The global economy is at risk of recession if the US-Israel war with Iran continues and high energy prices persist, the International Monetary Fund (IMF) has warned.

In its World Economic Outlook report, the IMF said in a worst-case scenario – where oil, gas and food prices spike and remain high this year and next – global growth could fall below 2% in 2026.

“This would mean a close call for a global recession which has happened only four times since 1980,” it said, most recently during the Covid pandemic.

US Treasury Secretary Scott Bessent told the BBC “a small bit of economic pain” was a price worth paying to eliminate the risk of Iran striking Western capitals with nuclear weapons.

Energy prices have soared since the war began more than six weeks ago after the key Strait of Hormuz shipping route effectively closed and peace talks between the US and Iran failed.

The IMF said: "Once again, the global economy is threatened with being thrown off course – this time by the outbreak of war in the Middle East at the end of February 2026.”

It said the most severe conditions that could lead to a worldwide slowdown would include oil prices reaching an average $110 per barrel this year and hitting $125 in 2027.

Based on these assumptions, the IMF said inflation could reach as much as 6% next year. This could force central banks to increase interest rates to slow the pace of price rises.

IMF chief economist Pierre-Olivier Gourinchas told the BBC a prolonged conflict would lead to spiralling inflation, push up unemployment and lead to food insecurity in some countries.

He warned that even If the conflict ended today, the impact on oil supply would be as big as the fallout from the 1970s oil crisis, when Arab oil producers placed an embargo on the US and other countries which backed Israel during the Yom Kippur war.

But Gourinchas said the world was now less dependent on oil and fossil fuels, so the impact on consumers would be less severe.

Oil has risen close to $120 during the Iran conflict but has since fallen back and on Tuesday, a barrel of crude cost $95.

Moreover, the IMF pointed out that the risk of recession would only increase if severe conditions continued over two years.

It said if the conflict was resolved in the next few weeks and if energy production and exports from the Middle East begin to normalise by the middle of this year, global growth would ease to 3.1% for 2026.

That is below an earlier forecast of 3.3%. It also left its prediction for global growth next year unchanged at 3.2%.

Of the world’s advanced economies, the IMF has forecast that the UK will be the hardest hit by the energy shock from the Iran war.

It cut Its estimate for UK growth this year to 0.8%, from a previous prediction of 1.3%. However, it expects the UK to then recover with economic expansion of 1.3%.

Oil exporting nations in the Gulf are likely to see a sharp slowdown in economic growth or even a contraction this year, according to IMF forecasts.

It estimates that Iran's economy will shrink by 6.1% this year. However, it forecasts a rebound of 3.2% in 2027 – providing the war ends in the next few weeks. That is far from certain. On Sunday US President Donald Trump announced a US blockade of Iranian ports to stop exports.

Some countries such as Qatar, a major supplier of liquefied natural gas (LNG), have been targeted with missiles and drones by Iran.

Qatar’s Ras Laffan, the world’s largest LNG refinery, has been struck and is not expected to be fully operational for some time.

US Treasury Secretary Bessent told the BBC he was less concerned about the economic hit than the risks to global security.

“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,” he said.

As the BBC has previously reported, the threat of Iranian ballistic missiles to London is remote.

A UK government spokesperson said: “There is no assessment Iran is trying to target Europe with missiles. But we have the military capability we need to keep Britain safe from any kind of attacks, whether it’s on our soil or from abroad.”

Bessent said: “The biggest risk you can take is one you don’t know you were taking.”

He added that US and Israeli strikes had removed the “tail risk” of Iranian nuclear strikes against Western countries.

The IMF forecasts that Qatar’s economy will contract by 8.6% in 2026, before bouncing back with 8.6% growth next year.

It also predicts that Iran's neighbour, Iraq, will take an economic hit this year from the war, with a slowdown of 6.8%. But it is expected to recover to 11.3% growth in 2027.

A country's economic resilience will depend on a number of factors, the IMF said, including the damage to energy infrastructure, dependence on the Strait of Hormuz and availability of alternative export routes.

Saudi Arabia, for example, has its East-West pipeline which runs from the Persian Gulf to the Red Sea and can pump up to 7 million barrels of oil per day.

Saudi’s growth will slow in 2026 but the economy is still expected to expand by 3.1%, and is projected to grow by 4.5% next year.

The IMF said most Middle East oil exporters are forecast for an upturn next year “based on the assumption that energy production and transportation are normalized over the next few months”.

But it cautioned that this assumption “may need to be revised if the duration of the conflict extends and the degree of damage suffered gets reassessed”.

The IMF also cut Its expectations for China’s economic growth this year, predicting it will grow by 4.4% in 2026, down from the 4.5% increase it had forecast in January.

Its projection that China’s economy will grow by 4% in 2027 was unchanged.

One country that has benefited from the surge in oil prices is Russia, according to IMF forecasts.

The Russian economy is expected to grow by 1.1% this year and next, ahead of previous predictions of 0.8% and 1% respectively.

Russia had been hit by a series of sanctions after it launched a full-scale invasion of Ukraine more than four years ago.

In March, Trump removed restrictions on exports of Russian oil as global prices soared.

He also temporarily lifted sanctions on 140 million barrels of Iranian oil for 30 days.

The European Commissioner for finance has warned against countries easing sanctions against Russia, arguing the country was ”emerging as a winner from this war”.

“Energy prices are up, and that gives additional revenues for Russia’s war machine,” Valdis Dombrovskis told an event on the sidelines of the IMF summit in Washington.

“Now is not the time to ease the pressure on Russia.” (BBC)

Update news