IMF Warns War Will Drive Higher Prices and Slower Global Growth

The International Monetary Fund delivered a stark warning Monday: regardless of how the Middle East conflict unfolds, "all roads lead to higher prices and slower growth." The assessment, published in a blog post authored by the fund's main department heads including chief economist Pierre-Olivier Gourinchas, described the war's impact as "both global and highly uneven" and said the IMF was stepping up support to the most vulnerable economies.

Now five weeks old, the conflict is transmitting economic damage through two primary channels that share the same chokepoint. The Strait of Hormuz has been effectively closed following US and Israeli strikes on Iran and subsequent retaliatory action, causing shipments of oil and gas to grind to a halt. Brent crude traded around $112 a barrel and West Texas Intermediate at about $102, with producers facing curtailed exports and investment due to heightened risk premia.

The closure compounds a second, slower-moving shock: about a third of global fertilizer production transits that same strait. "The interruption of crop-nutrient 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 IMF said. The timing concentrates maximum pressure on agricultural supply chains at their most critical point.

Those twin shocks do not fall equally. Large energy importers across Asia and Europe are bearing the brunt of higher fuel and input costs. Within Europe, the UK and Italy face particular exposure through their dependence on gas-fired power, while France and Spain are relatively insulated by their heavier use of nuclear and renewable energy sources, according to the IMF. Beyond Europe, energy importers across Africa, Latin America and the broader Middle East face acute strain, while Asia's manufacturers see rising costs squeezing consumers.

The heaviest burden falls on the world's poorest. Low-income countries, where households already devote a disproportionately large share of income to food, will feel the combined price pressures most acutely. Not every economy loses: the US, as a net exporter of oil and gas, stands to gain from elevated fossil fuel prices. But the IMF's analysis made clear that gains at one end of the ledger do not offset harm at the other.

The policy bind for central banks and governments is considerable. Businesses facing higher input costs are forecast to come under pressure to raise prices, which could force central banks to increase interest rates to contain inflation even as growth weakens. Governments that would ordinarily cushion households through fiscal support face an additional constraint: those carrying high levels of borrowing will have limited access to funds needed to absorb the worst effects of the crisis, Gourinchas and his co-authors warned.

"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. A short conflict could send oil and gas prices soaring before markets adjust; a prolonged war risks keeping energy expensive and straining import-dependent economies for an extended period, potentially leaving lasting scars on the global economy.