A prolonged Iran conflict could shave global growth to just 2 percent, the IMF warned. Its baseline assumes a short disruption and a 19 percent rise in energy prices this year, leaving world growth near 3.1 percent and headline inflation around 4.4 percent. Supply disruptions after a Strait of Hormuz closure have already pushed oil toward triple digits and knocked down PMIs across the euro zone, Britain, India and Australia, exposing importers and low-income economies to hotter inflation and weaker demand.

Energy shock sets the tone

The IMF lays out three core channels by which the war is hitting the global economy: higher commodity prices that act like a negative supply shock, second-round wage pressures that can entrench inflation, and tighter financial conditions as markets reprice risk and the dollar strengthens.

Those channels matter because a large share of world trade and energy flows runs through the Persian Gulf. The IMF flagged the closure of the Strait of Hormuz and damage to drilling and refining facilities as the immediate trigger for the current disruption. In its reference case, which assumes a short interruption and a moderate 19% rise in energy-commodity prices in 2026, the IMF still sees growth cooling to about 3.1% while headline inflation averages roughly 4.4%.

In more adverse settings the hit steepens. The IMF’s adverse scenario — which assumes a longer shutdown, higher energy prices and a tightening of financial conditions — cuts growth to 2.5% and lifts inflation to about 5.4%. In a severe scenario where supply problems last into next year and inflation expectations become less anchored, the IMF said growth could fall to 2% and inflation top 6%.

Brent crude climbed into triple digits in March and April, amplifying costs across logistics, fertilizer, chemicals and power inputs.

Mastheads

Markets, policy and the dollar

Financial markets have responded by trimming risky assets, lifting risk premia and driving safe-haven flows into the dollar. The IMF warned that a stronger dollar and tighter financial conditions would squeeze demand further, creating a feedback loop: higher borrowing costs, lower asset valuations, and less room for fiscal support in many countries.

Central banks are in a bind. Stubborn inflation pressures could force policymakers to keep rates higher for longer even as growth slows, raising the odds of policy mistakes — either leaving inflation to run or tightening so much that activity collapses. Low-income and developing countries with weak buffers and large import bills are most vulnerable to a sustained energy shock, facing higher food and fuel import bills, capital outflows and pressure on exchange rates.

Early signs across sectors and regions

Real-economy data are already showing damage. Multiple S&P Global purchasing manager indices signaled weaker activity in March:

  • Euro zone composite PMI fell more than economists expected.
  • Australia’s gauge slumped toward contraction.
  • India’s factory index slid to its weakest since 2021.
  • Britain’s manufacturers reported the sharpest jump in inflationary pressures in decades.

Those readings match industry anecdotes: producers in India delayed film releases that depend on Gulf markets after the bombing of Tehran reduced regional box-office demand; farmers in southern Italy reported squeezed margins as diesel, fertilizer and pesticide costs rose; in Pakistan, authorities moved toward fuel-saving policies such as a four-day work week, and public campaigns in parts of Asia urged households to cut air-conditioning and conserve petrol.

Even industries that seemed insulated are feeling the effects.

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In the IMF’s severe scenario — with sustained energy disruptions and unanchored inflation expectations — global growth would sink to about 2 percent and inflation would top 6 percent.

This article was created with AI assistance.