Iran war could slow global growth to weakest since pandemic, IMF warns
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The global economy is at risk of growing at its slowest pace since the Covid-19 pandemic if conflict in the Middle East keeps oil prices at $100 per barrel for the rest of this year, the IMF has warned.
The fund said the global economy would expand by just 2.5 per cent this year — the weakest pace since 2020 — and inflation would soar by 5.4 per cent under an “adverse scenario” where petroleum spot prices held around their current level.
The price of the global oil benchmark, Brent crude, rose back above $100 per barrel on Monday after talks between the US and Iran fell apart over the weekend and Washington imposed a naval blockade in the Strait of Hormuz.
Oil prices were around $70 per barrel before the outbreak of war in the Middle East disrupted shipments through the crucial waterway.
IMF chief economist Pierre-Olivier Gourinchas told the FT that developments over the weekend had triggered a rise in oil prices “that would bring us closer to the adverse scenario”.
“The failure of the negotiations between Iran and the US, the reciprocal blockade by the US . . . potentially makes the situation worse in terms of locking in more oil inside the Strait of Hormuz instead of allowing it to flow to the market.”
The IMF’s reference, or baseline, scenario — set earlier this month, ahead of the failure of ceasefire talks at the weekend — forecast growth of 3.1 per cent this year and inflation of 4.4 per cent. Those projections assume the conflict will end quickly and oil prices return to close to their pre-crisis levels.
In 2025, the global economy expanded by 3.5 per cent, while prices rose by 4.1 per cent.
Without the conflict in Iran, the IMF said it would have upgraded its growth forecasts from the last set of projections in January.
The release of the more negative outlook comes as global finance ministers and central bank governors travel to Washington for the IMF and World Bank spring meetings.
Some of the world’s poorest countries are now at risk of requiring bailouts from the fund and are expected to ask it for support to handle the impact of the war on energy prices and the cost of fertiliser.
“Our estimate is that about half of the increase in fertiliser prices becomes an increase in food prices 12 months later,” Gourinchas told the FT.
Even in the IMF’s reference projections, under which advanced economies would be barely affected as a whole, emerging markets would take a hit to growth of 0.3 percentage points. In the Middle East and central Asia, growth in 2026 would be 2 percentage points lower at 1.9 per cent, compared with 3.6 per cent last year.
Under the adverse scenario, the IMF forecasts a rise in short-term inflation expectations and a tightening in global financial conditions. Oil prices would fall back to $75 per barrel in 2027 in this scenario.
The IMF also forecast a more severe scenario, where the average spot price of petroleum hits $110 per barrel in 2026 and rises further to $125 the following year. In this projection, inflation expectations ratchet up and force central banks to raise interest rates.
Under that severe scenario, growth would fall to 2 per cent this year, with inflation soaring to 5.8 per cent.
“Two per cent growth is something we’ve seen only four times since 1980, and two of these times were associated actually with big crises, the global financial crisis and Covid,” Gourinchas said, adding that it was “an extremely low growth rate for the global economy”.
“It’s a growth rate that will be associated with missing the mark on a number of objective metrics,” he said. “If you think about the number of people living in poverty, if you think about macroeconomic instability, if you think about food insecurity — we will be doing worse across all these dimensions.”
Data visualisation by Ian Hodgson in Washington
