The global economy faces a laundry list of threats, and the war in the Middle East could worsen pretty much all of them, Mohamed El-Erian has warned.
“Reading between the lines, the message of today’s IMF flagship report is sobering: Virtually every challenge facing the global economy is poised to intensify due to the fallout of the Middle East War,” El-Erian said in an X post on Tuesday.
The Wharton professor and former deputy director of the International Monetary Fund ticked off a bunch of those challenges: tepid growth, onerous living costs, severe inequality, large budget deficits and national debts, climate risks, and policy constraints.
The conflict between Iran and the US and Israel has sent shockwaves through the global economy in large part because of the virtual closure of the Strait of Hormuz, a key shipping channel for oil and liquefied natural gas. The upshot has been surging energy prices over the past few weeks.
El-Erian, the chief economic advisor at insurer Allianz and the former CEO of fixed-income giant PIMCO, sounded the alarm after the IMF released its latest World Economic Outlook.
The report warned of a “major test” for the global economy as the war threatens to choke growth and reignite inflation. The IMF cut its global growth forecast for this year from 3.3% in January to 3.1%, and hiked its inflation projections to 4.4% this year and 3.7% in 2027.
The global financial body also cautioned that if the war drags on and energy infrastructure in the Middle East is damaged, growth this year could fall to 2%, and inflation could exceed 6% next year.
The IMF also said that “larger fiscal deficits and increasing public debt” could heap pressure on long-term interest rates, tightening wider financial conditions.
“The current hostilities in the Middle East pose immediate policy trade-offs: between fighting inflation and preserving growth and between supporting those affected by the rising cost of living and rebuilding fiscal buffers,” the agency wrote.
El-Erian has been sounding the alarm on the war’s economic repercussions for a while. In an X post on April 13, he wrote that “each day of higher oil prices and interrupted energy supplies blows a stronger stagflationary wind.”
In an April 2 post, he warned the fallout from the war for US households included “surging gas prices and more expensive mortgages,” almost certainly a “broader hit to the cost of living,” and potentially “lower economic growth and a higher risk of unsettling financial instability.”
Another leading economist and Wharton professor, Jeremy Siegel, spelled out why consumers and businesses should brace for steeper prices in his weekly WisdomTree commentary on Monday:
“The key issue now is that higher oil, higher diesel, and higher fertilizer costs are likely to work their way into freight, shipping, airfares, and a broad range of goods prices over the next two to three months.”
