IMF Managing Director: IMF Lowers Global Economic Growth Forecasts Due to Iran War

On Thursday local time, the International Monetary Fund stated that the Middle East conflict is a major supply shock that will test the resilience of a world with limited fiscal support space, despite the fact that the United States and Iran have negotiated a two-week ceasefire agreement.

Given the numerous uncertainties surrounding the Middle East conflict, the IMF will present a series of scenario forecasts in its "World Economic Outlook" report to be released next week. However, IMF Managing Director Georgieva stated that even under the most optimistic scenario, the organization will lower its economic growth forecasts. The magnitude of the impact of the Middle East situation on the global economy depends on whether the current ceasefire between the U.S. and Iran can be maintained and lead to lasting peace. What the IMF is certain of is that growth will slow down, even if this peace is lasting.

Georgieva made these remarks in a written speech on Thursday, delivered on the eve of the opening of the Spring Meetings of the International Monetary Fund and the World Bank in Washington, D.C. next week.

Georgieva stated that before the attack launched by the U.S. and Israel against Iran on February 28, the International Monetary Fund had originally planned to raise its global economic growth outlook. This week, the U.S. and Iran reached a ceasefire agreement, but the situation remains fragile. However, she noted that even in the most optimistic scenario, the damage to infrastructure and supply chains is sufficient to weigh on the economic outlook, necessitating a downward revision of expectations.

Faced with this supply shock that has caused oil prices to surge and exacerbated food insecurity in many parts of the world, Georgieva called on policymakers to respond prudently. With public debt levels high in many countries, there is little capacity to afford large-scale fiscal support. "I call on all countries to abandon the practice of every man for himself—export controls, price controls, and so on; such measures will only further disrupt the global situation. Do not add fuel to the fire."

In January, the International Monetary Fund had slightly raised its global economic growth forecast for this year to 3.3%, believing that economies had shown remarkable resilience amid trade and geopolitical tensions.

Georgieva stated that in the next "World Economic Outlook" scheduled for release on Tuesday, the International Monetary Fund will present three scenarios: first, a relatively rapid return to normalcy; second, an intermediate scenario; and third, a scenario where oil and gas prices remain high for a long period. She did not disclose specific figures.

Georgieva also stated that the International Monetary Fund expects countries to request $20 billion to $50 billion in balance of payments financing, which is a considerable increase compared to the pre-war stock of such financing of approximately $140 billion.

The surge in oil prices has triggered market concerns over consumer prices, complicating the policy outlook for central banks worldwide. The Organisation For Economic Co-Operation And Development expects the average inflation rate for the G20 this year to reach approximately 4%, a significant upward revision from previous estimates. The organization warned that if Middle Eastern exports are further disrupted, it could suppress economic growth and disturb financial markets.

Georgieva said that if inflation expectations face the risk of becoming unanchored and potentially triggering a costly inflationary spiral, central banks should take decisive action by raising interest rates. Currently, waiting and seeing still has its value.

Compared to past crises, the support that fiscal policy can provide is more limited. Following the pandemic, governments have high levels of debt, restricting their room for policy maneuver. Some countries have introduced subsidies or price caps to protect consumers from the impact of rising energy prices, but if these measures are not targeted, they risk putting public finances under strain.