The new conflict in the Middle East is once again putting pressure on the global economy. Several oil and gas facilities in the region have been affected and maritime traffic through the Strait of Hormuz — one of the world's most important energy routes — has fallen by about 90 percent, International Monetary Fund chief Kristalina Georgieva warned in a speech at an economic event in Japan.
Every 10% increase in oil prices leads to a 40 basis point increase in global inflation and a 0.1-0.2% drop in output, according to the IMF chief.
For many economies, especially in Asia, energy security has again become a major concern.
“If this conflict drags on, the impact on markets, economic growth and inflation may become significant,” Georgieva warned.
The data shows how important this energy corridor is: about 20% of global oil and liquefied natural gas trade passes through the Strait of Hormuz.
Asia is particularly dependent on this flow: almost half of its oil imports and a quarter of its LNG imports come from this route.
For Japan, the dependence is even greater: almost 60% of oil imports and 11% of liquefied natural gas imports are linked to transportation through the Strait of Hormuz.
In parallel, energy prices have risen sharply. Oil is almost 50% more expensive than in December, and Europe and Asia are experiencing rapid increases in gas prices.
What does this mean for the economy?
According to IMF estimates, a 10% increase in oil prices — if sustained over the course of the year — leads, on average, to:
an increase of 0.4 percentage points in global inflation
a 0.1–0.2% decline in global economic output
The IMF is currently analyzing the impact of the conflict on the world economy, and a detailed assessment will be published in the next World Economic Outlook report.
Even if the current conflict will end quickly, the head of the IMF warns that the world needs to get used to the idea of frequent shocks.
“If this conflict ends soon — as we all hope — another shock will probably appear shortly,” Georgieva said.
Her message to governments is simple: “Think the unimaginable and prepare for it.”
Three rules for governments
In an increasingly unstable world, Georgieva says governments should focus on three things they can control.
- Sound economic institutions and policies
States must build strong institutions and clear economic rules—from independent central banks to credible fiscal frameworks.
They help economies manage shocks and capitalize on opportunities.
Two of the most powerful forces that will reshape the economy are artificial intelligence and demographic change, says the head of the IMF.
Artificial intelligence may increase productivity, but it will also change the labor market, eliminating some jobs and creating others.
At the same time, the world is becoming more demographically unequal: some societies are aging rapidly, while others have growing young populations.
2. Financial reserves for hard times
The second essential element is the existence of financial “buffers”. For firms, they allow shocks to be absorbed without large price increases.
For governments, they provide room for countercyclical policies when the economy slows.
For this reason, the IMF recommends that countries strengthen their public finances in good times, in order to have room for intervention in difficult times.
- Adaptability
Finally, in an uncertain world, adaptability becomes essential.
Companies are quickly adapting to geopolitical and trade changes, reorganizing supply chains and trade flows.
Governments must be just as agile, says Georgieva.
An example is regional economic integration. In the European Union, about 60% of trade takes place between member states, while in ASEAN the proportion is only 20%.
According to the IMF, deeper trade integration in Asia could increase the region's GDP by nearly 1.8 percent over the long term.
