The International Monetary Fund’s managing director, Kristalina Georgieva, warns that the ongoing Iran war will leave lasting damage on the global economy, even if a lasting peace agreement emerges in the Middle East.
In a recent speech amid threats to a fragile ceasefire, Georgieva highlighted the war’s “scarring effects,” which will slow global growth this year below initial projections. Without the conflict that erupted six weeks ago, the IMF would have raised its 2026 growth forecast. “But now, even our most hopeful scenario involves a growth downgrade. Even in a best case, there will be no neat and clean return to the status quo,” she stated.
Ceasefire Tensions and Market Volatility
Six weeks into the war, the conditional ceasefire faces uncertainty as Washington and Tehran clash over its terms. Global oil prices climbed on Thursday, reflecting turbulent financial markets and concerns over disruptions in the Strait of Hormuz, a vital artery for world energy supplies.
Georgieva’s address previews the IMF’s annual spring meetings in Washington next week. All scenarios in the upcoming World Economic Outlook report indicate permanent reductions in living standards.
Revised Growth Outlook
Prior forecasts projected 3.1% global growth in 2026, down slightly from 3.2% in 2025, driven by an AI-fueled investment surge that offset tariff pressures. The economy entered the war with strong momentum from technology investments and favorable financial conditions.
Yet infrastructure destruction, supply chain interruptions, eroded confidence, and other war-related scars will cause enduring losses, regardless of peace prospects. Uncertainty persists around Gulf shipping, recovery timelines for damaged oil and gas sites, and regional air travel restoration. “The fact is, we don’t truly know what the future holds for transits through the Strait of Hormuz or, for that matter, for the recovery of regional air traffic,” Georgieva noted. “What we do know is that growth will be slower – even if the new peace is durable.”
Disproportionate Impacts and Policy Advice
Oil-importing nations, developing economies, and small island states face the steepest growth cuts. Georgieva advised governments to avoid unilateral measures like export restrictions or price caps. “That can further upset global conditions: don’t pour gasoline on the fire,” she cautioned.
With high debt levels and rising borrowing costs prevalent, leaders should prioritize targeted, short-term aid for vulnerable households. Broad tax reductions or energy subsidies risk fueling inflation and straining public finances. Central banks must hold interest rates steady but prepare to combat price pressures. “All countries must deploy their limited fiscal resources responsibly, and most must move decisively to rebuild space after this shock. I cannot emphasise this enough,” she emphasized.
Broader Financial Warnings
Bank of England Governor Andrew Bailey, who chairs the Financial Stability Board, described the war as a “very big shock” to the global economy. Speaking to the EU parliament’s economic and monetary affairs committee, he pointed to heightened market swings amid Middle East instability. “We’ve obviously had a very big shock in the last month or so, with the conflict breaking out in the Middle East, that has prompted, obviously, much greater market volatility,” Bailey said. “I mean, we all have to get up in the morning and find out what’s gone on overnight. At least we got up yesterday and found the world was still with us, but it obviously is very volatile.”
