The war in the Middle East will lead to higher inflation and slower global growth, says the head of the International Monetary Fund ahead of next week’s global forecast for the world economy.
The war has triggered the worst-ever disruption in global energy supply, with millions of barrels of oil production shuttered due to Iran’s effective blockage of the Strait of Hormuz, crucial for shipping one-fifth of the world’s oil and gas.
Even if the conflict is swiftly resolved, the IMF is set to reduce its forecast for economic growth and bump up its outlook for inflation, Kristalina Georgieva, managing director of the IMF, told Reuters.
The war is expected to dominate discussions among finance officials from around the world at next week’s spring meetings of the IMF and World Bank in Washington.
The Fund is expected to release a range of scenarios in its upcoming World Economic Outlook due on April 14.
It signalled a possible downgrade in a March 30 blog post, citing the asymmetric shock of the war and tighter financial conditions.
Without the war, Georgieva said the IMF had expected a small upgrade in its projection for global growth of 3.3 per cent in 2026 and 3.2 per cent in 2027 as economies continue to recover from the pandemic.
“Instead, all roads now lead to higher prices and slower growth,” said Georgieva, who will preview the spring meetings in a speech on Thursday.
World Bank President Ajay Banga will present his view at an Atlantic Council event on Tuesday.
“We are in a world of elevated uncertainty,” the IMF chief said, citing geopolitical tensions, technological advancements, climate shocks and demographic shifts.
“All of this means that after we recover from this shock, we need to keep our eyes open for the next one.”
The war has shrunk global oil supply by 13 per cent, Georgieva said, with the impact rippling through oil and gas shipments and into related supply chains such as helium and fertilisers.
Even a rapid end to hostilities and a fairly rapid recovery will result in a “relatively small” downward revision of the growth forecast and an upward revision of its inflation forecast, she said. If the war is protracted, the effect on inflation and growth will be greater.
Poor, vulnerable countries with no energy reserves will be hardest hit, Georgieva added, noting that many countries had little to no fiscal space to help their populations weather the price increases caused by the war, which in turn also increased the prospects of social unrest.
Georgieva said some countries had already asked for funding help, but did not name them. She said the IMF could augment some existing lending programs to meet countries’ needs. Eighty-five per cent of the IMF’s members are energy importers.
Broad energy subsidies were not the answer, she said, urging policymakers to avoid government payments that could further inflame inflationary pressures.
The impact has been asymmetric, hitting energy-importing countries hardest, but even energy exporters such as Qatar are feeling the effect from Iranian strikes against their production facilities.
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