How Much Will the Iran Conflict Hurt the Global Economy?

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**Ravi Agrawal** (0:31)
Hi, I'm Ravi Agrawal, Foreign Policy's Editor-in-Chief. This is FP Live.
So the closure of the Strait of Hormuz is like a ticking time bomb for the global economy. Regular FP listeners know why. It is a serious disruption to the flow of a fifth of the world's oil and natural gas. It is hitting key inputs for low-tech goods like fertilizer and clothing, but also very high-tech ones like semiconductors. We know intuitively that the longer the standoff with Iran continues, the worse it gets for the global economy. Well, now there's some data to prove the point. The International Monetary Fund has cut its forecast for global growth this year from 3.4% to 3.1%.
But those projections came out 2 weeks ago and were based on the conflict resolving quickly, a very optimistic scenario that has, of course, not yet come to pass. So here's the pessimistic scenario. If the flow of crude oil and natural gas is not restored until next year, the IMF expects growth to fall to 2%, a rare occurrence in recent decades. Inflation would rise to 6% and that, of course, is a major mismatch, a recipe for trouble. Apart from the countries directly involved in the conflict, energy importers and low-income countries will face the brunt of the pain.
So how bad can things get? And what can countries do to protect themselves? My guest this week is Gita Gopinath, an economics professor at Harvard University, who was formerly the chief economist and the first deputy managing director of the IMF. Also, we have one of our regular Ask Me Anything sessions next week live on the website. I would love to take your questions to write us at liveatforeignpolicy.com or head to our website to leave a question and register for the live discussion on video. Let's dive in.
Gita, welcome to FP Live.

**Gita Gopinath** (2:42)
Hi Ravi. Pleasure to join you.

**Ravi Agrawal** (2:45)
Let's just start with this. The IMF projections I mentioned at the start were from a couple of weeks ago. The Strait of Hormuz is still essentially shut down. There's no real sign of when it properly opens up.
What is your sense now of how bad all of this could get for global growth?

**Gita Gopinath** (3:05)
Ravi, what the IMF did very helpfully is provide scenarios because precisely, this very high level of uncertainty around how this conflict is going to evolve, they had this reference scenario, which is what you laid out where growth drops to about 3.1 percent, which is about a 0.3 percentage point drop, not that much. You do have inflation going up some more, like about 60 to 80 basis points for the world.
The problem, of course, is that that's the best-case scenario. It was in the assumption that this conflict would end relatively quickly, which was one of the reasonable assumptions one could make. Now, if this continues, then the fact that we are still here with no ships going through the Strait of Hormuz, regardless of the fact that there's no bomb is necessarily falling, but the fact that shipping has basically come to a standstill through that strait, has much more durable implications than what would be there in the reference scenario. And so the IMF provided what they called an adverse scenario, which is when we are looking at oil averaging about $100 a barrel for this year, as opposed to the assumption in the reference scenario, which is more like $82 a barrel. So if there's about $100 a barrel, and you have some more tightening of financial conditions, then we are looking at a global economy that's going to grow at only 2.5%.
Now, it's not common for the world economy to slow that much. And if it gets even worse, and we are looking at oil averaging $110 a barrel this year, and this is a much more disrupted situation with bigger hits to energy infrastructure, which means next year too, oil is going to stay very high and financial conditions get a whole lot worse. Then we're looking at the world economy growing at 2%, which again, those are extremely rare occurrences. So the risk seems squarely to the downside at this current point. It's of course affecting different countries differentially. The ones that are most hard hit, of course the countries right in the conflict, the Middle East, including countries like Saudi Arabia, which had one of the larger downgrades among the major economies. But the UAE, Qatar, all of these countries are also being backed in addition to of course Iran.