Iran war escalation could trigger global recession, IMF warns

A further escalation in the Iran war could trigger a global recession, spiralling inflation and a sharp backlash in financial markets, the International Monetary Fund has warned.

Against an increasingly volatile backdrop, the Washington-based fund said the economic damage from the Middle East conflict was steadily rising as it cut its growth forecasts for 2026 based on the impact from the war so far.

In its half-yearly update, the IMF said 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 the middle of 2026.

However, under a worst-case “severe scenario,” involving a drawn-out war and persistently higher energy prices, it said the world would face “a close call for a global recession” for only the fifth time since 1980.

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 on 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 from around the globe gather in Washington for the spring meetings of the IMF and the World Bank, the fund said war had darkened the outlook for global growth.

While warning that countries worldwide would face slower growth and higher inflation, the IMF said net energy importers and developing nations would face the biggest hit.

Highlighting how the fallout is hitting US households as Donald Trump issues conflicting statements 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%.

However, it reserved its sharpest downgrade for any G7 nation for the UK, cutting its forecast by 0.5 percentage points to 0.8%, while warning that inflation would climb to almost 4%.

It comes as Rachel Reeves prepares to use the IMF meetings to urge countries around the world to stage a coordinated response to the economic fallout from the war.

The chancellor, who is due to arrive in Washington late on Tuesday, is also 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.

“I have vowed that my economic approach to this crisis will be both responsive to a changing world and responsible in the national interest, keeping inflation and interest rates in check to protect households and businesses.”

With the pressure on the global economy mounting, the IMF set out three possible scenarios for the war in its World Economic Outlook (WEO) – in which even a short-lived conflict would dent growth and stoke inflation relative to its previous forecasts made last autumn.

Pierre-Olivier Gourinchas, the IMF chief economist, said: “Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated.”

In a central “reference forecast” – based on the assumption that disruption to the world economy from the war fades by mid-2026 – global growth would fall from 3.4% last year to 3.1% in 2026, a downgrade of 0.1 percentage points from the fund’s previous WEO report published last autumn.

Reflecting the existing hit to living standards from the rise in energy prices, headline inflation would also rise to 4.4%.

Should the conflict become more protracted, however, the IMF warned a longer shutdown of the strait of Hormuz and further damage to drilling and refining facilities would disrupt the global economy more deeply and for longer.

Setting out an “adverse scenario” to reflect this risk – in which the global oil price remains at $100 this year, before falling back to $75 in 2027 – growth would fall to 2.5% this year and inflation would rise to 5.4%.

Under a “severe scenario – with a lengthier, intensive war keeping the oil price above $110 into 2027 – global growth would collapse to about 2% this year, a threshold widely seen as equivalent to a worldwide recession. The IMF estimates global growth has only fallen below this rate four times since 1980, most recently amid the Covid pandemic in 2020 and after the 2008 financial crisis.

In a blow to households, inflation would also exceed 6% – forcing central banks worldwide to drive up interest rates to prevent the shock from allowing fast-rising consumer prices becoming entrenched.

With the threat of an escalating war in the Middle East, the IMF said the best way to limit the economy damage was to bring an end to the conflict. Beyond that, it called on central banks to remain vigilant and urged governments considering using emergency financial support to focus on temporary and targeted measures because most countries had unsustainably high debt levels.

“Untargeted measures – price caps, subsidies, and similar interventions – are popular. But they are frequently poorly designed and costly,” Gourinchas said.