The Iran war is threatening to exact a major hit on the global economy as negotiations for a lasting ceasefire remain at an impasse, the International Monetary Fund (IMF) has warned.
With the conflict now in its third month, negotiations between Washington and Tehran on a durable ceasefire remain at a standstill, and global oil supply chains continue to face disruptions due to the closure of the Strait of Hormuz.
The war was already expected to create a drag on global growth and raise inflation. In its reference forecast released in April, the IMF projected global growth to slow from 3.4 per cent last year to 3.1 per cent this year. Inflation was forecast to increase to 4.4 per cent.
The IMF at the time also published an “adverse scenario” in which a longer disruption would boost inflation to 5.4 per cent and drag global growth down to 2.5 per cent.
“We're clearly moving out of the reference scenario and towards … the adverse scenario,” IMF communications director Julie Kozack told reporters during a press briefing.
A third scenario, under which the war extends into next year, could trigger a global downturn. The closure of the Strait of Hormuz has rattled energy markets, with Brent crude trading more than 40 per cent higher since the war began.
The global benchmark for crude was trading virtually flat at $105.6 a barrel at 10.46am ET, while West Texas Intermediate, the US gauge for crude, was also little changed at $101.2 a barrel.
Ms Kozack noted that while short-term inflation expectations have risen, medium-term inflation expectations remain anchored.
Global response
The IMF is in active discussions with member countries on how best to navigate the economic fallout from the Iran war, a representative for the fund said on Thursday.
IMF managing director Kristalina Georgieva had previewed during the spring meetings last month that the fund expects demand for new programmes to range between $20 billion and $50 billion, with more than a dozen countries expressing interest.
Reuters reported earlier on Thursday that Iraq is one of the countries requesting a programme. Oil revenue typically accounts for 90 per cent of the government's income, but this has dropped considerably since the war began on February 28. Most recent forecasts released by the IMF in April point towards a 6.8 per cent contraction for the year, a downwards revision of more than 10 percentage points compared to its October projection.
Ms Kozack did not confirm which countries the fund was in discussions with when asked by reporters during a press briefing, including Iraq.
“We do have active discussions with our member countries to assess what their needs are given this latest shock to the global economy, and we're exploring, of course, with them, where the fund may be,” Ms Kozack said.
The IMF, World Bank and International Energy Agency (IEA) are also embarking on a co-ordinated response to tackle the latest energy shock's economic impact, with that work now at a “technical level”.
Ms Kozack said each organisation would address the tackle within their areas of expertise, with the IEA focusing on energy markets, the IMF assessing its impact on the global economy, and the World Bank focusing on developing countries.
“Here is when we started around the time of the spring meeting, and certainly intensified during the spring meeting,” she said.
