Former IMF Chief Economist: The global economy is "much weaker" than many think and is unable to cope with a prolonged Iran conflict

International Monetary Fund (IMF) former Chief Economist Gita Gopinath warns that the global economy is far more fragile than widely believed, with governments nearly exhausted of fiscal space. If the Iran war drags on and triggers sustained oil price shocks, the global economy will struggle to respond effectively.

According to Bloomberg News, Gopinath said in an interview on Tuesday that oil prices have risen significantly less than two weeks after the Iran conflict erupted, and global economic growth in 2026 will be under pressure as a result.

She expects that this year, the average crude oil price is more likely to hover around $75 per barrel, rather than the previous forecast of $65, a gap sufficient to reduce global growth by 0.1 to 0.2 percentage points and push up global inflation by about 0.5 percentage points.

Gopinath also pointed out that the global policy response space “has been thoroughly exhausted compared to the early days of the pandemic,” compounded by record-high global debt levels, leaving countries with very limited room to maneuver in the face of major crises.

Fiscal Space Is Running Out, G7 Countries Are Not Exempt

Gopinath noted that the lack of fiscal space “was mainly a problem for emerging markets and developing countries” in the past, but now this dilemma has spread to some developed economies. She said that government bond yields in the UK, France, and even Germany are rising, signaling market concerns about further borrowing by these G7 members.

Global debt reached a record $348 trillion last year, growing at the fastest pace since the COVID-19 pandemic began. According to the Institute of International Finance, developing countries face over $900 billion in refinancing needs this year, with risk exposure rising sharply amid volatile global liquidity conditions.

The shrinking of aid funds has further increased vulnerabilities. The Trump administration shut down USAID, and Bloomberg analysis shows that U.S. foreign aid commitments for the fiscal year ending September 2025 have plummeted by more than half from the previous year, from $31.6 billion to $14.7 billion. Meanwhile, the United Nations warned that even with significant cuts, funding could be exhausted by July.

Monetary Policy Shift Hindered, U.S. Dollar’s Status Unshaken

On the monetary policy front, Gopinath stated that the Iran war will lead the Federal Reserve, Bank of England, and European Central Bank to maintain more tightening policies than originally planned. “Even before this shock, the Fed’s recent rate cuts were already hard to justify, and this shock will only further reduce the likelihood of rate cuts,” she said.

Regarding the dollar’s performance amid the Middle East conflict, Gopinath believes the dollar’s behavior “aligns with traditional safe-haven logic” and shows no abnormality. She stated that there are currently no signs of a structural shift in the global financial decision-making landscape that could undermine the dollar’s dominant position.

Gopinath also issued a warning about the narrative of global economic resilience. She said that the resilience shown by the global economy in 2025 in response to tariff shocks should not lead to excessive optimism. “I don’t think people should look at all this and say, ‘Wow, this is a very resilient world economy,’” she said, noting that several factors supporting the global economy—including the artificial intelligence supply chain—could change rapidly. The IMF raised its 2026 global growth forecast slightly to 3.3% in January, and the latest World Economic Outlook is expected to be released next month.

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