The International Monetary Fund has issued a stark warning that an escalation in the Iran war could trigger a global recession, spiralling inflation, and severe financial market backlash. Against an increasingly volatile backdrop, the Washington-based fund highlighted the rising economic damage from the Middle East conflict, leading to cuts in growth forecasts for 2026 based on the war's impact so far.
UK Faces Sharpest Downgrade in G7
In its half-yearly update, the IMF reported that the UK would suffer the sharpest growth downgrade and joint highest inflation rate in the G7 this year, even if the fallout from soaring energy costs can be contained by mid-2026. Under a worst-case "severe scenario," involving a drawn-out war and persistently higher energy prices, the world would face "a close call for a global recession" for only the fifth time since 1980.
Oil Prices and Market Volatility
Oil prices jumped back above $100 (£74) a barrel on Monday amid choppy trading in global markets after crunch weekend talks between the US and Iran ended in stalemate and as a US blockade of the Strait of Hormuz began. On Tuesday, Brent crude eased 0.9% to $98.5 a barrel on hopes of further peace talks. As finance ministers and central bank heads gather in Washington for the IMF and World Bank spring meetings, the fund stated that the war had darkened the outlook for global growth.
Global Economic Impact
While warning that countries worldwide would face slower growth and higher inflation, the IMF noted that net energy importers and developing nations would bear the biggest hit. Highlighting the fallout on US households amid conflicting statements from Donald Trump about Washington's aims in the Middle East, the IMF lowered its forecast for US growth in 2026 by 0.1 percentage points to 2.3%.
UK Chancellor's Response
Rachel Reeves, the UK Chancellor, is preparing to use the IMF meetings to urge a coordinated global response to the economic fallout from the war. She is expected to outline the UK government's approach to providing targeted and temporary support for businesses while in the US. In response to the IMF report, Reeves said, "The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to."
IMF Scenarios and Risks
With pressure mounting on the global economy, the IMF set out three possible scenarios for the war in its World Economic Outlook. Pierre-Olivier Gourinchas, the IMF chief economist, stated, "Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated." In a central "reference forecast," global growth would fall from 3.4% last year to 3.1% in 2026, with headline inflation rising to 4.4%.
Adverse and Severe Scenarios
Should the conflict become more protracted, the IMF warned that a longer shutdown of the Strait of Hormuz and further damage to drilling and refining facilities would disrupt the global economy more deeply. Under an "adverse scenario," with oil prices at $100 this year, growth would fall to 2.5% and inflation would rise to 5.4%. In a "severe scenario," with oil above $110 into 2027, global growth could collapse to about 2%, widely seen as equivalent to a worldwide recession, with inflation exceeding 6%.
Policy Recommendations
The IMF emphasized that the best way to limit economic damage is to end the conflict. Beyond that, it called on central banks to remain vigilant and urged governments to focus on temporary and targeted measures, as most countries have unsustainably high debt levels. Pierre-Olivier Gourinchas cautioned, "Untargeted measures – price caps, subsidies, and similar interventions – are popular. But they are frequently poorly designed and costly."
