The International Monetary Fund (IMF) warned on Monday that a further escalation in the war involving Iran could trigger a global recession, spiraling inflation, and a sharp backlash in financial markets.
In its half-yearly update, the Washington-based fund cut its 2026 growth forecasts, citing the rising economic damage from the Middle East conflict. The fund's projections suggest the world faces a 'close call for a global recession' if a worst-case scenario unfolds.
Oil prices jumped back above $100 a barrel on Monday following stalled US-Iran talks and a US blockade of the Strait of Hormuz. While Brent crude eased slightly to $98.5 a barrel on Tuesday, the IMF remains cautious about long-term stability.
Global economic scenarios
The IMF outlined three distinct possibilities in its World Economic Outlook. Under a 'reference forecast' where disruptions fade by mid-2026, global growth would fall to 3.1% in 2026, with headline inflation rising to 4.4%.
An 'adverse scenario' involving a longer shutdown of the Strait of Hormuz could see global growth drop to 2.5% this year and inflation climb to 5.4%. This assumes oil prices remain at $100 for the remainder of the year.
The most severe scenario involves a lengthier, intensive war that keeps oil prices above $110 into 2027. In this instance, the IMF predicts global growth would collapse to approximately 2%, a threshold equivalent to a worldwide recession.
'Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated,' said Pierre-Olivier Gourinchas, the IMF chief economist.
UK Chancellor Rachel Reeves, arriving in Washington for IMF and World Bank meetings, said the UK would face significant costs despite the war being geographically distant. 'The war in Iran is not our war, but it would come at a cost to the UK,' Reeves stated.
Reeves also noted her commitment to keeping inflation and interest rates in check to protect households and businesses. The IMF noted the UK would suffer the sharpest growth downgrade and the highest inflation rate among G7 nations this year.
Developing nations and net energy importers are expected to face the heaviest economic hits. The IMF urged governments to avoid untargeted subsidies and instead focus on temporary, targeted measures to manage high debt levels.