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The IMF is widely expected to downgrade the outlook for the global economy in the coming week as policymakers count the mounting cost of the US-Israeli war on Iran.
Central bankers and key economic figures from leading economies are preparing to gather in Washington this week for the twice-yearly IMF and World Bank spring meetings. Analysts have warned that even if the current ceasefire holds, the economic damage caused by the conflict is likely to linger.
The global economy had been “thrown off track” and the disruption would “almost certainly lead to a spike in inflation”, Eswar Prasad of the Brookings Institution warned.
Research for the FT by the Brookings Institution found that the global economy had been showing its strongest momentum since the aftermath of the Covid-19 pandemic until the conflict erupted.
The Brookings-FT Tracking Indexes for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for individual countries.
The prewar data showed that “the world economy appeared resilient and set for a year of decent growth . . . financial markets were booming in many countries and private sector confidence was turning around”, Prasad said.
“Whether growth will be dented substantially depends on how prolonged the war is,” he added. “The lack of a resolution in the next few weeks, and the possibility that the war could engulf broader swaths of the Middle East, pose a substantial danger to the global economic outlook.”
Adding to the problem, central banks “are caught in a difficult bind”, Prasad said. “The public finances of many of the major advanced economies are already strapped, with high public deficit and debt levels leaving little room for manoeuvre.”
IMF chief Kristalina Georgieva said earlier this week that the fund would have upgraded its forecast for the global economy if it had not been for the war.
But now — due to the resulting infrastructure damage, supply disruptions, losses of confidence and other consequences — “even our most hopeful scenario involves a growth downgrade”, she said.
Ajay Rajadhyaksha, global chair of research at Barclays, pointed in a note to clients to higher oil prices, a hawkish pivot by western central banks and a “thinner cushion” for consumers as the lasting price of the conflict.
“Even if the war proves to be over, the bill is not — and the receipt is still being written,” he added.
Beata Manthey, head of European and global equities strategy at Citi, said: “Even a ceasefire doesn’t completely unwind what has already happened — higher input costs, some inflationary pressures, some pressure on consumers. The environment we had been expecting at the start of the year has gone . . . you cannot just unwind.”
Economics advisory firm Independent Economics said in a note to clients that higher risk and costs “will persist” while it would take time “to resume energy flows”.
“As in the 1970s, these events will lead to profound economic, financial and geopolitical restructuring,” it said.
Stefano Scarpetta, chief economist at the OECD, told the FT that if exports through the Strait of Hormuz resumed, the Paris-based organisation might be able to stick with the downgraded forecasts it published for major economies last month rather than switching to “a more dramatic downside scenario”.
Its latest projections “stand for the moment”, he said, adding that the extent of damage to energy infrastructure in the Gulf was still unknown.
“Uncertainty is still very high. We need to see the conditions of the ceasefire and whether this leads to a more stable peace,” he added.
Ricardo Amaro, an economist at Oxford Economics, said the ceasefire “dampens the risk of a far more disruptive outcome in the near term”, but “the deal looked fragile from the start and developments since then have only reinforced this view”.
In a letter to clients, Bank of America’s economics leads Claudio Irigoyen and Antonio Gabriel said: “Even if the ceasefire persists, we are unlikely to move back to the prewar scenario. Some disruption in energy markets will remain, still driving growth lower and inflation higher.
“At the same time, escalation scenarios still pose major risks which could lead to a global recession.”
The Wall Street bank has revised its 2026 global growth forecast from 3.5 per cent to 3.1 per cent, while its global inflation forecasts have gone from 2.4 per cent to 3.3 per cent for the year.
“This stagflationary shock will have a faster impact on inflation than on growth and we expect monetary policy rates to tighten,” the letter said.
Bruce Kasman, chief economist at JPMorgan, said: “Large energy supply shocks weigh on global growth and raise consumer price inflation.”
He said the likelihood was that the fallout from the war would lead to “a modest and transitory global stagflationary tilt” but that risks stemming from a prolonged closure of the strait “loom large” over the world economy.
Additional reporting by Emily Herbert