IMF warns of adverse global outlook

The International Monetary Fund said on May 14 that continued disruption from the Iran war was pushing the global economy toward the fund’s “adverse scenario,” a path with slower growth and higher inflation. Julie Kozack, the IMF’s chief spokesperson, told reporters in Washington that inflation expectations were still “reasonably well anchored” and financial conditions remained accommodative, but that the outlook was deteriorating as the conflict dragged on. The warning builds on the IMF’s April World Economic Outlook, which had already cut its 2026 global growth forecast to 3.1% under a reference case that assumed a limited conflict. The fund said a longer disruption to energy flows would produce a weaker outcome. ### What did the IMF say changed this week? Julie Kozack said on Thursday that “we are moving into the adverse scenario,” according to remarks reported from the IMF’s regular briefing in Washington. She said the shift reflected continued disruption tied to the Iran war, even though broader inflation expectations had not yet become unmoored and financial markets had not yet tightened sharply. The IMF had set out that adverse case in April as one of three possible paths for the world economy. In that framework, the reference forecast assumed a short-lived conflict and only a moderate increase in energy prices, while the adverse and severe scenarios assumed longer and more damaging disruptions. (al-monitor.com) ### What does the IMF’s adverse scenario actually include? The IMF’s April outlook said global growth would slow to 2.5% in 2026 in the adverse scenario, down from 3.1% in the reference case. The same scenario assumes headline inflation would rise to 5.4% this year, compared with 4.4% in the reference forecast. (imf.org) The model also assumes average oil prices of about $100 a barrel in 2026 under that downside path. Reuters’ April factbox on the IMF scenarios said the adverse case also included some tightening in financial conditions, while the IMF’s own analysis said rising inflation expectations and higher energy prices would amplify the shock. (imf.org) ### Why is energy at the center of the warning? The IMF said in April that the closing of the Strait of Hormuz and damage to critical facilities in a region central to hydrocarbon supply raised the prospect of a major energy crisis if hostilities continued. The fund said higher commodity prices would act as a negative supply shock, lifting costs for energy-intensive goods and services, disrupting supply chains and eroding purchasing power. (imf.org) The April World Economic Outlook said rising commodity prices, firmer inflation expectations and tighter financial conditions were testing the resilience the global economy had shown through earlier trade disruptions and policy uncertainty. It said the slowdown in growth and increase in inflation would be particularly pronounced in emerging market and developing economies. (imf.org) ### What other pressures did IMF officials identify? Julie Kozack said the war was also creating risks for food security because fertilizer supplies had been interrupted. She said history showed that higher fertilizer prices could take about six months to feed through into food prices and, in some cases, lower yields and food-security strains. (imf.org) Kristalina Georgieva said during the IMF and World Bank spring meetings in April that as many as 12 countries could require IMF financial assistance, with total needs of $20 billion to $50 billion, according to remarks cited by Al-Monitor. Kozack said discussions with member states were continuing, but the fund was not ready to identify countries involved. (al-monitor.com) ### How far is this from the IMF’s base case? The IMF’s reference forecast in April projected global growth of 3.1% in 2026 and 3.2% in 2027, assuming the conflict remained limited in duration and scope. It said headline inflation would rise modestly in 2026 before resuming its decline in 2027. Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote on April 14 that the world economy had been on track for a 3.4% growth forecast before the conflict, supported by lower U.S. tariffs than originally announced, some fiscal support and strong productivity gains. (al-monitor.com) He said the war in the Middle East had halted that momentum. (imf.org) July is the next scheduled checkpoint. The IMF said an updated World Economic Outlook is due then, and Kozack told reporters the fund was still in active discussions with member countries over financing and policy support needs. (al-monitor.com) (imf.org)