## FOREWORD

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### The War’s Impact on the Global Economy
- Triggering event: outbreak of war in the Middle East on February 28, 2026, including closure of the Strait of Hormuz and serious damage to critical production facilities in a region central to global hydrocarbon supply.
- Three channels determine the overall impact:
  - Direct commodity price increases: a textbook negative supply shock that raises costs of energy-intensive goods and services—including fertilizers, chemicals, food, transportation, and heating—disrupts supply chains, feeds into headline inflation, and reduces purchasing power.
  - Second-round effects: workers and firms may try to recoup expected income losses through higher wages and prices, increasing the risk of wage and price spirals, especially where inflation expectations are poorly anchored.
  - Financial market reaction: a risk-off episode could impair asset valuations, increase risk premiums, cause capital flight and dollar appreciation, and dampen aggregate demand.
- Distributional impacts:
  - Energy importers—particularly low-income developing countries with preexisting macroeconomic vulnerabilities and limited buffers—are highly exposed and likely to be hit hardest.
  - Gulf region energy exporters can suffer from conflict-related damage and production closures, export constraints, and weaker tourism and business activity.
  - Countries supplying migrant workers may face remittance losses.
  - Reduced fiscal resources and higher spending needs may force lower net savings, drawdowns of external wealth, and push up global real interest rates, tightening global financial conditions.

### Reference Forecast and Model Scenarios
- The report provides a reference forecast based on a bottom-up assessment assuming a relatively short-lived conflict, together with two model-based scenarios assuming a longer-lasting or expanding conflict.
- Reference forecast (short-lived conflict):
  - Projects global growth of 3.1 percent for this year, a downward revision of 0.2 percentage point from January projections.
  - Headline inflation expected to rise from 4.1 percent in 2025 to 4.4 percent in 2026.
- Adverse scenario (anchored to market conditions prevailing toward the end of March):
  - Global output would be expected to decline to 2.5 percent.
  - Inflation rising to 5.4 percent.
- Severe scenario (dislocations in energy markets extending to next year, de-anchoring of inflation expectations, and tightening of financial conditions):
  - Global economy would come close to experiencing a recession, with growth around 2 percent this year and next.
  - Global headline inflation near 6 percent.
- The duration and scale of the conflict and the time to normalize energy production and transit will determine the ultimate size of the shock.

### Lessons from the 2022 Energy Crisis
- Comparison to 2022 commodity-price surge after Russia’s invasion of Ukraine:
  - 2022: global inflation rose to levels not seen since the 1970s, triggering broad and synchronized monetary tightening; subsequent disinflation without a recession is viewed as a major policy success.
- Differences and caveats for the current shock:
  - Positive factors today: labor markets are significantly softer, private sector balance sheets have normalized, and pre-shock inflation pressures are more subdued—though still above target in some countries, including notably the United States.
  - Negative factors: price levels are permanently higher from the 2022 episode, heightening sensitivity of inflation expectations; the supply curve now appears much flatter, so disinflation could prove more costly than in 2022.
- Implication: if the shock remains modest, inflation impact may be subdued (consistent with the reference scenario); but higher sensitivity of expectations and a flatter supply curve raise downside risks.

### Policy Guidance
- Primary objective: An early and orderly end to the war is the best way to limit damage to the global economy.
- Monetary policy:
  - Standard response to energy price surge is to “look through” as long as inflation expectations remain well anchored.
  - If inflation expectations start drifting up, unchanged policy rates become overly stimulative (higher inflation expectations lower the real interest rate), requiring central banks to take firm action to reanchor expectations; this must take precedence over near-term growth concerns.
  - Recommended approach: a graduated and state-contingent monetary policy response—look through if and as long as inflation expectations remain stable, while communicating clearly and forcefully that any sign of de-anchoring will be met with a strong policy response.
  - Exchange rate flexibility is important as a buffer and to allow monetary policy to concentrate on price stability.
  - If the energy shock proves more permanent, coordinated tightening across countries to curb global demand can help reduce energy prices.
- Fiscal policy:
  - Avoid wasteful, untargeted fiscal measures (energy caps or subsidies) that are often poorly designed and very costly.
  - Fiscal support should be well targeted, temporary, with clear sunset clauses, and consistent with medium-term fiscal plans.
  - Avoid fiscal stimulus at a time of rising inflation so as not to complicate central banks’ tasks.
  - Preserve price signals; avoid price controls or export restrictions that can push up ex-subsidy prices or cause rationing and negative cross-border spillovers.
  - Use direct and targeted transfers to support the most vulnerable rather than broad untargeted subsidies.
- Financial stability:
  - If financial conditions deteriorate markedly with weakening global demand, monetary and fiscal policies should pivot toward supporting the economy and the financial system, with appropriate financial and liquidity policies.

### Fragmentation, Multipolarity, and Global Cooperation
- Geopolitical context:
  - The war illustrates strains on the international order: fraying alliances, new conflicts, national security concerns taking precedence.
  - Long-standing geopolitical tensions are making the global economic environment more complex, with signs of a transition to a more multipolar world and a rise in new regional trade agreements.
  - Concern: these trends could encourage more inward-looking policies.
- Critical minerals:
  - Extraction and refining of critical minerals are highly geographically concentrated and indispensable for the green and digital transition.
  - The report’s analysis finds output losses from supply disruption of rare earths are sizable.
  - The case for multilateral coordination, rather than unilateral industrial policy, is self-evident.
- Policy implication: seek ways to improve global cooperation; multipolarity need not lead to fragmentation.

### Medium-Term Priorities
- Technology and productivity:
  - Developments in artificial intelligence, including agentic AI, raise the prospect of meaningful productivity gains but also pose transition challenges.
  - Risks include financial market exuberance that may outstrip fundamentals and potential job obsolescence that could slow aggregate demand.
  - Policymakers should encourage diffusion and adoption of new technologies while ensuring adequate investments in skills to facilitate smoother labor market transitions.
- Energy transition and resilience:
  - Faster adoption of renewable energy can strengthen resilience to energy shocks, improve energy security, and support the climate transition.
- Overarching message: with right policies—including swift cessation of hostilities and reopening of the Strait of Hormuz—the damage could remain limited; international financial cooperation remains essential to preserve global prosperity.

*Source: Foreword, IMF World Economic Outlook, April 2026 (foreword.pdf).*

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_Source: https://www.imf.org/-/media/files/publications/weo/2026/april/english/foreword.pdf_