The war is expected to lead to higher inflation and slower global growth, according to the International Monetary Fund. The conflict has already triggered significant disruption to global energy supplies, and even a swift resolution will likely result in downward revisions to economic growth forecasts.
US-Israeli War on Iran to Slow Global Growth, Increase Inflation
The head of the International Monetary Fund (IMF) told Reuters on Monday that the war will have a negative impact on the world economy. The IMF is preparing a forecast for the world economy to be released next week, and the war is expected to dominate discussions among finance officials at the upcoming spring meetings of the IMF and World Bank.
The conflict has caused the worst-ever disruption in global energy supply, with millions of barrels of oil production halted due to Iran’s effective blockage of the Strait of Hormuz, a crucial shipping lane for approximately one-fifth of the world’s oil and gas.
IMF Managing Director Kristalina Georgieva said that even if the conflict is quickly resolved, the IMF will reduce its forecast for economic growth and increase its outlook for inflation. Without the war, the IMF had anticipated a slight upgrade in its global growth projection to 3.3 percent in 2026 and 3.2 percent in 2027 as economies continued to recover from the pandemic.
“Instead, all roads now lead to higher prices and slower growth,” Georgieva said, previewing the spring meetings in a speech scheduled for Thursday. World Bank President Ajay Banga will present his view at an Atlantic Council event on Tuesday.
Georgieva emphasized the elevated uncertainty in the world, citing geopolitical tensions, technological advancements, climate shocks, and demographic shifts. “All of this means that after we recover from this shock, we need to keep our eyes open for the next one,” she said.
Global oil supply has shrunk by 13 percent as a result of the war, impacting oil and gas shipments and related supply chains, including helium and fertilizers. Qatar expects it will take three to five years to restore 17 percent of its natural gas production due to damage sustained during the conflict, while the International Energy Agency has reported 72 energy facilities have been damaged, with one-third suffering significant damage.
“Even if the war is to stop today, there would be a lingering negative impact to the rest of the world,” Georgieva stated.
Poor Countries Will Be Hit Hardest
Poor, vulnerable countries without energy reserves will be most affected by the war, Georgieva added. Many of these countries have limited fiscal space to help their populations cope with rising prices, increasing the risk of social unrest. Some countries have already requested funding assistance from the IMF, which could augment existing lending programs to meet their needs. Eighty-five percent of the IMF’s members are energy importers.
Georgieva cautioned against broad energy subsidies, urging policymakers to avoid government payments that could exacerbate inflationary pressures. The impact of the war has been asymmetric, disproportionately affecting energy-importing countries, though even energy exporters like Qatar are experiencing effects from Iranian strikes against their production facilities.
The international Brent crude benchmark settled near $110 on Monday, with cash benchmarks sourced to the Middle East at a substantial premium to that price.
The heads of the IMF, IEA, and World Bank have agreed to a coordinated effort to assess the energy and economic effects of the war. The IMF is also collaborating with the United Nations’ World Food Programme and Food and Agriculture Organization on food security. The World Food Programme warned in mid-March that millions could face acute hunger if the war continues into June, though the IMF does not currently foresee a food crisis, but acknowledges that could change if fertilizer deliveries are impaired.
After the attacks on February 28, Iran effectively closed the Strait of Hormuz, causing a sharp increase in the price of crude oil and liquefied natural gas.
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