The International Monetary Fund (IMF) has warned that wars cause lasting economic scars, reducing output by roughly 7% over five years and affecting growth for more than a decade. The IMF's research highlights the devastating human toll of wars as well as their large and prolonged economic costs.
Key Takeaways
The International Monetary Fund (IMF) has warned that wars cause lasting economic scars, reducing output by roughly 7% over five years and affecting growth for more than a decade. Conflicts in over 35 countries impacted about 45% of the world's population in 2024.
In 2024, conflicts in over 35 countries impacted about 45% of the world’s population according to multiple reports. The World Bank also predicts that emerging and developing economies in Europe and Central Asia will experience a sharp economic slowdown this year due to rising energy prices from Middle East conflict.
According to Reuters, growth across the region is expected to slow down significantly by 2026. Countries engaged in foreign conflicts may avert physical destruction on their own soil, but neighboring countries or key trading partners will feel the shock according to TimesLIVE.
The U.S.-Israeli war on Iran has sent Brent crude prices up about 50%, raising the risk of an inflationary spike globally per Reuters. The IMF's managing director Kristalina Georgieva warned that all roads now lead to higher prices and slower growth. She also noted that even a rapid end to hostilities would result in a downward revision of the growth forecast and an upward revision of its inflation forecast.
The World Bank President Ajay Banga said that the impact of the war depends on the severity and duration of disruption to energy markets, with potential impacts ranging from 0.3% to over 1% on global GDP growth according to Reuters. The bond market has also been affected, with the FTSE World Government Bond Index sliding more than 3% in March.
Global imbalances have returned and are widening since the COVID-19 pandemic, reversing a decade of steady decline after the global financial crisis. The U.S. current account deficit and corresponding surpluses of China, oil producers, the euro zone, and other advanced economies have been widening. This poses potential threats to global economic and financial stability according to Reuters.
The IMF's recipe for narrowing these imbalances includes fiscal consolidation in deficit countries, more consumption-led growth in surplus economies, and productivity-enhancing investment elsewhere. However, current trends are moving in the opposite direction with large fiscal deficits and strong domestic demand in the U.S., a record trade surplus in China, and subdued investment and weak productivity growth in Europe according to Reuters.
Policymakers face immediate problems such as energy security, inflation, trade wars, and challenges posed by artificial intelligence. The world economy has been hit by a series of shocks fueled by U.S. President Donald Trump's policies including tariffs, unraveling U.S.-European relations, questions over NATO's future, Federal Reserve independence, and the Iran war according to Reuters.
According to Reuters, a growing group of Federal Reserve policymakers felt last month that interest rate hikes might be needed to counter inflation that continued to exceed the central bank's 2% target. The minutes of their March 17-18 meeting indicated that many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices.
The Guardian reports that while financial markets showed relief after an Iran ceasefire, with a plunge in oil prices and stock market rallies, the situation remains volatile. The effective closure of the Strait of Hormuz by Tehran triggered the worst energy crisis of the modern era. Despite steps towards peace, uncertainty over a durable solution persists, with potential lasting economic consequences.
Federal Reserve policymakers may consider cutting interest rates later this year now that an agreement for a two-week ceasefire in the Iran conflict has eased concerns about a resurgence of inflation. However, with oil prices still 30% above prewar levels and uncertainty over the outlook for peace, monetary policy easing is far from certain according to Reuters.
Traders are hedging their bets on interest-rate cuts, reflecting about a one-in-four chance of a U.S. interest-rate cut by year-end. This shift comes after an initial 65% chance priced immediately after the ceasefire, but also marks a significant change from before the ceasefire when traders had built in some chance of a Fed rate hike according to Reuters.
San Francisco Fed President Mary Daly noted that it is too early to know how the Iran war and higher oil prices will affect the economy. She emphasized focusing on inflation and monitoring the labor market, which remains solid according to Reuters.
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