The International Monetary Fund (IMF) has cautioned that the global economy is experiencing a significant deceleration and escalating inflation threats due to the conflict in the Middle East disrupting energy supplies. IMF Chief Economist Pierre-Olivier Gourinchas highlighted that the ongoing war has interrupted previous growth trends and heightened the possibility of a substantial energy crisis, with oil and gas prices surging because of disruptions related to the closure of the Strait of Hormuz.
The IMF’s latest World Economic Outlook projects a slowdown in global growth to 3.1 percent in 2026, a decrease from its earlier forecast in January, while anticipating a rise in headline inflation to 4.4 percent. The report presents three scenarios, with the most adverse scenario predicting a drop in growth to 2.5 percent and inflation climbing to 5.4 percent. In a severe scenario, prolonged energy disruptions could lead to a global growth decline to 2 percent and inflation surpassing 6 percent.
Gourinchas emphasized the persisting high risks, noting that elevated commodity prices are causing a detrimental supply shock, increasing expenses, disrupting supply chains, and diminishing purchasing power. Financial conditions are tightening as investors shift towards safer assets, strengthening the US dollar and exerting pressure on emerging markets, resulting in inflationary pressures in other nations and tighter financial conditions.
The IMF underscored that the duration of the conflict will significantly impact the global outlook. Gourinchas warned that each passing day brings the world closer to the adverse scenario, urging central banks to remain cautious and avoid immediate overreactions while staying vigilant. Fiscal policy options have narrowed considerably, with governments advised against broad subsidies or price controls, emphasizing targeted and temporary aid for vulnerable groups.
The IMF also drew parallels between the current shock and the 1970s oil crisis in terms of supply disruptions, highlighting that the global economy is now less reliant on oil and better equipped with policy instruments. Low-income, energy-importing nations are expected to bear the brunt of the impact, while Gulf economies face direct severe repercussions from the conflict. Emerging markets, despite recent resilience, may face fiscal challenges due to escalating debt and borrowing costs.
Gourinchas stressed the importance of appropriate policies to mitigate the damage, calling for a swift resolution to hostilities and the reopening of critical trade routes. The IMF’s World Economic Outlook, released biannually, with updates scheduled for July and January, aims to adapt to evolving global conditions.
