The warning from the International Monetary Fund is as stark as it is familiar: the global economy is once again at the edge of instability. This time, the trigger is not a pandemic or financial collapse but the deepening conflict involving the United States, Israel, and Iran—a geopolitical conflict now spilling directly into economic reality.
At the center of the concern is energy. As oil and gas prices surge, driven by disruptions in the Strait of Hormuz, the ripple effects are being felt across every major economy. What begins as a supply shock quickly evolves into something more systemic: rising inflation, tightening financial conditions, and slowing growth.
The IMF’s worst-case scenario paints a troubling picture. Global growth could fall below 2% by 2026—a level historically associated with near-recession conditions. It is a threshold crossed only a handful of times in recent decades, most notably during the Covid-19 crisis. That comparison alone underscores the seriousness of the moment.
Yet the economic calculus is not purely financial. For policymakers like Scott Bessent, the trade-off is explicit. Some degree of economic pain, he argues, may be justified if it prevents a far greater security threat—namely, the possibility of Iran acquiring or deploying nuclear capability against Western targets. It is a позиция that reflects a broader dilemma: how to balance immediate economic stability against long-term geopolitical risk.
But markets and households do not operate on strategic theory. They respond to prices, and those prices are rising. Oil climbing toward $110 per barrel—and potentially higher—translates into increased costs for transport, manufacturing, and food production. The result is inflation, which the IMF warns could reach as high as 6% next year.
Such inflation leaves central banks with limited options. To contain price growth, they may be forced to raise interest rates, even at the cost of slowing already fragile economies. This creates a двойной удар: higher living costs paired with reduced economic activity.
What makes this moment particularly precarious is its interconnectedness. A যুদ্ধ in one region disrupts shipping lanes, which drives up energy costs, which fuels inflation, which triggers monetary tightening, which ultimately suppresses growth worldwide. It is a chain reaction that highlights just how fragile—and interdependent—the global system has become.
The longer the conflict persists, the greater the risk that temporary shocks become structural problems. Supply chains adjust, investment slows, and confidence erodes. By the time stability returns, the economic damage may already be deeply embedded.
The IMF’s warning is not a prediction—it is a possibility. But it is one that hinges on decisions being made now, both on the battlefield and at negotiating tables.
For the global economy, the message is clear: the path away from recession does not lie in markets alone, but in diplomacy.
IMF chief economist Pierre-Olivier Gourinchas told the said a prolonged conflict would lead to spiralling inflation, push up unemployment and lead to food insecurity in some countries.
He warned that even if the conflict ended today, the impact on oil supply would be as big as the fallout from the 1970s oil crisis, when Arab oil producers placed an embargo on the US and other countries which backed Israel during the Yom Kippur war.
But Gourinchas said the world was now less dependent on oil and fossil fuels, so the impact on consumers would be less severe.
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Oil has risen close to $120 during the Iran conflict but has since fallen back and on Tuesday, a barrel of crude cost $95.
Moreover, the IMF pointed out that the risk of recession would only increase if severe conditions continued over two years.
It said if the conflict was resolved in the next few weeks and if energy production and exports from the Middle East begin to normalise by the middle of this year, global growth would ease to 3.1% for 2026.
That is below an earlier forecast of 3.3%. It also left its prediction for global growth next year unchanged at 3.2%.
Of the world’s advanced economies, the IMF has forecast that the UK will be the hardest hit by the energy shock from the Iran war.
It cut its estimate for UK growth this year to 0.8%, from a previous prediction of 1.3%. However, it expects the UK to then recover with economic expansion of 1.3%.
Oil exporting nations in the Gulf are likely to see a sharp slowdown in economic growth or even a contraction this year, according to IMF forecasts.
It estimates that Iran’s economy will shrink by 6.1% this year. However, it forecasts a rebound of 3.2% in 2027 – providing the war ends in the next few weeks. That is far from certain. On Sunday US President Donald Trump announced a US blockade of Iranian ports to stop exports.
Some countries such as Qatar, a major supplier of liquefied natural gas (LNG), have been targeted with missiles and drones by Iran.
Qatar’s Ras Laffan, the world’s largest LNG refinery, has been struck and is not expected to be fully operational for some time.
US Treasury Secretary Bessemer said he was less concerned about the economic hit than the risks to global security.
“I wonder what the hit to global GDP would be if a nuclear weapon hit London… I am saying that I am less concerned about short-term forecasts, for long-term security,” he said.
As the BBC has previously reported, the threat of Iranian ballistic missiles to London is remote.
“The biggest risk you can take is one you don’t know you were taking,” Bessent said, adding that US and Israeli strikes had removed the “tail risk” of Iranian nuclear strikes against Western countries.
The IMF forecasts that Qatar’s economy will contract by 8.6% in 2026, before bouncing back with 8.6% growth next year.
It also predicts that Iran’s neighbour, Iraq, will take an economic hit this year from the war, with a slowdown of 6.8%. But it is expected to recover to 11.3% growth in 2027.
A country’s economic resilience will depend on a number of factors, the IMF said, including the damage to energy infrastructure, dependence on the Strait of Hormuz and availability of alternative export routes.
Saudi Arabia, for example, has its East-West pipeline which runs from the Persian Gulf to the Red Sea and can pump up to 7 million barrels of oil per day.
Saudi’s growth will slow in 2026 but the economy is still expected to expand by 3.1%, and is projected to grow by 4.5% next year.
The IMF said most Middle East oil exporters are forecast for an upturn next year “based on the assumption that energy production and transportation are normalized over the next few months”.
But it cautioned that this assumption “may need to be revised if the duration of the conflict extends and the degree of damage suffered gets reassessed”.
The IMF also cut its expectations for China’s economic growth this year, predicting it will grow by 4.4% in 2026, down from the 4.5% increase it had forecast in January.
Its projection that China’s economy will grow by 4% in 2027 was unchanged.
One country that has benefited from the surge in oil prices is Russia, according to IMF forecasts.
The Russian economy is expected to grow by 1.1% this year and next, ahead of previous predictions of 0.8% and 1% respectively.
Russia had been hit by a series of sanctions after it launched a full-scale invasion of Ukraine more than four years ago
In March, Trump removed restrictions on exports of Russian oil as global prices soared.
He also temporarily lifted sanctions on 140 million barrels of Iranian oil for 30 days.
The European Commissioner for finance has warned against countries easing sanctions against Russia, arguing the country was “emerging as a winner from this war”.
“Energy prices are up, and that gives additional revenues for Russia’s war machine,” Valdis Dombrovskis told an event on the sidelines of the IMF summit in Washington.
“Now is not the time to ease the pressure on Russia.”
