Global economy has so far withstood Iran war energy shock, IMF chief says

Global economy resists energy shock for now

The International Monetary Fund's managing director, Kristalina Georgieva, said on Tuesday that the global economy is faring better than feared despite energy supply disruptions following the outbreak of the Iran war. Speaking to reporters at IMF headquarters ahead of the G20 meeting in North Carolina, Georgieva warned, however, that rising fiscal pressures pose a growing risk.

Traffic disruption in the Strait of Hormuz a key chokepoint through which roughly 20 per cent of the worlds energy supplies transited before the conflict began in February has driven volatility in oil markets and fuelled concerns about inflation. Yet Georgieva said a combination of policy and market responses has helped the world resist the immediate energy shock.

She pointed to several offsetting factors: coordinated drawdowns from strategic oil and gas reserves, increases in non-Gulf crude supply, demand reductions in some regions and a partial rebound to coal use in others. Those elements, together with other forces, have so far prevented a broader macroeconomic blow-out.

Georgieva also highlighted the countervailing boost from the artificial intelligence (AI) investment cycle. What began as a US-centred AI boom is now spreading more widely and acting as a positive demand shock for parts of the global economy. The IMFs latest projections foresee global growth at about 3 per cent this year slightly down from the funds April forecast of 3.1 per cent and a rebound to roughly 3.4 per cent next year. But the fund has lowered its 2026 growth forecast for the Middle East to 0.7 per cent, down 1.2 percentage points from Aprils outlook.

The net effect, Georgieva said, is uneven. Some countries benefit more from AI-driven demand and investment; others are hit harder by higher energy costs and supply uncertainty. That divergence complicates the policy response for international institutions and national authorities alike.

Rising bond yields are a visible sign of growing fiscal stress, Georgieva added. The US Treasury last week announced plans to at least double the size of its debt repurchases after long-term yields reached two-decade highs. Separately, recent US data showed the national debt surpassing $40 trillion about double the level recorded in 2017 underscoring the scale of fiscal challenges in major economies.

Georgieva urged all countries to confront their fiscal imbalances and to present credible plans to put debt and deficits on sustainable paths. Without such plans, she warned, higher yields and market anxiety could compound the risks posed by energy and geopolitical shocks.

In sum, the IMF managing director said the global economy has so far weathered the disruption from the Strait of Hormuz closure better than anticipated, thanks to a mix of supply management, demand responses and the offset from technology-driven growth. But the balance is fragile: policymakers must address rising debt pressures and be prepared for a widening of economic divergences across countries if the conflict or energy disruption persists.