The International Monetary Fund (IMF) has cautioned that any additional intensification of the conflict in Iran could precipitate a global recession, fuel spiralling inflation, and trigger sharp volatility in financial markets.
In its latest half-yearly update, the Washington-based institution stated that the economic toll from the Middle East hostilities is steadily mounting as it revised its growth projections for 2026, reports The Guardian.
The warning coincides with the gathering of global finance ministers and central bank governors in Washington for the spring meetings of the IMF and World Bank.
Pierre-Olivier Gourinchas, the IMF chief economist, remarked that while there has been news of a temporary ceasefire, “some damage is already done, and the downside risks remain elevated.”
Economic scenarios and growth downgrades
The IMF’s World Economic Outlook detailed three potential trajectories for the global economy. In a central “reference forecast” – predicated on the assumption that disruption diminishes by mid-2026 – global growth is expected to slow to 3.1% from 3.4% last year, with headline inflation rising to 4.4%.
However, the fund warned of a “close call for a global recession” under a worst-case “severe scenario.”
This scenario, involving a protracted, intensive war that keeps oil prices above $110 per barrel into 2027, could see global growth collapse to approximately 2%. Such a rate has been breached only four times since 1980, most recently during the 2008 financial crisis and the 2020 pandemic.
In this event, global inflation would likely exceed 6%, necessitating further interest rate hikes by central banks.
Impact on G7 and developing economies
The IMF noted that while the slowdown is a worldwide phenomenon, net energy importers and developing nations are expected to bear the heaviest burden.
Among the G7, the United Kingdom is projected to experience the most significant growth downgrade. The fund reduced the UK’s 2026 growth forecast by 0.5 percentage points to 0.8%, while warning of inflation climbing to nearly 4%.
The United States also saw its growth forecast lowered by 0.1 percentage points to 2.3%.
Policy advice and official response
To mitigate economic damage, the IMF urged a cessation of the conflict and advised central banks to remain vigilant.
For governments, the fund recommended that any emergency financial support be temporary and targeted, citing concerns over unsustainably high debt levels in many nations. Gourinchas specifically cautioned against “untargeted measures” like price caps and subsidies, labelling them “poorly designed and costly.”
UK Chancellor Rachel Reeves, arriving in Washington for the meetings, is expected to advocate for a coordinated international response to the crisis.
Reflecting on the impact, Reeves said, “The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to.”
In energy markets, Brent crude prices remain volatile.
Prices surged above $100 a barrel following a stalemate in weekend negotiations between the US and Iran and the commencement of a US blockade of the Strait of Hormuz, before easing slightly to $98.5 on Tuesday amid hopes for further dialogue.
