The International Monetary Fund (IMF) has warned the global economy could slip into its third recession this century if energy supply disruptions worsen, particularly through a sustained closure of the Strait of Hormuz.
In its latest outlook, the IMF said a sharp rise in oil prices linked to Middle East conflict could cut global growth by 1.3 percentage points to around 2 per cent, widely seen as recession level, while fuelling inflation and volatility.
“Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated,” the report stated.
Australian Treasurer Jim Chalmers said the warning would shape preparations for the May budget, calling it “a dangerous moment for the global economy,” with expectations of “slower growth, higher inflation, and extreme volatility”.
The IMF cautioned governments against broad cost-of-living relief, warning such measures could complicate efforts by central banks to combat inflation.
It described untargeted policies as “poorly designed and costly,” adding: “Avoiding fiscal stimulus is also critical when inflation is rising, so as not to complicate central banks’ task.”
Reserve Bank of Australia deputy governor Andrew Hauser said the oil shock would hit household incomes, describing the situation as “the central banker’s nightmare … inflation up, activity down”.
Oil prices have hovered near $US100 a barrel, well above pre-war levels, with worst-case projections reaching $US110–$US125 across 2026–27.
Economists warn this could push Australia toward stagflation, with inflation forecast to rise into the 5–6 per cent range, exceeding the central bank’s 2–3 per cent target.
The IMF stressed that price pressures should not be artificially suppressed, stating: “Preserving price signals is important… Price controls … cannot change that fact,” and warning such interventions can “backfire by raising underlying prices, leading to rationing.”
Confidence indicators are already weakening, with consumer sentiment posting its sharpest monthly fall since the pandemic and business confidence recording one of its largest declines.
The Reserve Bank has indicated further rate rises remain possible if inflation risks persist, as policymakers weigh slowing growth against ongoing price pressures.
Source: AFR.
