Can the Middle East War “Bankrupt” the World? IMF Chief Warns: Slower Economic Growth, Worsening Inflation!

Caixin News, April 7 (Editor: Huang Junzhi)—On Monday (the 6th), local time, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said that the war in the Middle East will lead to worsening inflation and a slowdown in global economic growth.

The nearly one-and-a-half-month-long war between Iran and the U.S. has triggered the most severe global energy supply disruption in history. Because Iran has blocked the Strait of Hormuz (a key passage for one-fifth of the world’s oil and natural gas transportation), millions of barrels of oil production have been forced to stop.

The IMF plans to release a new World Economic Outlook next Tuesday (the 14th). According to Georgieva, even if the conflict is resolved quickly, the IMF will still cut its economic growth forecasts and raise its inflation forecasts.

On March 30, the IMF had hinted in a blog post that, due to the asymmetric shocks brought by the war and tighter financial conditions, it might lower its economic growth forecasts. If there had been no war, the institution originally expected the economic growth forecasts could be raised slightly—global economic growth would be 3.3% in 2026 and 3.2% in 2027.

“Instead, now every road leads to higher prices and slower growth,” Georgieva said.

She further noted that the war has reduced global oil supply by 13%, causing knock-on effects on related supply chains such as oil and natural gas transportation, as well as helium and fertilizer.

It is also worth noting that Georgieva believes that even if hostilities end quickly and the economy recovers rapidly, it will still result in a “relatively small” downward cut to growth projections and an upward revision to inflation projections. And if the war drags on, the impact on inflation and economic growth will be greater.

IMF Spring Meetings are about to be held

The IMF and World Bank Spring Meetings expected to be held in Washington next week will mainly focus on this war, when financial officials from around the world will gather.

Georgieva added that poor, vulnerable countries with no energy reserves will be hit hardest, and pointed out that many countries have almost no fiscal room to help their people cope with the price increases caused by the war.

She also further said that the IMF has received some requests from countries for financing assistance. The IMF can increase some existing loan programs to meet those countries’ needs. Georgieva did not specify which countries, but 85% of the IMF’s member countries are energy importers.

It is evident that the effects of this attack are asymmetric: energy-importing countries are hit the hardest, but even energy exporters such as Qatar have felt the impact of Iran’s attacks on its production facilities.

Georgieva said Qatar expects it will take three to five years to recover about 17% of its natural gas production because the war has caused damage. The International Energy Agency reports that the war has damaged 72 energy facilities, with one-third suffering serious damage.

“Even if the war stops today, it will still have lasting negative effects on other parts of the world,” she said.

“Food concerns”

Georgieva said the IMF is also consulting with the United Nations World Food Programme (WFP) and the Food and Agriculture Organization on food security issues.

In mid-March, the WFP said that if the war lasts until June, hundreds of millions of people will face severe hunger. Georgieva said that the IMF has not yet seen a food crisis, but this could happen if fertilizer supply is disrupted.

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Responsible editor: Guo Jian