IMF warns ‘unprecedented’ energy crisis could trigger global recession as Australia prepares for G20 fuel talks

The International Monetary Fund has warned the US-Israel war on Iran risks creating an “energy crisis of an unprecedented scale” that could tip the global economy towards recession.

The grim warning contained in the IMF’s latest World Economic Outlook comes as Jim Chalmers prepares to attend the organisation’s spring meetings in Washington DC this week, where he said he would be “joining with other countries continuing to call for an enduring end to the war”.

As the United States began its blockade of the critical strait of Hormuz in an effort to force Iran back to the negotiating table, the IMF’s chief economist, Pierre-Olivier Gourinchas, said “the world economy faces another difficult test”.

“The closing of the strait of Hormuz and serious damage to critical facilities in a region central to global hydrocarbon supply raise the prospect of a major energy crisis should hostilities continue,” Gourinchas said.

As higher fuel costs smash household and business confidence in Australia, the treasurer will hold bilateral meetings with his foreign counterparts from the nation’s major fuel suppliers, including South Korea, Singapore, Japan and China.

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In a statement on Tuesday night, Chalmers said Australians were “paying a hefty price for events on the other side of the world”.

“I’ll continue Australia’s calls for an enduring ceasefire, an end to the conflict in the Middle East and the proper reopening of the strait of Hormuz because that’s what the global economy desperately needs,” he said.

“From an economic perspective, a proper end to this war can’t come soon enough.”

The latest World Economic Outlook report outlines three scenarios, one of which assumes a relatively benign baseline stance – where the Iran war ends in a few weeks’ time and energy markets have returned to normal by the middle of the year.

In this scenario, Australia’s economy will grow at a steady 2% in 2026 – a downgrade of 0.1 percentage points on the IMF’s January forecasts – and by 1.7% in 2027, a heftier 0.5 percentage points downgrade.

Australia’s inflation rate will average 4% this year – a sharp lift from the 2.9% average rate in 2025 – before easing to 3.2% in 2027, the IMF said.

However, it showed unemployment will remain in the low 4% in this year and the next.

Empty fuel pumps at a petrol station in Sydney. Photograph: Hollie Adams/Reuters

Were the war to end in the coming few weeks, global growth this year would only come in 0.2 percentage points below the IMF’s prewar forecasts in January, at 3.1%.

Inflation under this scenario would be 4.4% in 2026 – still meaningfully above the previous estimate of 3.8%.

But as analysts struggle to keep up with the rapidly changing Middle East conflict, the IMF outlined two more pessimistic – albeit increasingly likely – scenarios.

In an “adverse” scenario where oil prices average around US$100 a barrel through 2026, the world economy will grow by 2.5% this year, against the 3.3% forecast in January. Global inflation would climb to 4.4%.

In a “severe” scenario where a persistent energy shock sees oil prices average US$110 this year and US$125 in the next, global growth plunges to just 2% in 2026, while inflation would average 5.8%.

“This would mean a close call for a global recession (growth rate below 2%), which has happened only four times since 1980, with the latest two occasions corresponding to the global financial crisis and the Covid-19 pandemic,” the report said.

The IMF did not model the impact on Australia from these worst-case scenarios.

With under a month until the budget on 12 May, Chalmers said the IMF’s report “shows it’s a dangerous moment for the global economy”.

“We’re weighing all of this extreme uncertainty as we prepare a budget focused on resilience and reform.”

Anthony Albanese has promised Labor’s most ambitious budget yet, arguing the fuel crisis has sharpened the need for reform.

There is widespread speculation the budget will include changes to tax discounts and negative gearing rules for property investors, a potential additional tax on booming LNG exports, and reforms to expensive electric vehicle and battery subsidies.

The government has also flagged a push for additional budgetary savings, even as economists predict higher commodity prices will deliver tens of billions of dollars in extra tax revenue.

With expectations of further cost of living relief come 12 May, Gourinchas warned governments against “popular” non-targeted support measures.

“Given the lack of fiscal space with still elevated budget deficits and rising public debt, any fiscal support should remain narrowly targeted and temporary,” he said.

“Avoiding fiscal stimulus is also critical when inflation is rising, so as not to complicate central banks’ task.”