IMF sounds alarm: Prolonged West Asia war could lead to ‘much worse’ global outlook

The International Monetary Fund has warned that the global economy faces a significantly weaker trajectory if the ongoing conflict in West Asia persists, with rising oil prices already pushing inflation higher and undermining growth prospects.

IMF Managing Director Kristalina Georgieva said the Fund’s earlier “reference scenario”, which assumed a short-lived conflict, is no longer viable. That baseline had projected global growth of 3.1 per cent and inflation at 4.4 per cent.

She said the IMF’s “adverse scenario” is now effectively in play. Under this, global growth could slow to 2.5 per cent in 2026, with inflation rising to 5.4 per cent.

Georgieva cautioned that if the conflict stretches into 2027 and oil climbs towards $125 per barrel, “we have to expect a much worse outcome,” including a renewed surge in inflation and the risk of inflation expectations becoming unanchored.

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Markets are already reflecting the strain. Oil prices remained elevated on Tuesday as renewed confrontation between the United States and Iran under President Donald Trump’s “Project Freedom” raised fears of supply disruptions.

Brent crude settled at $114.06 a barrel, up 5.45 per cent, while US West Texas Intermediate hovered near $105 after a volatile session.

The risks are centred on the Strait of Hormuz, a vital artery through which about one-fifth of global crude supply flows.

Price pressures are already spreading beyond energy. The IMF estimates fertiliser costs have risen by 30–40 per cent, which could push global food prices up by 3–6 per cent and intensify supply chain stress.

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Earlier, IMF Asia-Pacific Director Krishna Srinivasan urged Asian governments to avoid broad energy subsidies despite mounting pressure from rising costs. Instead, he called for targeted, budget-neutral support while maintaining fiscal discipline.

He also warned that if disruptions in the Strait of Hormuz persist beyond the next few months, the IMF’s more severe scenario — with global growth slowing towards 2 per cent — could become increasingly likely.

The Fund has already signalled that, without a swift resolution to the conflict, downside risks to global growth and price stability will continue to intensify.