Governments around the world don't have the fiscal capacity needed to respond to any economic downturn caused by an oil shock fueled by prolonged war in Iran, the IMF's former top deputy and chief economist warned Tuesday.
In an interview with Bloomberg News, Gita Gopinath said the world economy is already facing a slowdown in growth in 2026 due to higher oil prices in the wake of the conflict that erupted less than two weeks ago. Crude oil now looks more likely to average $75 a barrel this year than the $65 figure built into many forecasts, she said.
That 15% difference is enough to strip 0.1 to 0.2 percentage point off of global growth for 2026, and to add 0.5 percentage point to the world inflation rate, said Gopinath, now an economics professor at Harvard University.
The global economy is more fragile than many people assume, she also said - especially after in 2025 it proved resilient to shocks including President Donald Trump's tariffs. Oil prices could easily climb higher, she said as the West Texas Intermediate benchmark was trading below $90 a barrel Tuesday.
"I don't think people should look at everything and say 'Wow, this is like a phenomenally resilient world economy,'" Gopinath said. "Several of the things that are holding the world economy up, including AI - which is true not just for the US but for any other country that's involved in trading components in AI, like South Korea or Japan or Taiwan - this can change quickly."
The International Monetary Fund in January slightly raised its outlook for global growth this year to 3.3% from the 3.1% predicted in October. An updated version of its World Economic Outlook with new forecasts is due to be published next month.
One key danger: The world "does not have the capacity" to respond to a major crisis, she said. "It has absolutely depleted policy space, compared to the start of the pandemic."
Global debt ballooned to a record $348 trillion last year, and marked the fastest annual increase since the Covid crisis, as governments ramped up borrowing across advanced and developing economies, according to a report by Institute of International Finance. Developing nations face more than $9 trillion in refinancing needs this year, raising the stakes as global liquidity conditions fluctuate.
EM Stress Test
Lack of fiscal space "used to be a problem for emerging and developing countries," Gopinath said. That's where "you can't do much in a bad shock event because you can't really borrow that much," she said. But rising government debt yields are already signaling wariness about some Group of Seven nations borrowing more, including the UK, France, and even Germany, Gopinath said.
As for emerging markets, the Iran war is posing a stress test for their revival, though Gopinath said "flows are still going in" even if the geopolitical shock means a reduction, especially in equities. "There is still some resilience," she said. "What's problematic is that we are living in a world with very little aid or grants."
The Trump administration's shut down the US Agency for International Development (USAID), with US foreign assistance commitments falling by more than half in the fiscal year ending September 2025 compared to the same period in 2024, to $14.7 billion from $31.6 billion - according to a Bloomberg analysis.
And the United Nations, a key source for grants for developing economies, has warned it could run out of cash by July, even as the organization is introducing sharp cuts amid overdue US payments.
The war in Iran will also lead to tighter monetary policies across central banks in the US, UK and the euro area than would have been the case otherwise, she said.
"Even before the shock, it was a hard argument to make for the Fed to cut interest rates anytime soon, and the shock just moves it in the direction of making it less likely," Gopinath said.
On the dollar's appreciation amid the conflict in the Middle East, she said the US currency has "played out in a pretty normal, traditional way."
"None of that financial decision making has shifted in any way that's causing anybody to question the dollar dominance," the former IMF official said
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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