WASHINGTON: The International Monetary Fund cut its growth outlook on Tuesday due to Iran war-driven energy price spikes and supply disruptions and warned that the global economy would teeter on the brink of recession if the conflict worsens and oil stays above USD100 per barrel through 2027.
With massive uncertainty over the Middle East conflict gripping finance officials gathering for IMF and World Bank spring meetings in Washington, the IMF presented three growth scenarios: weaker, worse and severe, depending on how the war unfolds.
The World Economic Outlook’s most optimistic “reference scenario” assumes a short-lived Iran war and forecasts 3.1 percent real GDP growth for 2026, down 0.2 percentage point from its previous forecast in January. Under this scenario, oil prices average USD82 per barrel for all of 2026, a decline from recent levels of around USD100 for the Brent benchmark futures price.
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Absent the Middle East conflict, the IMF said it would have upgraded its growth outlook by 0.1 percentage point to 3.4 percent, due to a continued technology investment boom, lower interest rates, less-severe US tariffs and fiscal support in some countries.
But the war has created a far bigger risk to the global economy than President Donald Trump’s initial wave of steep tariffs did a year ago, IMF chief economist Pierre-Olivier Gourinchas told Reuters in an interview.
“What’s happening in the Gulf is potentially much, much larger, and that’s what our scenarios are kind of documenting,” he said. Under an “adverse scenario” of a longer conflict that keeps oil prices around USD100 per barrel this year and USD75 in 2027, the IMF predicts global GDP growth would fall to 2.5 percent this year. The IMF in January had forecast that oil would decline to about USD62 in 2026.
And the IMF’s worst-case “severe scenario” assumes an extended and deepening conflict and much higher oil prices that prompt major financial market dislocations and tighter financial conditions, slashing global growth to 2.0 percent. “This would mean a close call for a global recession,” the IMF said, adding that growth has been below that level only four times since 1980 - with the last two severe recessions in 2009, following the financial crisis, and in 2020 as the COVID-19 pandemic raged.
Inflation Pressures
Gourinchas said that a number of countries would be in outright recessions under this scenario, with oil prices averaging USD110 per barrel in 2026 and USD125 in 2027. Prices at this level for an extended time would also increase expectations “that inflation is here to stay,” prompting wider price increases and wage hike demands. “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, adding that this may require more pain than in 2022.
The IMF said, however, that central banks may be able to “look through” a short-lived energy price surge and hold rates steady amid weaker activity, which would be a de facto monetary easing, but only if inflation expectations remain anchored.
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