Iran War’s ‘Scarring Effects’ Threaten Global Growth, Says IMF Head

International Monetary Fund chief Kristalina Georgieva urges policymakers not to ‘pour gasoline on the fire.’

IMF Managing Director Kristalina Georgieva delivers a keynote speech ahead of the IMF/WB Spring Meetings at IMF headquarters in Washington on April 17, 2025. Jim Watson/AFP via Getty Images

The Iran war’s “scarring effects”—accumulating as the conflict enters its seventh week—have pushed global growth prospects lower, says International Monetary Fund (IMF) managing director Kristalina Georgieva.

Next week’s World Economic Outlook will map out several possible paths amid the uncertainty.

Yet Georgieva says that even the best‑case scenarios now assume slower worldwide growth.

This past fall, the IMF projected global growth of 3.1 percent in 2026, a slight drop from 3.2 percent in 2025.

An investment boom from the buildout of artificial intelligence (AI) infrastructure and supportive financial conditions would have generated substantial momentum for the economy.

Looking ahead, the international economy will face a turbulent climate to navigate.

“Had it not been for this shock, we would have been upgrading global growth,” Georgieva said on April 9 ahead of next week’s IMF-World Bank spring meetings.

“But now, even our most hopeful scenario involves a growth downgrade. Why? Because of significant infrastructure damage, supply disruptions, losses of confidence, and other scarring effects.”

President Donald Trump announced a two-week ceasefire with Iran on April 7, though the U.S.–Iran truce appears to be fragile.

Despite this development, “growth will be slower—even if the new peace is durable,” she added.

‘Don’t Pour Gasoline on the Fire’

Georgieva pointed to the war-driven oil price shock as one of the chief threats to the outlook, although she acknowledged that some places—Sub-Saharan Africa and Pacific Island countries—are more vulnerable to the energy crisis than others.

Disruptions to energy markets have and will continue to produce “ripple effects,” including refinery interruptions, shortages of diesel and jet fuel, food insecurity, and supply chain disturbances.

These shocks will then filter through the broader economy, leading to higher prices, shortages of key inputs, and rising inflation expectations.

While economists say the United States is more insulated from global energy shocks than a decade ago, businesses and consumers are still wrestling with increasing prices.

The national averages for a gallon of gasoline and diesel, for example, are above $4 and $5, respectively.

This environment poses a key challenge because governments have limited fiscal maneuvering—tax cuts and spending hikes—due to surging debt, budget deficits, and debt-servicing payments.

Georgieva also urged officials “not to make things worse” by implementing price controls and preventing exports.

“Don’t pour gasoline on the fire,” she said.

To date, several countries—China, Croatia, France, and South Korea—have introduced temporary gasoline price caps.

While the United States is not expected to emulate these measures, states have started introducing relief strategies.

Indiana Gov. Mike Braun suspended the state’s sales tax on gasoline for 30 days as the average price in the Hoosier State climbed above $4.

Monetary Policy in Focus

As for central banks, the IMF chief believes monetary policymakers are being prudent by “waiting and watching.”

However, if inflation expectations become unanchored, these institutions need to “step in firmly” by raising interest rates, she said.

But this, she says, requires a trade-off.

“Rate hikes, of course, would further dampen growth—that’s how they work,” Georgieva stated.

This would pose a potential risk to the United States, as growth prospects appear to have slowed and the labor market faces a low-hire, low-fire environment.

The Federal Reserve in Washington on July 21, 2025. Madalina Kilroy/The Epoch Times

New data show the U.S. economy slowed to 0.5 percent in the fourth quarter.

The widely watched Atlanta Fed GDPNow Model estimates first-quarter growth could come in at around 1 percent.

In recent weeks, a growing chorus of central banks has told the public that officials could tighten monetary policy if inflation threats intensify to support price stability.

The most hawkish has been the Bank of England, with Governor Andrew Bailey stating that the institution “stands ready to act” to clamp down on inflationary pressures.

“War in the Middle East has pushed up energy prices. You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year,” said Bailey.

“Whatever happens, our job is to make sure inflation gets back to its 2 percent target.”

Minutes from last month’s policy meeting revealed that some Federal Reserve officials expressed support for a rate hike as the central bank’s next action.

“Some participants judged that there was a strong case for a two-sided description of the Committee’s future interest rate decisions in the post-meeting statement, reflecting the possibility that upwards adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the meeting summary, released on April 8, stated.

Last month, traders had priced in a rate hike later this year, but they have since scaled back these expectations and anticipate the Fed keeping interest rates higher for longer.