The International Monetary Fund (IMF) has begun assessing the economic fallout from the conflict in the Middle East, warning that vulnerable households will bear the “heaviest burden” through rising energy prices, food costs driven by fertilizer shortages, and disruptions to financial markets. The assessment comes as many national economies remain fragile following the COVID-19 pandemic.
In a blog post published Thursday, IMF economists offered an initial analysis of the costs stemming from the recent escalation of tensions involving Israel and Iran, ahead of the release of the organization’s World Economic Outlook (WEO) report on April 14th. The analysis details how the conflict is already impacting global trade, energy markets, and inflation.
The war is manifesting economically through several channels: increased oil and gas prices, trade disruptions due to potential blockages of the Strait of Hormuz, inflationary pressures, and shocks to financial and sovereign debt markets. A significant portion of global fertilizer shipments – roughly one-third – transit the narrow waterway between Iran and the United Arab Emirates, threatening harvests and food prices throughout the year.
Spain, Shielded by Renewables
The de facto disruption of traffic through the Strait of Hormuz has already driven up crude and gas prices, reviving memories of the 2021-2022 energy crisis in Europe. However, Spain appears comparatively well-positioned to weather the storm, thanks to its substantial renewable energy generation capacity. The IMF notes that countries like Italy and the United Kingdom, heavily reliant on gas-fired electricity, are particularly exposed, while France and Spain benefit from their nuclear and renewable infrastructure.
Beyond price increases, the rerouting of global trade to avoid the conflict zone is adding to costs, increasing shipping insurance and extending delivery times. The redirection of air traffic to bypass the Persian Gulf is also impacting the tourism sector.
The IMF emphasizes that the duration of the conflict will be a key determinant of the ultimate economic impact. A brief episode could lead to a temporary spike in crude and gas prices, while a prolonged war could sustain high energy costs and “add pressure on countries most dependent” on imported energy. “It all depends on how long the conflict lasts, how far it spreads, and how much damage is inflicted on infrastructure and supply chains,” the IMF stated.
The potential for inflation to develop into entrenched is also a concern. If individuals and businesses anticipate sustained high inflation, they may incorporate those expectations into wage and price-setting, making it more difficult to contain the economic shock without triggering a recession. The IMF warns that the war not only increases current inflation but also risks undermining confidence in the ability to control it.
The IMF also highlighted the limited fiscal space available to many economies to absorb these shocks, noting that numerous countries were already carrying record levels of debt before the current crisis. This underscores the importance of “carefully calibrated” policies tailored to the specific needs of each country, particularly those with fewer resources.
“The most vulnerable will bear the heaviest burden. Populations in low-income countries are more at risk from rising prices since food accounts for 36% of their consumption, on average, compared to 20% in emerging economies or 9% in advanced economies,” the IMF stated. “This makes any increase in fertilizer or food prices not only an economic problem, but a socio-political one, especially where fiscal resources to cushion the blow are limited.”
