By Tobias Adrian, Jihad Azour, Nigel Chalk, Pierre-Olivier Gourinchas, Alfred Kammer, Abebe Aemro Selassie, Krishna Srinivasan, Rodrigo Valdés
The world faces yet another shock. The war in the Middle East is upending lives and livelihoods in the region and beyond. It is also dimming the outlook for many economies that had only just shown signs of a sustained recovery from previous crises.
The shock is global, yet asymmetric. Energy importers are more exposed than exporters, poorer countries more than richer ones, and those with meager buffers more than those with ample reserves.
Beyond its painful human toll, the war has caused serious disruption to the economies of the most directly affected countries, including damage to their infrastructure and industries that could become long-lasting. Although these countries are resilient, their short-term growth prospects will be negatively affected.
Meanwhile, large energy importers in Asia and Europe are bearing the brunt of higher fuel and input costs: about 25 to 30 percent of global oil and 20 percent of liquefied natural gas pass through the Strait of Hormuz, feeding demand not only in Asia but also in parts of Europe. Economies heavily dependent on oil imports in Africa and Asia are finding it increasingly hard to access the supplies they need, even at inflated prices.
Parts of the Middle East, Africa, Asia-Pacific, and Latin America face the added strain of higher food and fertilizer prices and tighter financial conditions. Low-income countries are especially at risk of food insecurity; some may need more external support—even as such assistance has been declining.
Strait of Hormuz tanker traffic plunges
Although the war could shape the global economy in different ways, all roads lead to higher prices and slower growth. A short conflict might send oil and gas prices soaring before markets adjust, while a long one could keep energy expensive and strain countries that rely on imports. Or the world may settle somewhere in between—tensions linger, energy stays costly, and inflation proves hard to tame—with ongoing uncertainty and geopolitical risk. Much depends on how long the conflict lasts, how far it spreads, and how much damage it inflicts on infrastructure and supply chains.
We are closely monitoring these developments and will provide a fuller assessment in our World Economic Outlook and Global Financial Stability Report, to be published on April 14, followed by our Fiscal Monitor on April 15.
Energy prices
Energy is the main transmission channel. The de facto closure of the Strait of Hormuz and damage to regional infrastructure have produced the largest disruption to the global oil market in its history, according to the International Energy Agency. For fuel‑importing economies, the effect is that of a large, sudden tax on income.
Oil and gas prices surge amid conflict
The multi-regional impact is apparent. Energy‑importing economies in Africa, the Middle East and Latin America are feeling the strain from higher import bills on top of already limited fiscal space and external buffers.
In Asia’s large manufacturing economies, higher fuel and power bills are raising production costs and squeezing people’s purchasing power; in some, balance‑of‑payments pressures are already weighing on currencies. In Europe, the shock is reviving the specter of the 2021–22 gas crisis, with countries such as Italy and the United Kingdom especially exposed by their reliance on gas‑fired power, while France and Spain are relatively protected by their greater nuclear and renewables capacity.
By contrast, oil‑exporting countries in the Middle East, parts of Africa, and Latin America that can still get their barrels to market have a prospect of stronger fiscal and external positions from higher prices. Producers whose exports are constrained or curtailed—including several Gulf Cooperation Council members—can expect much less upside. Even after transit resumes, higher risk premia and uncertainty may curb investment and growth
Supply chains
The war is also reshaping supply chains for non-energy and critical inputs. Rerouting tankers and container ships raises freight and insurance costs and lengthens delivery times. Air‑traffic disruptions around key Gulf hubs affect global tourism and add another layer of complexity to trade.
In addition to higher commodity prices, countries, companies, and consumers already face the effects of these supply‑chain complications. With shipments of fertilizer—of which about one-third passes through the Strait of Hormuz—disrupted, concerns about food prices are mounting. The interruption of crop-nutrient supplies from the Gulf comes just as planting season begins in the Northern Hemisphere, threatening yields and harvests through the year and pushing food prices higher.
The most vulnerable will bear the heaviest burden. People in low‑income countries are most at risk when prices rise because food accounts for about 36 percent of consumption on average, compared with 20 percent in emerging market economies and 9 percent in advanced economies. That makes any spike in fertilizer and food prices not just an economic problem but a socio-political one, especially where fiscal resources to cushion the blow are limited.
There could also be shortages or price surges of other materials used in manufacturing. The Gulf supplies a large share of the world’s helium, used in a vast array of products from semiconductors to medical imaging devices. Indonesia, which provides roughly half of global nickel—a key component in electric‑vehicle batteries—could face a shortage of sulfur needed to process the metal. Eastern African economies that depend on trade links with and remittances from Gulf countries face weaker demand for their services exports, logistical bottlenecks and reduced remittances.
Inflation and inflation expectations
If elevated energy and food prices persist, they will fuel inflation worldwide. Historically, sustained oil‑price spikes have tended to push inflation higher and growth lower. Over time, higher transport and input costs work their way into the prices of manufactured goods and services. For many countries that had only just brought inflation closer to target, and even more so those with stickier inflation, this risks a renewed period of uncomfortable price pressures.
Here, too, the pattern is uneven. In much of Asia and parts of Latin America, where inflation had been relatively low, higher energy and food costs will test the resilience of expectations, particularly in economies with weaker currencies and large energy imports. In Europe, another energy‑driven spike in prices would come on top of existing cost‑of‑living strains, raising the risk of more persistent wage demands. In low‑income countries where people spend a large share of their income on food, especially in Africa and parts of the Middle East, and Central America, higher food prices carry acute social and economic costs.
If people and businesses in any of these regions believe inflation will remain higher for longer, they may build this into wages and prices, making it harder to contain the shock without a sharper slowdown. The war thus raises not only current inflation but also a risk of expectations becoming less firmly anchored.
Financial conditions
Finally, the war has unsettled financial markets. Global stock prices have declined, bond yields have risen across major advanced economies and many emerging markets, and volatility has increased. The market sell-off has so far been contained compared with past global shocks. Nonetheless, these moves have tightened financial conditions worldwide.
Again, effects vary. In Europe and many emerging markets, higher yields and wider credit spreads raise debt‑service burdens and complicate refinancing for governments and firms alike. In sub‑Saharan Africa and some low‑income economies in the Middle East and South Asia, already meager reserves and limited market access make external shocks to financing conditions more dangerous—especially as higher import bills for fuel, fertilizer, and food widen trade deficits and put pressure on currencies. In the Middle East and elsewhere, high levels of debt and tighter financial conditions may further raise debt financing costs.
By contrast, advanced economies with deep domestic capital markets and some commodity exporters with ample buffers—such as Saudi Arabia and United Arab Emirates, or Latin American commodity producers like Brazil and Ecuador—can better absorb market stress, even if they are not immune to higher risk premia.
The IMF’s role
These channels show why the war’s economic impact is both global and highly uneven. They help explain why the same shock can look like a terms‑of‑trade windfall for some countries, a balance‑of‑payments strain for others, and a renewed cost‑of‑living squeeze across many economies.
Such complex spillovers confront us at a time when many economies have limited room to absorb shocks. Many countries were already facing record-high debt levels, raising concerns about fiscal sustainability.
To manage the shock and maintain resilience, it is therefore more important than ever that countries adopt appropriate policies. Measures need to be carefully calibrated to country-specific needs. Countries with limited reserves and little fiscal room to maneuver should be especially cautious.
At this pivotal moment, the IMF is stepping up as well. We are supporting our members—especially the most vulnerable—with policy advice, capacity development and, where needed and in coordination with the international community, financial assistance. As Managing Director, Kristalina Georgieva has said: “In an uncertain world, more countries are needing more of our support. We are there for them.”
