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

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Gita Gopinath, former Chief Economist of the International Monetary Fund (IMF), warns that the global economy is much more fragile than widely believed. Governments have almost exhausted their fiscal space, and if a prolonged war involving Iran leads to sustained oil price shocks, the global economy will struggle to respond effectively.

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

She expects that this year, the average price of crude oil is more likely to be around $75 per barrel rather than the previously forecasted $65 baseline. This difference is enough to cause global growth rates to drop by 0.1 to 0.2 percentage points and push up global inflation by about 0.5 percentage points.

Gopinath also pointed out that global policy response space "has been completely exhausted compared to the early days of the pandemic," with the record-high global debt further limiting countries' room to maneuver when faced with major crises.

Fiscal space is tight, and even the G7 cannot remain unaffected

Gopinath noted that insufficient fiscal space "used to be mainly a problem for emerging markets and developing countries," but now this predicament has spread to some developed economies. She said, the government bond yields of the UK, France, and even Germany have risen, and markets are sending warning signals about further debt issuance by these G7 member countries.

Global debt surged to a record $348 trillion last year, the fastest increase since the pandemic. According to an International Financial Association report, developing countries face more than $9 trillion in refinancing needs this year. With increased volatility in global liquidity conditions, risk exposure has risen significantly.

The shrinkage of aid funds has further increased vulnerabilities. The Trump administration closed the US Agency for International Development (USAID). According to Bloomberg analysis, in the fiscal year ending September 2025, US foreign aid commitments have dropped more than half compared to the same period last year, from $31.6 billion to $14.7 billion. Meanwhile, the United Nations warns that even after major cuts, its funds could be depleted by July.

Obstacles for monetary policy shifts, the dollar’s status remains unshaken

On the monetary policy front, Gopinath said the Iran war will prompt the Federal Reserve, the Bank of England, and the European Central Bank to maintain even tighter policy stances than originally planned. "Even before this shock, the case for the Fed to cut rates in the near term was already weak, and this shock will make rate cuts even less likely," she said.

Regarding the dollar’s performance amid Middle East conflicts, Gopinath said the dollar is behaving "in line with traditional safe-haven logic," with no abnormalities. She said there are currently no signs of structural changes among global financial policymakers that would shake the dollar’s dominant status.

Gopinath also cautioned against overly optimistic narratives about global economic resilience. She said the resilience shown by the global economy in 2025 in response to tariff shocks should not be cause for excessive optimism. "I don’t think people should look at all this and say, ‘Wow, this is a very resilient global economy,’" she said, pointing out that several factors supporting the global economy—including the artificial intelligence industry chain—could change rapidly. In January, the IMF raised its 2026 global growth forecast slightly to 3.3%. The latest World Economic Outlook is expected to be released next month.

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