The leaders of the International Energy Agency (IEA), the International Monetary Fund (IMF), and the World Bank Group recently convened as part of the Coordination Group, established in early April, to enhance their institutions’ response to the economic and energy ramifications of the ongoing conflict in the Middle East. Following their discussions, they issued a joint statement highlighting the widespread impact of events in the Middle East on the global economy.
The statement underscored that the war’s effects are extensive, global, and largely unfair, disproportionately affecting energy-importing nations, especially those with low incomes. This crisis has driven up prices for oil, gas, and fertilizers, sparking concerns about global food security and potential job losses. Conversely, some oil and gas-producing countries in the Middle East have experienced a significant drop in export revenues.
The situation remains highly volatile, with shipping through the Strait of Hormuz yet to normalize. Even once regular shipping resumes, it will take considerable time for global supplies of essential goods to return to pre-conflict levels. Furthermore, fuel and fertilizer prices may remain elevated for an extended period due to infrastructure damage.
The joint statement further elaborated that disruptions to supply chains are likely to cause ripple effects across the energy, food, and other industries due to shortages of critical inputs. The conflict has also led to forced displacement, negatively impacted employment opportunities, and significantly reduced travel and tourism—consequences that will require time to overcome.
The IMF emphasized that the global economy is undergoing a significant test because of the Middle East war, coming after economic activity demonstrated resilience against rising trade barriers and increased uncertainty last year. Assuming the conflict remains limited in duration and scope, global growth is projected to decelerate to 3.1 percent in 2026 and 3.2 percent in 2027. Global headline inflation is also anticipated to see a slight increase in 2026 before declining again in 2027. This slowdown in growth and rise in inflation are expected to be particularly acute in emerging market and developing economies.
The economic outlook is fraught with considerable downside risks. A prolonged or expanding conflict, increased geopolitical fragmentation, a reassessment of AI-enhanced productivity gains, or renewed trade tensions could severely undermine growth and destabilize financial markets. Compounding these vulnerabilities are rising public debt and diminishing institutional credibility. Conversely, economic activity could receive a boost if AI-driven productivity gains materialize more rapidly or if trade tensions ease sustainably.
To navigate the current shock and prepare for future disruptions in an increasingly uncertain global environment, strengthening resilience, maintaining credible policy frameworks, and consolidating international cooperation are paramount. While increased defense spending, spurred by heightened geopolitical tensions, might stimulate short-term economic activity, it simultaneously generates inflationary pressures, weakens fiscal and external sustainability, and risks crowding out vital social spending, potentially fueling discontent and social unrest. As highlighted in Chapter 3, when conflicts erupt, the macroeconomic trade-offs are severe, leaving lasting scars long after the immediate shock of war subsides.
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