The war in Iran weighs on the global economy at the opening of IMF meetings

The worry about the impact of the war in Iran on the global economy has intensified on Monday, as new countries announced emergency support measures to counter the surge in energy costs, while others have made an appeal for international aid.

The conflict – the third major shock to hit the global economy after the COVID pandemic and Russia’s invasion of Ukraine – will dominate discussions among financial officials meeting this week at the International Monetary Fund in Washington.

Any lingering hopes for a quick recovery of oil shipments through the Strait of Hormuz, a vital chokepoint, were dashed after the failure of talks between the U.S. and Iran this weekend, leaving a fragile ceasefire even more compromised.

The IMF and World Bank have already indicated they will lower their global growth forecasts and raise their inflation projections due to the war, with emerging markets and developing countries being considered the hardest hit.

Nigeria announced on Monday that it would need increased international support to cope with fuel costs domestically, even as the rise in oil prices boosted the foreign currency earnings of Africa’s largest oil producer.

“This shock comes at a critical juncture, intensifying inflationary pressures and increasing the cost of living for households,” stated Finance Minister Wale Edun in a press release preceding this week’s meetings in Washington.

Local gasoline prices have jumped over 50% and diesel prices by over 70% since the conflict began, Mr. Edun pointed out, warning that this shock could derail efforts launched in 2023 to stabilize the economy and revive growth.

NEW COUNTRIES ANNOUNCE SUPPORT MEASURES AMID THE SEVERITY OF THE SHOCK

Few countries are immune to the repercussions of the halt in energy deliveries through the Strait since the war erupted on February 28, causing the worst disruption of global supply ever recorded. Dozens of governments have already taken measures to conserve energy or support consumers.

The German coalition government, initially resisting calls for support, declared on Monday that it had accepted an easing of fuel prices for consumers and businesses amounting to 1.6 billion euros (1.9 billion dollars) through tax reductions on diesel and gasoline.

“This war is the root cause of the problems we are also facing in our own country,” said Chancellor Friedrich Merz during a press conference.

The Swedish government also announced it would reduce fuel taxes and increase subsidies for electricity as part of a plan worth around $825 million.

“This is a signal that we will do whatever it takes to… mitigate the shock for households facing what is currently happening,” said Finance Minister Elisabeth Svantesson to journalists.

British Finance Minister Rachel Reeves is expected to outline later this week her approach to help businesses grappling with high energy prices. In a column for the Sunday Times, she wrote that British industries had “faced uncompetitive energy prices for too long”.

Furthermore, Prime Minister Keir Starmer cited global conflicts to explain his government’s plans to realign with the European Union and its single market, ten years after the country’s Brexit vote.

“We are in a world of massive conflicts and great uncertainty, and I firmly believe that the UK’s best interest lies in a stronger and closer relationship with Europe,” he stated on BBC radio.

The war in Iran is also shaking up central banks’ policies worldwide, with policymakers trying to assess the extent to which it will weigh on economic growth while exacerbating inflation – potentially simultaneously, which could lead to a dreaded “stagflation” scenario.

European Central Bank Vice President Luis de Guindos said on Monday that any ECB rate increases would depend on how the rise in crude oil costs affects prices across the economy.

The Bank of Japan policymakers are also keeping all options open ahead of their monetary policy meeting this month, although once-high chances of a rate hike are dwindling.