WASHINGTON – A prolonged conflict in the Middle East could force central banks worldwide to implement severe economic measures that would be more painful than actions taken during the post-pandemic recovery, according to the International Monetary Fund’s top economist.
Pierre-Olivier Gourinchas, the IMF’s chief economist, warned Tuesday that controlling inflation sparked by an extended war could require much harsher monetary policies than those used to address price increases following COVID-19.
However, Gourinchas noted that today’s global economy differs significantly from the 1970s oil crisis era. Oil represents a smaller portion of economic output now, and central banks have developed better tools for managing inflation expectations over the past five decades.
The economist explained that when Russia attacked Ukraine in 2022, sending oil costs beyond $100 per barrel, modest interest rate increases effectively cooled an already overheated post-pandemic economy.
Today’s economic landscape presents different challenges, with more slack in the system, including softer job markets and abundant supplies of most goods and services. This could necessitate more aggressive monetary tightening, especially if inflation expectations spiral out of control, Gourinchas explained.
“Stepping on the brakes will be painful” in such circumstances, Gourinchas stated during the opening of the IMF and World Bank spring meetings in Washington.
“You may have to inflict a lot more pain to get the same disinflation result,” he added.
The uncertainty surrounding how the conflict might evolve makes it difficult to predict exactly how forcefully central banks may need to respond to rising oil, gas, and commodity prices.
On Tuesday, the IMF reduced its 2026 global growth projection to 3.1%, a decrease of 0.2 percentage points from January’s forecast. This projection assumes a brief conflict with oil averaging $82 per barrel annually. However, Gourinchas indicated at a press conference that global conditions are already moving toward the organization’s “adverse scenario” – a longer conflict with oil prices averaging $100 this year and growth declining to 2.5%.
The IMF’s most dire projection, termed the “severe scenario,” forecasts an extended conflict with oil prices reaching $110 in 2026 and $125 in 2027. Under these conditions, growth would fall to 2.0% this year, approaching what the IMF considers the threshold for global recession.
Gourinchas emphasized that the primary worry in such circumstances would be inflation expectations becoming unmoored. He noted that 2022’s inflation surge has made consumers extremely sensitive to price changes.
In this environment, businesses would increase prices more quickly, and employees would demand higher wages more aggressively, he explained.
“Once we get into that world, people are going to look at this and say, inflation is here and it’s here to stay,” Gourinchas said.
He identified both similarities and differences between current conditions and the 1970s oil crises. The current oil supply shortage, measured by volume and averaged over 2026, matches the size relative to global consumption seen in the 1970s.
“Now the good news is between 1974 and now, the global economy has become much less oil intensive, or fossil fuel intensive more generally. So we produce a lot more GDP per barrel of oil,” he explained. “And so the impact on the economy from a shock the same size could be smaller.”
Gourinchas noted that central banks in the 1970s prioritized supporting economic activity over controlling inflation. Since that era’s oil crisis and the severe early 1980s recession used to combat inflation, central banks have gained greater independence from governments and established inflation-targeting frameworks.
“We don’t necessarily think that they need to raise interest rates right away, but if they see signs that inflation is taking hold, that if they see signs that the wage-price spirals, if they see signs that households and businesses start expecting a more permanent and persistent inflation, then they will need to take action,” Gourinchas concluded.
