Global growth is under threat from rising conflict
International Monetary Fund warned the world economy might slip into recession if conflict continues between Israel, the United States and Iran.
IMF’s latest forecast said that war and energy price increases could bring global growth down to 2% in 2026. This level is very close to global recession. The world has only experienced this few times in the past, such as during the COVID-19 Crisis.
Prices of energy surge following supply disruptions
Oil prices peaked at $120 per barrel before falling to $95. IMF warns that oil prices may average $100 this year, and reach $125 in 2027 if crisis persists.
Interest rates and inflation could increase
Higher energy prices often cause a broader increase in inflation. In a worst case scenario, the IMF predicts that global inflation will reach around 6% in 2013.
Inflation can increase the interest rate. It could reduce economic activity and spending worldwide, and cause unemployment to rise.
Scott Bessent stated that some pain in the short-term is tolerable if this reduces security risks over time. He said that the prevention of potential nuclear threats was more important than forecasts for short-term economies.
Pierre-Olivier Gourinchas, economist at the IMF, warned of food insecurity and job loss in regions vulnerable to a conflict. He said that the current situation is similar to the oil crisis of the 1970s, but pointed out that the economy today relies less on fossil-fuels.
Countries face uneven economic impact
Economic effects will differ across the regions. IMF predicts that the United Kingdom will face the largest slowdown among advanced economies this year, with growth falling to just 0.8%.
The oil-exporting countries in the Gulf could also experience a slower or even negative growth.
Energy infrastructure damage raises concerns
The attacks on Qatari facilities, such as the Ras Laffan site of Ras LNG, disrupted gas supply worldwide. The refinery, which is the biggest in the world and has a reduced production rate, may cause energy prices to remain high.
How quickly a conflict is resolved will determine the outlook.
The global economy could grow by 3.1%, slightly less than earlier estimates, in 2026.If tensions continue for more than two years, then the risks of a recession increase, which will have lasting impacts on global trade, inflation and jobs.
