The foreword to its World Economic Outlook (WEO) report released yesterday set out the overall situation.
“The global outlook has abruptly darkened following the outbreak of war in the Middle East… The closure of the Strait of Hormuz and the serious damage to critical production facilities in a region central to global hydrocarbon supply could cause an energy crisis on an unprecedented scale.”
Prior to the outbreak of the war, the IMF said it was poised to upgrade its growth predictions on the back of some easing of trade tensions, a tech investment boom and more accommodative financial conditions. “War in the Middle East will overwhelm these underlying forces.”
Due to the uncertainty generated by the war, the IMF abandoned its usual practice of issuing a “baseline scenario” replacing it with a “reference scenario,” which assumed that the war would end shortly and oil prices would quickly return to their previous levels. But even under these conditions, it said global growth would fall to 3.1 percent this year down from 3.5 percent in 2025 and inflation would rise to 4.4 percent from 4.1 percent last year.
Under what it called an “adverse scenario,” the global economy would grow by only 2.5 percent this year—the lowest since 2020 and the start of the pandemic—and inflation would rise to 5.4 percent.
Speaking to the Financial Times, IMF chief economist Pierre-Olivier Gourinchas said that developments at the weekend—the collapse of talks in Islamabad and the imposition of a US blockade on the Strait of Hormuz—had triggered a rise in oil prices “that would bring us closer to the adverse scenario.”
In blog post, he said that if a “severe scenario” developed, where inflation expectations were less anchored and financial conditions tightened sharply, “global growth would decline to 2 percent this year and next, while inflation would exceed 6 percent.”
As the foreword to the report spelled out: “Under our severe scenario—assuming dislocations in energy markets that extend to next year, together with a de-anchoring of inflation expectations and a tightening of financial conditions, the global economy would come close to experiencing a recession… Clearly, the downside risks are tremendous.”
