'No return to normal': IMF warns of lasting economic damage from Iran war
The IMF is cutting its global growth forecast, preparing €42.9bn in emergency aid and warning that 45 million people face food insecurity.
The International Monetary Fund will downgrade its global growth forecasts due to the Middle East war, managing director Kristalina Georgieva said Thursday, warning of lasting economic damage even in the most optimistic scenario.
"Even in a best case, there will be no neat and clean return to the status quo ante," Georgieva said, citing spiralling energy costs, infrastructure damage, supply disruptions and a collapse in market confidence as factors that would weigh on growth regardless of how the conflict unfolds.
The IMF also expects to deploy between $20bn (€17.2bn) and $50bn (€42.9bn) in emergency balance-of-payments support to war-affected countries — with the lower figure contingent on the ceasefire holding.
At least 45 million people face food insecurity as a result of the conflict.
Over €50 billion on the table
Speaking on Bloomberg TV on Thursday, World Bank President Ajay Banga said his institution could mobilise as much as $25bn (€21.4bn) "very quickly" for developing countries hit by the war, with up to $60bn (€50bn) available over the longer term.
The remarks came as the IMF and World Bank kicked off their annual Spring Meetings in Washington, gathering top economic policymakers from around the world.
The US-Israel war on Iran, launched on 28 February, has engulfed the Middle East in violence, snarled supply chains and sent oil prices surging after Tehran virtually blocked the Strait of Hormuz.
Tehran and Washington have traded accusations of ceasefire violations, with talks aimed at a more durable peace slated for Saturday.
'Spare a thought for the Pacific Islands'
Georgieva highlighted the uneven toll of the crisis, warning that low-income energy importers were bearing the heaviest burden.
"Spare a thought for the Pacific Island nations at the end of a long supply chain, wondering if fuel still reaches them," she said.
The World Bank said Wednesday that the Middle East, excluding Iran, was now expected to grow just 1.8% in 2026 — a downgrade of 2.4 percentage points from pre-war projections.
Global headline inflation is also expected to be revised upward, driven by oil price shocks and supply chain disruptions.
A joint statement from the IMF, World Bank and World Food Programme warned that rising oil, gas and fertiliser prices, combined with transport bottlenecks, would "inevitably lead to rising food prices and food insecurity".
The fund's own research makes for grim reading.
Output in countries where fighting takes place drops by 3% at the outset "and continues falling for years," it found.
An earlier assessment of the Iran war was blunter still: "All roads lead to higher prices and slower growth."
By Hippolyte Balima, Andresa Lagerborg and Evgenia Weaver
War is again defining the global landscape. After decades of relative calm following the Cold War, the number of active conflicts has surged in recent years to levels not seen since the end of the Second World War. Meanwhile, rising geopolitical tensions and heightened security concerns are prompting many governments to reassess their priorities and spend more on defense.
Beyond their devastating human toll, wars impose large and lasting economic costs, and pose difficult macroeconomic trade-offs, especially for those countries where the fighting is taking place. Even without active conflicts, rising defense spending can raise economic vulnerabilities in the medium term. After the war, governments face the urgent post-conflict task of securing durable peace and sustaining recovery.
In an era of proliferating conflicts, our research in two analytical chapters of the latest World Economic Outlook highlights the deep and prolonged economic harm inflicted by war, which has particularly affected sub-Saharan Africa, Europe, and the Middle East. We also show that rising defense spending—which can boost demand in the short term—imposes difficult budgetary trade‑offs that make good policy design and lasting peace more important than ever.
For countries where wars occur, economic activity drops sharply. On average, output in countries where fighting takes place falls by about 3 percent at the onset and continues falling for years, reaching cumulative losses of roughly 7 percent within five years. Output losses from conflicts typically exceed those associated with financial crises or severe natural disasters. Economic scars also persist even a decade later.
Wars also tend to have significant spillover effects. Countries engaged in foreign conflicts may avoid large economic losses—partly because there is no physical destruction on their own soil. Yet, neighboring economies or key trading partners with the country where the conflict is taking place will feel the shock. In the early years of a conflict, these countries often experience modest declines in output.
Major conflicts—those involving at least 1,000 battle-related deaths—force difficult trade-offs in economies where they occur. Government budgets deteriorate as spending shifts toward defense and debt increases, while output and tax collection collapse.
These countries may also face strains on their external balances. As imports contract sharply because of lower demand, exports decrease even more substantially, resulting in a temporary widening of the trade deficit. Heightened uncertainty triggers capital outflows, with both foreign direct investment and portfolio flows declining. This forces wartime governments to rely more heavily on aid and, in some cases, remittances from citizens abroad to finance trade deficits.
Despite these measures, conflicts contribute to sustained exchange rate depreciation, reserve losses, and rising inflation, underscoring how widening external imbalances amplify macroeconomic stress during wartime. Prices tend to increase at a pace higher than most of central banks’ inflation targets, prompting monetary authorities to raise interest rates.
Taken together, our findings show that major conflicts impose substantial economic costs and difficult trade-offs on economies that experience conflicts within their borders, as well as hurting other countries. And these costs extend well beyond short-term disruption, with enduring consequences for both economic potential and human well-being.
Spending trade-offs
More frequent conflicts and rising geopolitical tensions have also prompted many countries to reassess their security priorities and increase defense spending. Others plan to do so. This situation presents policymakers with a crucial question about trade-offs involved with such a boost to spending.
Our analysis looks at episodes of large buildups in defense spending in 164 countries since the Second World War. We find that these booms typically last nearly three years and increase defense spending by 2.7 percentage points of gross domestic product. That’s broadly similar to what is required by North Atlantic Treaty Organization (NATO) members to reach the 5 percent of GDP defense spending target by 2035.
Ramping up defense spending primarily acts as a positive demand shock, boosting private consumption and investment, especially in defense-related sectors. This can raise both economic output and prices in the short term, requiring close coordination with monetary policy to temper inflationary pressures.
Overall, the aggregate effects on output of scaling up defense spending are likely modest. Increases in defense spending typically translate almost one for one into higher economic output, rather than having a bigger multiplier effect on activity. That said, the multiplier or ripple effects of such spending vary widely depending on how outlays are sustained, financed and allocated, and how much equipment is imported.
For instance, output gains are smaller and external balances deteriorate when the stimulus is partly spent to import foreign goods, which is especially the case for arms importers. By contrast, a buildup of defense spending that prioritizes public investment in equipment and infrastructure, together with less fragmented procurement and more common standards, would expand market size, support economies of scale, strengthen industrial capacity, limit import leakages, and support long-term productivity growth.
The choice of how to finance defense spending entails critical trade-offs. Defense spending booms are mostly deficit-financed in the near-term, while higher revenues play a larger role in later years of defense spending booms and when the defense spending buildup is expected to be permanent.
The reliance on deficit financing can stimulate the economy in the short term, but strain fiscal sustainability over the medium term, particularly in countries with limited room in government budgets. Deficits worsen by about 2.6 percentage points of GDP, and public debt increases by about 7 percentage points within three years of the start of a boom (14 percentage points in wartime). The resulting increase in public debt can crowd out private investment and offset the initial expansionary effect of defense spending.
The buildup of fiscal vulnerabilities can be mitigated by durable financing arrangements, especially when the increase in defense spending is permanent. However, raising revenues come at the cost of reducing consumption and dampening the demand boost, while re-ordering budget priorities tends to come at the expense of government spending on social protection, health, and education.
Policies for recovery
Our analysis also shows that economic recoveries from war are often slow and uneven, and crucially depend on the durability of peace. When peace is sustained, output rebounds but often remains modest relative to wartime losses. By contrast, in fragile economies where conflict flares up again, recoveries frequently stall. These modest recoveries are driven primarily by labor, as workers are reallocated from military to civilian activities and refugees gradually return, while capital stock and productivity remain subdued.
Early macroeconomic stabilization, decisive debt restructuring, and international support—including aid and capacity development—play a central role in restoring confidence and promoting recovery. Recovery efforts are most effective when complemented by domestic reforms to rebuild institutions and state capacity, promote inclusion and security, and address the lasting human costs of conflict, including lost learning, poorer health, and diminished economic opportunities.
Importantly, effective post-war recovery requires comprehensive and well-coordinated policy packages. Such an approach is far more effective than piecemeal measures. Policies that simultaneously reduce uncertainty and rebuild the capital stock can reinforce expectations, encourage capital inflows, and facilitate the return of displaced people. Ultimately, successful post-war recovery lays the foundation for stability, renewed hope and improved livelihoods for communities affected by conflict.
—This article is based on Ch. 2 of the April 2026 World Economic Outlook, “Defense Spending: Macroeconomic Consequences and Trade-Offs,” and Ch. 3, “The Macroeconomics of Conflicts and Recovery.” For more on fragile and conflict-affected states: How Fragile States Can Gain by Strengthening Institutions and Core Capacities.
Andresa Lagerborg s an economist at the International Monetary Fund (IMF).
Evgenia Weaver is an Information Management Officer at the International Monetary Fund, working in the Research Department’s World Economic Studies Division. She supports analytical and data workflows for flagship research products and has worked on numerous research and policy publications, including chapters and boxes in the World Economic Outlook, as well as working papers and journal articles.
Source: This article was published by IMF Blog
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