk scenario in which higher commodity prices and concerns about the fiscal outlook lead to a reassessment of public borrowing risks. This causes an increase in the term premium and inflation expectations. In that scenario, global growth in 2027 would be materially lower than in the baseline projections, with inflation significantly higher. The shock would also have tangible spillovers for emerging markets and developing economies. Keeping public debt on a durably sustainable path can prevent such a scenario.
In turn, monetary policy should remain firmly focused on price stability, in line with central banks’ mandates. The policy stance should be sufficiently restrictive to return inflation to target in a timely manner, preventing second-round effects. While passthrough to core inflation has been contained so far, continued vigilance is required. Where commodity price increases and technology-related investment (or other factors) add to persistent inflationary pressures, monetary policy will need to tighten further. Starting levels of inflation, labor market tightness, and technology and commodity exposures remain key policy guideposts. The appropriate stance will differ across countries, but the objective is the same: to ensure price stability. Central bank independence remains vital in achieving that goal.
To support medium-term growth, countries should safeguard financial stability, support private sector dynamism, and strengthen fiscal and supply-side resilience. International cooperation is indispensable. Many of the shocks weighing on the global economy cross borders, and so must the response. In a more shock-prone and interconnected world, resilience cannot be built by countries acting alone. Transparent and predictable trade rules can facilitate long-term planning and enhance investment. Cooperation on energy security and critical supply chains can make adjustment less disruptive when shocks occur. Rapidly changing technologies, including artificial intelligence, also call for cooperation to ensure that the gains are broadly harnessed and risks prudently managed. In this way, the benefits of innovation should help raise living standards and make growth more durable and inclusive.
The task ahead is to move from coping to rebuilding, restoring fiscal space and supply-side resilience, lifting productive potential, and ensuring that the next decade is defined by growth and shared prosperity.
—This blog is based on the October 2026 World Economic Outlook: “Resilience under Strain, Urgent Choices.” For more, see the accompanying analytical reports on cost-of-living crises and corporate taxation.