The International Monetary Fund (IMF) warned on Tuesday that the Iran War has slowed the world’s economic pace this year, which is likely to reduce growth rates by 2025. The IMF has reduced its global growth forecast for 2026 to 3.1 percent, whereas in January it had estimated 3.3 percent. This projected growth rate will represent a decline compared to the 3.4 percent growth expected in 2025. The US and Israeli attacks on Iran — and Tehran’s closure of the Strait of Hormuz and retaliatory attacks on oil refineries and other energy infrastructure in neighboring countries — have caused a surge in oil and gas prices around the world. Due to which the IMF has increased its estimate of global inflation this year from 4.1 percent to 4.4 percent by 2025, and has also increased it from the 3.8 percent estimate made for this year in January.
The economy was strong last year
Before the war began, the world economy had shown surprising strength despite President Donald Trump’s protectionist policies. These policies created a wall of import taxes around America – the world’s largest economy and once a completely open market for imports. The loss was less than expected, one reason for which was that the tariffs (import duties) imposed by Trump last year were lower than originally announced. The technological boom brought about by huge investments in data centers and artificial intelligence, and increasing productivity also contributed to the strengthening of the world economy.
Growth may also go down to 2 percent
IMF chief economist Pierre-Olivier Gourinchas wrote in a blog post released with the fund’s latest ‘Global Economic Outlook’ report that the ongoing war in the Middle East has halted this momentum. The IMF’s forecast is based on the assumption that the ongoing conflict in the Persian Gulf will be short-lived and that energy prices will increase by “modest 19 percent” this year. But the situation could be much worse than this. In a “severe outlook”—in which the energy crisis continues into next year and central banks are forced to raise interest rates to tackle inflation—global growth could fall to 2 percent in 2026 and 2027. Gourinchas wrote that despite recent news of a temporary ceasefire, some damage has already been done, and the risk of economic fallout still remains.
Shock to America and Europe also
The fund has slightly reduced its estimate of America’s growth rate this year to 2.3 percent. The 21 European countries that use the euro currency – and which have been hit hard by rising natural gas prices – will collectively grow 1.1 percent this year, according to IMF estimates. This is less than the estimate of 1.4% for 2025. Poor countries that are deeply indebted, import energy, and lack the ability to prop up their economies through increased government spending or tax breaks are likely to be hardest hit. For example, the IMF has significantly reduced its economic growth projections for sub-Saharan Africa. While 4.6 percent was expected in January, it has been reduced to 4.3 percent for this year.
Russia will benefit
One country that appears to be benefiting from this conflict is Russia – an energy exporter that stands to benefit from rising prices. IMF has improved its projections for the Russian economy. This economy, which was badly hit by the sanctions imposed after the attack on Ukraine, is now projected to grow by 1.1% in 2022, which is still a modest figure. Meanwhile, the Governor of the National Bank of Ukraine has tried to keep the war waged by Russia in his country at the center of discussions among global economic leaders. But in an interview with journalists on Monday, Andrey Pishny explained how rising oil prices due to the ongoing war in Iran are hurting his country.
Inflation increased in Ukraine
He told through a translator that in the month of March the annual inflation rate in Ukraine had reached 7.9 percent. This is much higher than the estimate of 7 percent, and the main reason for this is rising fuel prices. He estimated that due to fuel prices, the annual inflation rate could increase by 1.5 percentage points to 2.8 percentage points. Pishni also said that in an economy that is trying to stabilize prices amid the ongoing war with Russia, fertilizer and production costs may also increase. It is noteworthy that on an average, Russia keeps attacking Ukraine through air strikes every 3 to 4 minutes. He said that we are trying to walk on a sword’s edge, and he was referring to a difficult task which has been made even more complicated by external factors.
