The US-Israeli conflict with Iran could throw the world economy “off course” and trigger a global recession, the International Monetary Fund (IMF) has warned.
In its half-yearly update released during spring meetings in Washington, the firm said the closing of the strategic Strait of Hormuz – where one fifth of global oil and gas exports transit – and serious damage caused to critical facilities in the Middle East “raise the prospect of a major energy crisis should hostilities continue”.
“Once again, the global economy is threatened with being thrown off course,” the IMF said.
The Washington-based fund presented three growth scenarios based on how the war unfolds, ranging from its most optimistic “reference scenario” if the war is short-lived, to an “adverse scenario” in the event of a longer conflict and its worst-case “severe scenario” of an extended conflict, where there is more damage to energy infrastructure.
Under the reference scenario, the IMF said the global economy is set to grow by 3.1 per cent this year, and puts inflation at 4.4 per cent this year.
The IMF said it was planning to upgrade growth to 3.4 per cent this year if not for the war.
Under the severe scenario, the average price of oil would rise to $110 per barrel this year and hit $US125 in 2027.
Global economic growth would fall by 1.3 percentage points to 2 per cent – the threshold for a global recession – this year, while inflation would exceed six per cent.
“This would mean a close call for a global recession, which has happened only four times since 1980,” the IMF said.
Treasurer Jim Chalmers, who has flown to Washington for IMF meetings and talks with US Treasury Secretary Scott Bessent ahead of the May 12 budget, said the IMF’s outlook “shows it’s a dangerous moment for the global economy”.
“The world is expecting slower growth, higher inflation, and extreme volatility arising out of the conflict in the Middle East, and we are, too.”
The IMF warned governments against untargeted cost-of-living relief, including price caps and subsidies, acknowledging that while popular, they are “poorly designed and costly”.
The warning comes after the Albanese government’s recent decision to halve the fuel excise on petrol and diesel for three months to 26.3 cents per litre.
“Given the lack of fiscal space with still elevated budget deficits and rising public debt, any fiscal support should remain narrowly targeted and temporary — with clear sunset clauses, and consistent with medium-term fiscal plans to rebuild buffers,” the IMF said.
“Avoiding fiscal stimulus is also critical when inflation is rising, so as not to complicate central banks’ task.”
“Preserving price signals is important: high prices signal scarcity, encouraging demand restraint and supply expansion. Price controls and export restrictions cannot change that fact. Worse, such measures often backfire by raising underlying prices, leading to rationing and shifting adverse spillovers to other countries.”
Uneven impact
The IMF cautioned that the war has taken a bigger toll on the Middle East and “vulnerable economies” elsewhere.
“The impact on emerging market and developing economies would be almost twice that on advanced economies,” the fund said.
Higher energy and fertiliser costs could bring steeper food prices, mainly hitting low-income energy importers, IMF chief economist Pierre-Olivier Gourinchas said.
Growth projections this year for the Middle East and central Asia were cut by around half to 1.9 per cent.
Saudi Arabia, the Middle East’s biggest economy, is set to see 3.1 per cent growth this year, down 1.4 percentage points from January’s expectation.
Among the world’s two biggest economies, US growth is still set to accelerate to 2.3 per cent this year, although the pace of growth was revised slightly lower.
“The US at the margin is benefiting from higher energy prices,” Mr Gourinchas said. But gasoline prices have also jumped for consumers.
China’s growth is anticipated to cool to 4.4 per cent, a touch below the January forecast.
The IMF flagged an underlying “unevenness” in both economies. Domestic activity lags behind exports in China, while a strong showing in the United States has been accompanied by low employment growth.
Euro area growth was revised 0.2 points down to 1.1 per cent for 2026. While the IMF does not expect inflation expectations to go off-track, there is concern they may not be as well-anchored as before.
Past inflation episodes remain fresh in the public’s minds, and firms might act to restore margins more quickly than before.
“If that happens, then you can get much more persistent inflation going on, (which) would be reflected in higher inflation expectations,” Mr Gourinchas said.
Central banks might then need to step in and raise interest rates to cool the economy, despite ongoing negative supply shocks.
– With AFP
