The war being prosecuted by the U.S. and Israel against Iran means the world economy is facing “a close call for a global recession,” in the more severe of two scenarios presented by the International Monetary Fund in its World Economic Outlook released April 14.
The IMF considers a recession to be a growth rate below 2%, which it says has happened only four times since 1980, with the latest two occasions corresponding to the global financial crisis and the COVID-19 pandemic.
The military conflict engulfing the Middle East since the end of February is testing the resilience of the global economy, said the report’s authors. “The conflict has already inflicted humanitarian costs, damaged critical infrastructure, and severely disrupted maritime and air traffic in the affected region,” the report continued. “Economies around the world face repercussions through the direct impact of higher commodity prices, indirect second-order effects on inflation expectations — which tend to be especially sensitive to energy and food prices — and amplification effects coming from risk-off sentiment in financial markets.”
Under the IMF’s “adverse” scenario, where the war lasts a few more weeks, allowing for relatively rapid recovery, global growth would be reduced by 0.8% in 2026, dropping to 2.5%, and 3.0% in 2027. Inflation would rise to 5.4% in 2026, mostly because of higher energy prices, then 63.9% in 2027.
But under the IMF’s “severe” scenario, where the war drags on for months and continues to severely impact the entire Middle East region, global growth would struggle to stay above 2%, and inflation would rise to 5.8% in 2026, and 6.1% in 2027.
In both scenarios, the IMF warned, the impact on emerging markets would again be greater than that on advanced economies.
Absent the war, sources of recent resilience would have been expected to continue to hold global economic activity on a steady path in 2026. Near-term prospects have, however, worsened given the disruptions caused by the closure of the Strait of Hormuz and the attacks on production facilities, the report said.
