The International Monetary Fund (IMF) says the war in the Middle East threatens to throw the global economy off course. It is pegging that global economic growth will be 3.1% in 2026, down on its earlier estimates.

And for South Africa, it sees growth coming in at a mere 1.0% much lower than National Treasury’s estimate of 1.6%.

It says higher oil prices will elevate inflation in the short-term, but says central banks will need to keep a close eye on the inflation trajectory and, if necessary, intervene with higher interest rates, which global markets are already pricing into their assumptions for this year.

When National Treasury delivered the 2026 National Budget on 25 February, the idea that a major conflict would break out in the Middle East that would cause a major energy crisis was far from mind, with the outlook for economic growth and inflation positive.

But the IMF says with the closure of the Strait of Hormuz and now the US’s blockade of Iran’s blockade, the global economy is likely to be in for a rough ride this year.

“Higher commodities, negative supply shocks, raising prices and costs disrupting supply chains and eroding purchasing power. Secondly, these effects may be amplified as firms and workers try to recoup losses, rising wage price spirals, especially where inflation expectations are poorly anchored. Thirdly, financial conditions with lower asset valuations, higher risk premium, capital flight, dollar appreciation, dampening demand,” says IMF Chief Economist Pierre-Olivier Gourinchas.

VIDEO | Discussion on US blockade of Iran’s ports:

Due to the uncertainty that prevails because of the geopolitical environment, the IMF has considered three possible scenarios for the global economy.

“Our reference forecast assumes a short-lived conflict and a moderate 19% rise in energy prices…while inflation exceeds 6%,” says Gourinchas

He says given recent developments in the Middle East, downside risks appear to be very elevated but noted that the situation is extremely fluid.

In the meantime, the IMF says while governments need to be sensitive to the inevitable increase in the cost of living, they must ensure that any support given to their citizens falls within their fiscal abilities so as to ensure that already high debt levels are not worsened.