The International Monetary Fund (IMF) has warned that the global economy could edge towards a recession if the ongoing US-Israel conflict with Iran persists and energy prices remain elevated.
In its latest World Economic Outlook report, the IMF said global growth could fall below 2 per cent in 2026 under a worst-case scenario marked by sustained spikes in oil, gas and food prices. Such a slowdown would bring the world close to a recession, a situation seen only four times since 1980, including during the COVID-19 pandemic.
The warning comes amid continued volatility in energy markets following disruptions in the Strait of Hormuz, a key global shipping route that has been affected since the conflict escalated in late February.
According to the IMF, the global economy is once again at risk of being “thrown off course” by geopolitical tensions in West Asia. It noted that if oil prices average around $110 per barrel this year and rise further to $125 by 2027, inflation could surge to as high as 6 per cent next year. This, in turn, may force central banks worldwide to raise interest rates, further dampening economic activity.
While crude prices had surged close to $120 during the peak of the conflict, they have since eased to around $98 per barrel. However, the IMF cautioned that prolonged disruption could significantly worsen the outlook.
If the conflict is resolved in the coming weeks and energy flows normalise by mid-year, global growth is projected to settle at 3.1 per cent in 2026, slightly below earlier estimates, before improving to 3.2 per cent the following year.
The report highlighted that oil-exporting nations in the Gulf region could face sharp economic slowdowns or even contraction in the short term. Iran’s economy is expected to shrink by 6.1 per cent this year, though it could rebound if the conflict ends soon.
Similarly, Qatar is projected to see an 8.6 per cent contraction in 2026 after its key LNG infrastructure at Ras Laffan was hit, with recovery expected the following year.
The IMF noted that economic resilience across countries will depend on factors such as damage to energy infrastructure, reliance on the Strait of Hormuz, and access to alternative export routes. Countries like Saudi Arabia, which has pipeline alternatives, are expected to better withstand the shock, though growth may still slow.
The Fund added that most Middle East economies could recover in 2027, but warned that its projections may need revision if the conflict continues or infrastructure damage worsens.
