An extra escalation within the Iran war could trigger a global recession, spiralling inflation and a pointy backlash in monetary markets, the International Monetary Fund has warned.
Against an more and more risky backdrop, the Washington-based fund mentioned the financial injury from the Middle East battle was steadily rising because it minimize its development forecasts for 2026 primarily based on the impression from the war to this point.
In its half-yearly replace, the IMF mentioned the UK would undergo the sharpest development downgrade and joint highest inflation fee within the G7 this 12 months, even when the fallout from hovering vitality prices may be contained by the center of 2026.
However, below a worst-case “severe scenario”, involving a drawn-out war and persistently larger vitality costs, it mentioned the world would face “a close call for a global recession” for under the fifth time since 1980.
Oil costs jumped again above $100 (£74) a barrel on Monday amid uneven buying and selling in global markets after crunch weekend talks between the US and Iran resulted in stalemate and as a US blockade of the strait of Hormuz started. On Tuesday, Brent crude eased 0.9% to $98.5 a barrel on hopes of additional peace talks.
As finance ministers and central financial institution heads from across the globe collect in Washington for the spring conferences of the IMF and the World Bank, the fund mentioned war had darkened the outlook for global development.
While warning that nations worldwide would face slower development and better inflation, the IMF mentioned web vitality importers and creating nations would face the most important hit.
Highlighting how the fallout is hitting US households as Donald Trump points conflicting statements about Washington’s goals within the Middle East, the IMF lowered its forecast for US development in 2026 by 0.1 share factors, to 2.3%.
However, it reserved its sharpest downgrade for any G7 nation for the UK, slicing its forecast by 0.5 share factors to 0.8%, whereas warning that inflation would climb to virtually 4%.
It comes as Rachel Reeves prepares to make use of the IMF conferences to induce nations all over the world to stage a coordinated response to the financial fallout from the war.
The UK chancellor, who is because of arrive in Washington late on Tuesday, can also be anticipated to stipulate the UK authorities’s method to offering focused and short-term assist for companies whereas within the US.
In response to the IMF report, Reeves mentioned: “The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to.
“I have vowed that my economic approach to this crisis will be both responsive to a changing world and responsible in the national interest, keeping inflation and interest rates in check to protect households and businesses.”
With the strain on the global economy mounting, the IMF set out three potential situations for the war in its World Economic Outlook (WEO) – by which even a short-lived conflict would dent growth and stoke inflation relative to its earlier forecasts made final autumn.
Pierre-Olivier Gourinchas, the IMF chief economist, mentioned: “Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated.”
In a central “reference forecast” – primarily based on the belief that disruption to the world economy from the war fades by mid-2026 – global development would fall from 3.4% final 12 months to three.1% in 2026, a downgrade of 0.1 share factors from the fund’s earlier WEO report printed final autumn.
Reflecting the present hit to residing requirements from the rise in vitality costs, headline inflation would additionally rise to 4.4%.
Should the battle turn out to be extra protracted, nevertheless, the IMF warned an extended shutdown of the strait of Hormuz and additional injury to drilling and refining amenities would disrupt the global economy extra deeply and for longer.
Setting out an “adverse scenario” to mirror this danger – by which the global oil value stays at $100 this 12 months, earlier than falling again to $75 in 2027 – development would fall to 2.5% this 12 months and inflation would rise to five.4%.
Under a “severe scenario – with a lengthier, intensive war keeping the oil price above $110 into 2027 – global growth would collapse to about 2% this year, a threshold widely seen as equivalent to a worldwide recession. The IMF estimates global growth has only fallen below this rate four times since 1980, most recently amid the Covid pandemic in 2020 and after the 2008 financial crisis.
In a blow to households, inflation would also exceed 6% – forcing central banks worldwide to drive up interest rates to prevent the shock from allowing fast-rising consumer prices becoming entrenched.
With the threat of an escalating war in the Middle East, the IMF said the best way to limit the economy damage was to bring an end to the conflict. Beyond that, it called on central banks to remain vigilant and urged governments considering using emergency financial support to focus on temporary and targeted measures because most countries had unsustainably high debt levels.
“Untargeted measures – price caps, subsidies, and similar interventions – are popular. But they are frequently poorly designed and costly,” Gourinchas mentioned.
