The Iran war, in its fifth week, is set to reshape the global economy, with its impact "global, yet asymmetric”, the International Monetary Fund said on Monday.
"Although the war could shape the global economy in different ways, all roads lead to higher prices and slower growth,” the fund said in a blog post.
While a short conflict might send oil and gas prices soaring before markets adjust, a long one could keep energy expensive and strain countries that rely on imports.
"Much depends on how long the conflict lasts, how far it spreads, and how much damage it inflicts on infrastructure and supply chains,” the IMF said.
Energy prices have soared since the US and Israel attacked Iran on February 28, with Tehran retaliating with strikes on the Gulf countries and effectively closing the Strait of Hormuz.
The de facto closure of the strait, through which a fifth of the world's oil passes, and damage to regional infrastructure have produced the "largest disruption to the global oil market in its history”, the International Energy Agency has said.
Brent, the benchmark for about two third of the world’s oil, was trading at around $112 a barrel at 7.30pm UAE time on Monday, up more than 55 per cent since its closing on February 27. West Texas Intermediate, benchmark for US crude, was trading at roughly $102, also more than 52 per cent higher since the start of the war.
Energy‑importing economies in Africa, the Middle East and Latin America are feeling the strain from higher bills on top of already limited fiscal space and external buffers, the IMF said.
In Asia’s large manufacturing economies, higher fuel and power bills are pushing up production costs and squeezing the consumer’s purchasing power and in Europe, the shock is "reviving the spectre of the 2021–2022 gas crisis”.
For oil producers such as the Gulf region, whose exports are constrained or curtailed, even after the strait reopens, higher risk premia and uncertainty may curb investment and growth, the fund said.
Supply chain impact
The war is also reshaping supply chains for non-energy and critical inputs such as fertilisers. The interruption of supplies from the Gulf comes just as planting season begins in the Northern Hemisphere, "threatening yields and harvests through the year and pushing food prices higher”.
"The most vulnerable will bear the heaviest burden,” the IMF said.
People in low‑income countries are most at risk when prices rise because food accounts for about 36 per cent of expenditure on average, compared with 20 per cent in emerging market economies and 9 per cent in advanced economies.
"That makes any spike in fertiliser and food prices not just an economic problem but a sociopolitical one, especially where fiscal resources to cushion the blow are limited,” it said.
If elevated energy and food prices persist, they will also fuel inflation worldwide. Historically, sustained oil price spikes have tended to push inflation higher and growth lower.
This month, the IMF said for every 10 per cent sustained increase in oil prices, it could lead to an increase of 40 basis points in global inflation and lower output by 0.1 per cent to 0.2 per cent.
The war has also unsettled financial markets, with declining global stock prices, higher bond yields and increased volatility. "The market sell-off has so far been contained compared with past global shocks. Nonetheless, these moves have tightened financial conditions worldwide,” the IMF said.
The fund urged countries to adopt "appropriate policies” to manage the shock and maintain resilience.
"Measures need to be carefully calibrated to country-specific needs. Countries with limited reserves and little fiscal room to manoeuvre should be especially cautious,” it added.
