IMF: Iran conflict could drag global growth to post-COVID-19 lows.

Global economic growth faces the risk of falling to its lowest level since the Covid-19 pandemic if the conflict in the Middle East keeps oil prices around $100 a barrel for the rest of the year, according to the International Monetary Fund (IMF). In the adverse scenario, IMF projects global GDP growth at 2.5% this year— the weakest since 2020— while inflation could rise to 5.4% if oil stays at the current high level. Brent crude futures have topped $100 a barrel after talks between the U.S. and Iran collapsed and Washington imposed maritime sanctions in the Hormuz Strait, though prices have cooled somewhat since. Before the conflict escalated, oil prices hovered around $70 per barrel. The fighting has disrupted energy flows via the Hormuz Strait, one of the world's most important transport routes. IMF Chief Economist Pierre-Olivier Gourinchas said the recent developments have brought the global economy closer to the adverse scenario. He said: "Breakdown in talks between Iran and the U.S., along with sanctions, could keep several oil supplies from reaching the market by getting stuck in Hormuz." IMF GDP growth and global inflation forecasts Base case—constructed before negotiations failed—IMF projects global growth at 3.1% and inflation at 4.4%, assuming the conflict eases soon and oil prices return to near pre-crisis levels. In 2025, global economy grew 3.5% with inflation at 4.1%. IMF notes that without the war, they might have considered lifting the growth forecast. Outlook worsens as finance ministers and central bank governors meet in Washington for the IMF and World Bank spring meetings. Many low-income countries could need financial assistance as energy and fertilizer costs rise. IMF says roughly half of fertilizer price increases will feed through to food prices within about 12 months. Even under the baseline scenario, emerging economies would feel the effects, with growth down about 0.3 percentage points. In the Middle East and Central Asia, 2026 growth is forecast at 1.9%, a sharp drop from 3.6% the previous year. IMF also presents a more negative scenario in which oil prices average $110 a barrel in 2026 and rise to $125 in the following year. In that case, inflation would push central banks to tighten, dragging global growth to 2% this year, while inflation rises to 5.8%. "2% is an extremely low growth rate— only four times since 1980, two of which were tied to major shocks like the global financial crisis and the Covid-19 pandemic," Gourinchas said, warning of broader consequences for poverty, macro instability, and food security. Beyond growth prospects, IMF also warns of risks to the global financial system. In its financial stability report released the same day, the IMF cautions markets remain somewhat optimistic that the conflict will end soon despite underlying vulnerabilities. IMF’s Tobias Adrian, head of the monetary and capital markets department, said: "Markets are somewhat overly optimistic," noting the rebound in equities and bonds after a ceasefire was "notable." The S&P 500 index has recovered to pre-conflict levels, indicating investors are pricing in a near-term scenario. IMF says this mainly reflects position adjustments rather than a shift in sentiment. The biggest risk lies in the possibility of a prolonged shock, especially if energy prices stay high. IMF warns that high debt levels across governments, hedge funds, and ETFs could leave financial markets more vulnerable if funding conditions tighten. Additionally, increased issuance of short-term debt raises rollover risk in a high-inflation environment, a factor behind several past crises. By Vuong Dong