Governments should avoid large-scale energy subsidies as the global economy grapples with a fresh supply shock from the Middle East conflict, the IMF cautioned on Tuesday
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WASHINGTON — The global economy has taken a hit from the ongoing conflict in the Middle East, with growth projections lowered despite strong underlying momentum driven by technology investment and private sector resilience, the International Monetary Fund (IMF) said Tuesday.
Speaking during a group interview with reporters from India, Japan, the UAE, the Netherlands and Chile, IMF Chief Economist Pierre-Olivier Gourinchas said the conflict has reversed earlier expectations of a modest upgrade to global growth.
“We were looking at increasing our forecast for 2026 to 3.4 per cent,” he said, adding that growth is now closer to “3.1”, reflecting the impact of the war.
The downgrade comes at a time when the global economy had begun to stabilise after earlier shocks from tariffs and trade policy uncertainty.
“There was quite a bit of momentum,” Gourinchas said, pointing to a mix of factors that had supported growth, including “very accommodating financial conditions” and “the AI tech boom”.
He said private sector adaptability also played a key role. “Private sector was very agile in rerouting supply,” he noted, helping offset earlier disruptions linked to trade tensions.
The IMF estimates that tariffs and trade policy uncertainty had weighed on global growth by “0.5, 0.6 percentage point,” but their impact has now begun to fade.
“The trade and the tariffs [are] more and more in the rear view mirror,” he said.
However, the escalation in the Middle East has emerged as a fresh and significant drag, primarily through rising energy prices and supply disruptions.
Gourinchas said the extent of the damage would depend on how long the conflict lasts and how severely energy markets are affected.
“In our reference forecast, we’re expecting a relatively short-lived conflict and some normalization of oil and energy flows,” he said, adding that in such a scenario, “the effects [would be] mostly concentrated on this year.”
But he warned that more severe scenarios could have longer-lasting consequences. “If we get a tightening of financial conditions… that might actually cast a shadow beyond just one or two years,” he said.
He also flagged risks from rising food prices and financial instability, particularly in vulnerable economies. “That could create food insecurity… especially the most vulnerable,” he said.
The IMF noted that earlier gains in global growth had been supported by a combination of easing tariff pressures, strong investment in technology, and resilient domestic demand across major economies.
At the start of the year, there were expectations that growth would strengthen modestly as trade tensions eased and financial conditions remained supportive.
However, the Middle East conflict has disrupted that trajectory, adding uncertainty to energy markets and increasing inflationary pressures worldwide.
IMF warns against costly energy subsidies
Governments should avoid large-scale energy subsidies and instead adopt targeted, temporary support measures as the global economy grapples with a fresh supply shock from the Middle East conflict, the International Monetary Fund (IMF) cautioned on Tuesday.
Speaking during a group interview with reporters from India, Japan, the UAE, the Netherlands and Chile, IMF Chief Economist Pierre-Olivier Gourinchas said fiscal responses must remain measured amid rising inflation and limited policy space.
"We're somewhat concerned about it," Gourinchas said, referring to government moves to cushion households and businesses through subsidies and price caps.
He noted that such measures are understandable but warned they could backfire if not carefully designed.
"It's very understandable that governments would want to... shield part of their population and businesses against that external shock," he said.
However, fiscal resources have become constrained after repeated interventions in recent years, including during the Covid-19 pandemic and earlier energy crises.
"Fiscal resources have become much more limited," he said, noting that governments now face the challenge of rebuilding buffers while managing new shocks.
Gourinchas pointed to the scale of past interventions as a cautionary example.
"The fiscal measures... were quite expensive... on the order of two to three per cent of GDP," he said, adding that such spending was largely financed through deficits and rising debt.
"In the environment we're in... adding two to three (per cent)... that's really not advisable," he said.
He warned that excessive spending could unsettle financial markets.
"It could lead to a situation where you get markets becoming more nervous... interest rates rising... (and) financial instability," he said.
Instead, the IMF is advocating a more calibrated approach focused on vulnerable groups.
"The support should be very targeted... (and) temporary," Gourinchas said.
He stressed the importance of designing measures that automatically phase out.
"You put them in place for three months or six months... it rolls off on its own," he said.
Another key concern is the interaction between fiscal and monetary policy at a time of rising inflation.
"If fiscal authorities (are) adding fiscal stimulus... that would make the inflation pressures even worse," he said, complicating efforts by central banks to maintain price stability.
Gourinchas underlined that the current shock is fundamentally a supply problem.
"There isn't enough energy... so the demand is gonna have to come down and meet supply," he said.
Measures that artificially suppress prices, he added, do not address the underlying imbalance.
"Any measure that tries to keep the price unchanged... it doesn't do the job," he added.
The IMF's warning comes as several countries consider or implement measures to shield consumers from rising fuel and energy costs following disruptions linked to the Middle East conflict.
Such policies, while politically necessary in the short term, risk adding to already elevated public debt levels and could undermine financial stability if sustained over longer periods.
Damage is visible on a residential building that, according to Iranian authorities, was hit by a strike on March 4 during the U.S.-Israeli military campaign, in southeastern Tehran, Iran, Tuesday, April 14, 2026. (AP Photo/Vahid Salemi)