IMF Warns Middle East War to Slow Global Growth

The International Monetary Fund (IMF) has warned that wars cause lasting economic scars, reducing output by roughly 7% over five years. The ongoing conflict in the Middle East is expected to slow global growth and raise inflation significantly. Conflicts in over 35 countries impacted about 45% of the world’s population last year.

The World Bank 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. The U.S.-Israeli war on Iran has sent Brent crude prices up about 50%, raising the risk of an inflationary spike globally.

IMF Managing Director Kristalina Georgieva warned that all roads now lead to higher prices and slower growth. She 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.

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.

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.

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.

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 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.

Top finance officials from around the world will convene in Washington this week under the shadow of the war in the Middle East, which has delivered a third major shock to the global economy after the COVID pandemic and Russia's full-scale invasion of Ukraine in 2022. The World Bank's baseline estimate now projects growth in emerging markets and developing economies of 3.65% in 2026, down from 4% in October, but sees that number dropping as low as 2.6% if the war lasts longer.

The IMF warned last week that about 45 million additional people could also face acute food insecurity if the war persists and continues to disrupt fertilizer shipments needed now. The IMF said it expects demand for $20 billion to $50 billion in near-term emergency support to low-income and energy-importing countries.

The World Bank has said it could mobilize some $25 billion through crisis response instruments in the near-term, and up to $70 billion in six months, as needed. But economists are urging governments to use only targeted and temporary steps to ease the pain of higher prices for their citizens, since broader measures could fuel inflation.

Countries now face a tough balancing act managing inflation while keeping an eye on growth and the longer-term challenge of creating enough jobs for the 1.2 billion people who will reach working age in developing countries by 2035. IMF and World Bank also face a far different global landscape with tensions running high between the United States and China, the world's largest economies, and the Group of 20 major economies hobbled in its ability to coordinate a response.

The International Monetary Fund (IMF), World Bank, and International Energy Agency have urged countries to avoid hoarding energy supplies and imposing export controls that could worsen what they called the biggest shock ever to the global energy market. The U.S. military began a blockade of ships leaving Iran's ports, and Tehran threatened to retaliate against its Gulf neighbors' ports after weekend talks in Islamabad on ending the war broke down.

IEA chief Fatih Birol told reporters that several countries were holding onto stocks and imposing export restrictions, appealing to all countries to let energy stocks flow to the markets. He did not name the countries. The conflict has triggered the worst global energy disruption ever, with more than 80 oil and gas facilities across the Middle East damaged to date.

World Bank President Ajay Banga is sounding the alarm about a bigger, looming crisis: a huge gap in jobs for the 1.2 billion people who will reach working age in developing countries in the next 10 to 15 years. At current trajectories, those economies will generate only about 400 million jobs, leaving a deficit of 800 million jobs.

The Guardian reports that more than 32 million people worldwide could be plunged into poverty by the economic fallout from the Iran war, with developing countries expected to be hit hardest. The United Nations Development Programme (UNDP) said the world was facing a “triple shock” involving energy, food, and weaker economic growth.

Governments are spending more on defence and cutting their reliance on rivals in response to global threats. This is pushing up debt relative to GDP, limiting their ability to project power. Borrowing costs have also shot up. The yield on 10-year U.S. government bonds has almost trebled to 4.3% over the past five years.

The Los Angeles Times reports that while oil prices are once again surging in the wake of war in the Middle East, driving up the cost of gasoline, diesel and jet fuel and threatening a return to stagflation – the toxic mix of higher prices and slower growth that made economic life so miserable a half century ago. But the U.S. and world economies are less vulnerable now than they were when Saudi Arabia and other Middle Eastern petroleum producers withheld oil supplies to punish countries that supported Israel in the 1973 Yom Kippur War.

The IMF said its executive board has agreed to retain the current floor for precautionary balances, which consist of general and special reserves, at 20 billion Special Drawing Rights, or nearly $29 billion. Precautionary balances provide a buffer to protect the Fund against potential losses from credit, income, and other financial risks.

World Bank President Ajay Banga said on Tuesday that the World Bank could mobilize $80 billion to $100 billion in funding over the next 15 months for countries hit hard by the war in the Middle East. This includes $20 billion to $25 billion available immediately through crisis response instruments and an additional $30 billion to $40 billion that could come from repurposing existing programs within six months.

Treasury Secretary Scott Bessent expressed confidence in the underlying strength of the U.S. economy, suggesting growth could still exceed 3% or even 3.5% this year despite the impact of the Iran war. He characterized cuts to global growth forecasts and higher inflation projections by international institutions as an overreaction.

Stock markets rallied on Tuesday following renewed optimism about ongoing U.S.-Iran talks, which boosted hopes for de-escalation in the Middle East. This sentiment was reflected in falling oil prices and a focus on corporate earnings reports.