IMF warns war on Iran could push world economy to the brink of recession

The International Monetary Fund (IMF) has sounded the alarm: the ongoing war involving Iran could push the global economy dangerously close to a recession if things spiral further.

In its latest World Economic Outlook released during the spring meetings in Washington, the IMF said rising oil prices and supply chain disruptions tied to the conflict are already shaking economic stability worldwide.

Right now, the IMF is working with three possible scenarios: the “reference”, “adverse”, and “severe”, all depending on how the war unfolds.

Under its most optimistic “reference scenario”, where the conflict is short-lived, global growth is projected at 3.1% in 2026. That’s already a slight drop from earlier forecasts. Oil prices, in this case, are expected to average around $82 per barrel, down from the current ~$100 range.

READ ALSO: Nigerian Workers Demand Higher Pay and Lower Taxes Over Economic Hardship

But even that “best case” isn’t exactly reassuring.

Without the conflict, the IMF says global growth could have actually improved to 3.4%, thanks to factors like increased tech investments, lower interest rates, and easing trade tensions.

Instead, the war has introduced what IMF chief economist Pierre-Olivier Gourinchas describes as a much bigger threat than previous economic shocks.

"What's happening in the Gulf is potentially much, much larger, and that's what our scenarios are kind of documenting," he said.

If the conflict drags on, things get worse. In the IMF’s “adverse scenario”, where oil hovers around $100 this year before easing slightly, global growth could slow to 2.5%.

And in the worst-case “severe scenario”? Growth drops to just 2.0%, a level the IMF says is dangerously close to a global recession. Historically, the world economy has only dipped that low a handful of times, including during the 2009 financial crisis and the 2020 COVID-19 pandemic.

Beyond growth, inflation is another major concern.

In the severe scenario, global inflation could rise above 6% by 2026, compared to 4.4% in the more stable outlook. According to Gourinchas, sustained high oil prices could shift how people and businesses think about inflation, and that’s where the real trouble starts.

"That change in inflation expectations is going to require central banks to step on the brakes and try to bring inflation back down," he said.

In simple terms, that could mean higher interest rates again, and more financial pressure on everyday people.

There’s a small silver lining, though. If the spike in energy prices is temporary, central banks might choose to hold off on aggressive rate hikes, allowing economies some breathing room.

Still, not all regions will feel the impact equally.

The IMF says emerging markets and developing economies, many of which rely heavily on oil, will be hit harder than advanced economies. The Middle East and Central Asia region, at the centre of the conflict, is expected to take the biggest hit, with sharp declines in GDP across several countries.

Meanwhile, countries like the United States and China are expected to slow only slightly, cushioned by internal economic policies and investments. One notable exception is India, which continues to show strong growth, with projections holding steady at 6.5%.

The IMF also warned governments against rushing into broad fuel subsidies or tax cuts to ease the pressure of rising energy costs. While helping citizens is important, poorly managed interventions could create even bigger economic problems.

As Gourinchas put it:

"You have to do it in a very targeted, very temporary way that doesn't really mess up the fiscal framework."

Bottom line: the global economy isn’t in crisis just yet, but it’s definitely on edge. And what happens next in the Middle East could make all the difference.