Iran war wreaks havoc on global economy and could spark recession, says IMF
The war on Iran has “abruptly darkened” the global economic outlook, and if it continues could trigger a worldwide recession, the International Monetary Fund (IMF) has warned.
In its latest World Economic Outlook, a half-yearly update, the IMF downgraded most of its growth forecasts made three months earlier.
It said that if the war is short-lived, global growth would be 3.1 percent this year. That is lower than the 3.4 percent that had been predicted for 2026 before the US and Israel attacked Iran in late February, sparking weeks of war.
The IMF said the global economy had gathered momentum, partly driven by a tech boom, only to be stopped in its tracks.
“The global outlook has abruptly darkened following the outbreak of war,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
“The closure of the Strait of Hormuz and serious damage to critical production facilities in a region central to global hydrocarbon supply could cause an energy crisis on an unprecedented scale.”
He said that the war had interrupted a steady growth trajectory, which had been driven by “a tech investment boom, some moderation in trade policy tensions, fiscal support in some countries, and accommodating financial conditions”.
“War in the Middle East will overwhelm these underlying forces,” Gourinchas added.
The sharpest downgrade among G7 nations was the UK, with the IMF cutting its forecast by 0.5 percentage points, down to 0.8 percent growth.
It downgraded its forecast for US growth in 2026 by 0.1 percentage point, to 2.3 percent.
Many emerging markets will be hit hard, with sub-Saharan Africa downgraded by 0.3 percent down to 4.3 percent.
The Middle East and North Africa saw the biggest downgrade, partly due to direct attacks on infrastructure and the blockage of the Strait of Hormuz. The region was downgraded 2.8 percentage points, down to 1.1 percent growth.
The Strait of Hormuz is a narrow maritime channel, around 33km at its slimmest point, between the Musandam peninsula in Oman and Iran.
It is described as the most significant oil chokepoint in the world, with around a fifth of global oil output passing through it, and a third of global liquefied natural gas (LNG).
Few winners
Inflation globally was projected to hit 4.4 percent in 2026 - a significant increase from the 3.7 percent figure that had been previously forecasted by the IMF. That is largely driven by rising energy prices from the war.
The conflict has seen oil prices soar above $100 a barrel, while natural gas prices have risen over 80 percent.
The IMF set out several different best and worst case economic scenarios, based on how the war plays out.
The worst case scenario involving a long protracted war would drag global growth down to two percent and send inflation to six percent. Such an outlook would be seen as equivalent to a worldwide recession.
According to the IMF, global growth has only fallen below such a rate four times since 1980, most recently after the Covid-19 pandemic and the 2008 financial crisis.
But the best case scenario would still wreak havoc on the global outlook.
If the war ends soon and the Strait of Hormuz is reopened, oil prices are still estimated by the IMF to increase by 21.4 percent this year.
Energy commodity prices, which had been forecast to fall this year, would rise by 19 percent this year. This will result in higher costs for energy-intensive goods.
“The direct effect of commodity price increases represents a textbook negative supply shock,” said Gourinchas.
“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.”
Notably, the IMF report finds that the biggest relative winner of the war appears to be Russia, whose economy is forecast to grow 1.1 percent in 2026.
That is slightly up from 1 percent growth last year, and 0.3 percent higher than the IMF had previously forecast for this year.
Moscow has benefited from higher oil prices, and the US temporarily lifting sanctions on some Russian oil exports.
This article was sourced from Middle East Eye.
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