The Economic Fallout of War: A Double-Edged Sword

The International Monetary Fund (IMF) has downgraded its 2026 global growth forecast to 3 percent, citing the lingering effects of the energy shock caused by the US-Israel war on Iran. This reduction in growth is hardly surprising, given the significant disruption to global trade caused by the conflict.

The Strait of Hormuz, a critical shipping lane, remains heavily constrained due to ongoing threats of Iranian attacks, leading to a sharp increase in oil prices. Brent crude has surged as much as 7 percent following the latest round of strikes. This energy shock has had far-reaching consequences for economies around the world.

While some sectors have seen increased demand for AI-driven technologies, which are helping to offset some lost growth, others are suffering from reduced economic activity and rising fuel costs. The people most affected by this war are not just those living in Iran or Israel but also those in countries dependent on oil exports.

History has shown us that military conflicts can have far-reaching economic consequences, often with devastating effects for ordinary citizens. The 2008 financial crisis was preceded by a series of military interventions in the Middle East that helped fuel global instability. Similarly, the ongoing conflict in Iran serves as a stark reminder that economic costs and human suffering often go hand-in-hand.

Policymakers must balance competing priorities and weigh the human costs of war against its benefits. The IMF’s revised forecast is a wake-up call for policymakers to consider the long-term economic consequences of their actions. As one analyst noted, the recent surge in oil prices reflects not just market volatility but also a shift in sentiment.

Global growth is forecast to rebound to 3.4 percent in 2027, but this outcome depends on policymakers finding a way to bring about peace and reduce the costs of war. The continued involvement of the US in the conflict raises important questions about its long-term economic costs. Unless policymakers address these issues, the costs of war will only continue to mount.