Failure to resolve the war in the Middle East could lead to an energy crisis of “unprecedented scale,” the International Monetary Fund (IMF) has warned.
In its latest assessment, the Washington-based institution said the war and the spike in energy prices had fundamentally changed the global economic outlook.
“The ultimate size” of the shock depended on the scale and duration of the conflict, it said.
Assuming the conflict is short-lived, the IMF projects global growth of 3.1 per cent for this year, a downward revision of 0.2 per cent on its January projections, with headline inflation expected to rise from 4.1 per cent in 2025 to 4.4 per cent in 2026.
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However, more attacks on critical energy facilities and the prospect of a longer shutdown of the Strait of Hormuz are raising “the spectre of a more significant and persistent conflagration for the global economy,” the fund said.
Under an adverse scenario with larger and more persistent increases in energy prices, global growth would slow further to 2.5 per cent in 2026 and inflation would reach 5.4 per cent.
However, under the fund’s severe scenario which assumes dislocations in energy markets that extend to next year, the global economy would come close to experiencing a recession, with growth of about 2 per cent this year and next and global headline inflation near 6 per cent.
“Clearly, the downside risks are tremendous,” it said.
With the US threatening to blockade Iranian ports and Tehran threatening to resume rocket and drone attacks on its Gulf neighbours, the conflict does not appear to be nearing a resolution.
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IMF chief economist Pierre-Olivier Gourinchas said the war had interrupted what had been a steady growth trajectory for the global economy.
“Prior to the war we were poised to upgrade our global growth forecast, reflecting continued momentum in the global economy supported by a tech investment boom, some moderation in trade policy tensions, fiscal support in some countries and accommodating financial conditions,” he said.
“War in the Middle East will overwhelm these underlying forces,” he warned.
Gourinchas warned the impact of the shock depends on three channels.
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“First, the direct effect of commodity price increases represents a textbook negative supply shock, raising the cost of all energy-intensive goods and services – including fertilisers, chemicals, food, transportation and heating – disrupting supply chains, feeding into headline inflation and reducing purchasing power,” he said.
But this direct shock can be amplified via second-round effects as workers and firms try to recoup expected income losses through higher wages and prices, he said.
The reaction of financial markets is the third channel.
“A classic risk-off episode triggered by the prospects of macroeconomic instability could ensue, impairing asset valuations, increasing risk premiums, causing capital flight and the dollar to appreciate with a flight to safety, and dampening aggregate demand,” Gourinchas said.
