Rising oil prices triggered by the ongoing conflict involving Iran are adding new pressure on an already fragile global economy, according to former International Monetary Fund (IMF) deputy managing director and chief economist Gita Gopinath.
In an interview with Bloomberg News, Gopinath warned that governments around the world may lack the fiscal capacity to respond effectively if the geopolitical conflict evolves into a broader economic shock. Higher energy prices, she said, are already expected to weigh on global growth in 2026 while adding to inflationary pressures.
Her comments come as energy markets react sharply to escalating tensions in West Asia. Crude oil prices have surged in recent days amid fears that supply routes and production facilities in West Asia could face prolonged disruption.
Oil Prices Rise As War Disrupts Energy Flows
Global oil markets have become increasingly volatile as the conflict involving the United States, Israel and Iran intensifies. Energy prices have surged as traders assess the risk that shipments from the region could be interrupted.
West Asia remains central to the global energy system, with a significant share of the world’s crude supply passing through the Strait of Hormuz. Any disruption to shipping through the narrow maritime corridor can quickly tighten global supply and push prices higher.
Recent market movements have reflected these fears. Oil prices have climbed sharply, driven by concerns about damaged infrastructure, disrupted logistics and heightened risk to maritime trade routes.
Against this backdrop, Gopinath told Bloomberg News that crude prices now appear likely to average around $75 per barrel in 2026, compared with earlier expectations of about $65 per barrel.
That difference of roughly 15 per cent could have meaningful implications for the global economy.
Growth Risks And Rising Inflation
According to Gopinath, the increase in oil prices could shave 0.1 to 0.2 percentage points off global economic growth in 2026.
At the same time, the oil shock could add around 0.5 percentage point to global inflation, creating additional challenges for policymakers already grappling with elevated price pressures.
The warning comes at a time when the global economy is already experiencing a slowdown.
The IMF in January revised its global growth forecast slightly higher to 3.3 per cent, up from 3.1 per cent projected earlier, but the outlook remains modest by historical standards. An updated version of the IMF’s World Economic Outlook is scheduled to be released next month.
Gopinath, now an economics professor at Harvard University, cautioned against assuming that the world economy can easily absorb another major shock.
“I don’t think people should look at everything and say ‘Wow, this is like a phenomenally resilient world economy,’” she said in the interview.
She noted that several forces currently supporting global growth, including the rapid expansion of artificial intelligence-related industries, could shift quickly if conditions deteriorate.
Limited Fiscal Room For Governments
One of the most significant risks highlighted by Gopinath is the limited fiscal capacity governments now have to respond to crises.
“The world does not have the capacity” to deal with a major shock in the same way it did during previous crises, she said.
“It has absolutely depleted policy space, compared to the start of the pandemic,” she added.
Public debt levels have risen sharply since the COVID-19 crisis as governments increased borrowing to support economies through the pandemic.
According to a report from the Institute of International Finance (IIF), global debt reached a record $348 trillion last year, marking the fastest annual increase since the pandemic period.
Developing countries alone face more than $9 trillion in refinancing needs this year, highlighting the growing strain on global financial systems as borrowing costs fluctuate.
Emerging Markets Face New Stress Test
Gopinath also said that emerging markets may face renewed pressure if the conflict leads to prolonged economic instability.
Historically, limited fiscal capacity has been a major challenge for developing economies during global crises. These countries often struggle to increase borrowing during shocks because investors become cautious about sovereign debt risks.
But rising government bond yields are now signalling investor concern even in some advanced economies.
According to Gopinath, markets have begun showing wariness about increased borrowing by several Group of Seven (G7) nations, including the United Kingdom, France and Germany.
For emerging markets, the Iran conflict could act as a stress test for economic recovery.
She noted that capital flows into emerging economies are continuing for now, though the geopolitical shock could reduce investment, particularly in equity markets.
“There is still some resilience,” she said.
However, she also warned that global support systems for developing economies are weakening.
Shrinking Global Aid And Financial Support
Gopinath pointed to declining international aid flows as another factor that could complicate the response to future economic shocks.
The Trump administration’s shutdown of the US Agency for International Development (USAID) has significantly reduced American foreign assistance commitments.
According to a Bloomberg analysis, US foreign aid commitments fell to $14.7 billion in the fiscal year ending September 2025, down from $31.6 billion in the same period a year earlier.
At the same time, the United Nations, another key source of financial support and grants for developing countries, has warned that it could run out of funds by July, while introducing spending cuts due to overdue payments from the United States.
These developments could make it harder for vulnerable economies to cope with global shocks.
Monetary Policy Could Stay Tight
Higher oil prices could also influence monetary policy decisions across major central banks.
Gopinath said the Iran war could result in tighter monetary policies in the United States, the United Kingdom and the euro area than would otherwise have been expected.
The inflationary impact of higher energy prices makes it more difficult for central banks to cut interest rates.
“Even before the shock, it was a hard argument to make for the Fed to cut interest rates anytime soon,” she said. “And the shock just moves it in the direction of making it less likely.”
Dollar Strength Remains Intact
Despite geopolitical tensions, the role of the US dollar in global financial markets remains largely unchanged.
Gopinath said the currency’s behaviour during the conflict has followed traditional patterns seen during periods of global uncertainty.
“None of that financial decision making has shifted in any way that’s causing anybody to question the dollar dominance,” she said.
