The IMF warns that the global economy faces recession if the Iran war continues.

 

Food prices have risen in countries such as Iraq during the US-Israel war with Iran(image: Getty Images)

The International Monetary Fund (IMF) has issued a warning that high energy costs and the US-Israeli war with Iran could lead to a recession. The International Monetary Fund (IMF) stated in its report titled "World Economic Outlook" that global growth could fall below 2% in 2026 in the worst-case scenario in which prices for oil, gas, and food rise and stay high this year and next. It stated, "This would mean a close call for a global recession, which has only happened four times since 1980," the most recent instance occurring during the Covid pandemic. US Treasury Secretary Scott Bessent told the BBC "a small bit of economic pain" was a price worth paying to eliminate the risk of Iran striking Western capitals with nuclear weapons.

 Since the war began more than six weeks ago, when peace talks between the US and Iran failed and the important shipping route through the Strait of Hormuz effectively closed, energy prices have skyrocketed. The IMF said: "Once again, the global economy is threatened with being thrown off course - this time by the outbreak of war in the Middle East at the end of February 2026."

 It stated that oil prices reaching an average of $110 per barrel this year and $125 in 2027 would be the most severe conditions that could result in a global slowdown. The IMF predicted that inflation could rise as much as 6% next year on these presumptions. In order to slow the rate of price increases, this could force central banks to raise interest rates.

According to the BBC, the IMF's chief economist Pierre-Olivier Gourinchas, a prolonged conflict would result in food insecurity, escalating unemployment, and spiraling inflation. 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.

During the Iran conflict, oil prices reached close to $120, but they have since fallen, and on Tuesday, a barrel of crude cost $95. In addition, the IMF emphasized that the likelihood of a recession would only rise if severe conditions persisted for two years. It stated that global growth would slow to 3.1% in 2026 if the conflict was resolved within the next few weeks and energy production and exports from the Middle East began to normalize by the middle of this year. That is below an earlier forecast of 3.3%.  Additionally, it maintained its 3.2% forecast for global growth for the upcoming year.

The IMF has predicted that the energy shock from the Iran war will be most severe for the UK out of all the advanced economies in the world. 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 anticipates a 3.2% increase in 2027, subject to the war's conclusion within the next few weeks. That's not entirely certain. Trump announced on Sunday that the United States would blockade Iranian ports to prevent 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.

 The BBC was informed by US Treasury Secretary Bessent that he was more concerned about threats to global security than about the impact on the economy.

"I wonder how much the global GDP would be affected if London were hit by a nuclear weapon... "I'm saying that long-term security is more important to me than short-term forecasts," he said. The BBC has previously reported that Iranian ballistic missiles pose no significant threat to London. "There is no assessment that Iran is trying to target Europe with missiles," a spokesperson for the UK government stated. However, we possess the necessary military capability to safeguard Britain from all attacks, whether domestic or foreign. Bessent said: "The biggest risk you can take is one you don't know you were taking."

 He added that US and Israeli strikes had removed the "tail risk" of Iranian nuclear strikes against Western countries.

The Qatari economy will shrink by 8.6% in 2026, according to the IMF, before expanding by 8.6% the following 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%.  However, in 2027, it is anticipated to resume growth at 11.3%. According to the IMF, a country's economic resilience will be affected by a variety of factors, such as the destruction of its energy infrastructure, its reliance on the Strait of Hormuz, and the availability of alternative export routes. For instance, Saudi Arabia has its East-West pipeline, which can pump up to 7 million barrels of oil per day and connects the Persian Gulf to the Red Sea. Although Saudi Arabia's growth will slow in 2026, the economy is still anticipated to expand by 3.1% and by 4.5 percent the following year. "Based on the assumption that energy production and transportation are normalized over the next few months," the IMF stated, "the majority of Middle East oil exporters are forecast for an upturn next year." It did, however, warn that this assumption "may need to be revised if the duration of the conflict extends and the degree of damage suffered gets reevaluated." 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."

Source; BBC