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As tensions escalate between the US, Israel, and Iran, US Treasury Secretary Bessent has asserted that enduring a “small bit of economic pain” is a necessary sacrifice for the sake of long-term global security. His comments come as the International Monetary Fund (IMF) warns that the ongoing conflict could jeopardise international economic stability, potentially pushing the global economy towards recession.
The Cost of Conflict
In a recent BBC interview, Bessent expressed that the immediate economic repercussions are less concerning than the long-term risks posed by Iran’s advancing nuclear capabilities. He highlighted, “I wonder what the hit to global GDP would be if a nuclear weapon hit London… I am saying that I am less concerned about short-term forecasts, for long-term security.”
While Iran currently does not possess nuclear weapons, it reportedly has uranium enriched to 60%, raising alarms within international circles. Bessent stressed that recent military actions by the US and Israel have mitigated the “tail risk” of Iranian nuclear strikes, although the threat of ballistic missiles remains a point of contention. The UK government has stated that there is “no assessment” suggesting Iran intends to target Europe with missiles, asserting that the UK is prepared to defend itself against any potential attacks.
IMF’s Dire Projections
The IMF’s latest World Economic Outlook report paints a grim picture, predicting that if the current geopolitical strife continues, global growth could dip below 2% by 2026. Such a downturn would echo previous recessions, which have only occurred four times since 1980, with the most recent being during the Covid-19 pandemic.
The report speculates that should oil and gas prices remain elevated, with oil averaging $110 per barrel this year and spiking to $125 in 2027, inflation could reach as high as 6% next year. Pierre-Olivier Gourinchas, the IMF’s chief economist, warned that prolonged hostilities could lead to rising unemployment and food insecurity globally, echoing the economic fallout of the 1970s oil crisis.
Regional Economic Impacts
The conflict has already led to significant spikes in energy prices and disruptions to essential supply routes, particularly affecting the Strait of Hormuz. Oil prices surged to nearly $120 per barrel during the initial stages of the conflict but have since stabilised around $95. However, the IMF cautions that a prolonged crisis could lead to dire economic consequences, particularly for countries in the Middle East.
The IMF forecasts that the UK will endure the most significant economic hit among advanced economies, downgrading its growth estimate for this year to 0.8%, down from 1.3%. Conversely, it predicts a rebound in UK growth to 1.3% next year, contingent upon the resolution of the conflict.
Iran’s economy is expected to contract by 6.1% this year, with a potential recovery of 3.2% in 2027 if hostilities cease soon. Neighbouring Iraq is projected to suffer a 6.8% slowdown but could rebound to 11.3% growth in 2027.
Global Dynamics and the Future
The IMF’s predictions extend beyond the immediate region, suggesting that oil-exporting nations in the Gulf may face economic slowdowns or contractions this year. Saudi Arabia is expected to see its growth slow to 3.1% in 2026, while still benefiting from its East-West pipeline that offers alternative export routes.
China, too, is not exempt from the economic fallout, with the IMF revising its growth forecast down to 4.4% for 2026, while Russia stands to gain from the situation, with its economy projected to grow by 1.1% this year, buoyed by high energy prices.
Why it Matters
The implications of the ongoing conflict extend far beyond the immediate geopolitical landscape. As nations grapple with the potential for recession, rising inflation, and energy insecurity, the need for strategic economic planning has never been more critical. The future resilience of economies worldwide will hinge on their ability to adapt to these challenges, as the interplay between military conflict and economic stability continues to unfold in a rapidly changing global landscape.