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How long can we manage to combine a resilient economy with chaotic politics? Can the answer really be ‘forever’? If not, will it end with the triumph of resilience over chaos, or vice versa? These are the questions raised by today’s combination of a robust economy with politics that might be considered farcical were it not so serious.
Early last week, Donald Trump warned Iran that if the Strait of Hormuz was not reopened, “the entire country could be taken out in one night, and that night could be tomorrow night.” Two days later we were told that the US and Iran had agreed to a two-week ceasefire that would open the Strait. When the ceasefire turned out not to be a ceasefire and the Strait remained closed, US Vice President JD Vance went to Islamabad to negotiate a peace agreement. That failed. Trump then wrote on Truth Social that “the U.S. Navy will immediately begin blocking all ships attempting to enter or exit the Strait of Hormuz.” The US then explained that the blockade would cover “the entire Iranian coastline”, including ports and oil terminals, and would apply to all ships “regardless of flag”.
What can we make of this? One point is that confusion is a feature, not a bug, in the Trumpian playbook. Yet unpredictability has consequences. The latest from the IMF World economic prospects begins with a discussion of uncertainty. The current war in the Middle East is a major source of such uncertainty. The ups and downs of US trade policy under Trump are another, not to mention the war in Ukraine and the fractures in the Western alliance. Not surprisingly, several measures of political and economic uncertainty have increased. (See charts.)
Against this backdrop, the IMF has taken a new approach to its forecasts in recent years. Instead of the traditional ‘baseline’, it presents a ‘reference forecast’ based on the assumption that the disruptions caused by the war with Iran will disappear by mid-2026. But it also adds ‘adverse’ and ‘severe’ scenarios. In the first case, a longer conflict would keep energy prices high for longer. In the latter case, the damage to the region’s energy infrastructure would be even greater.
The benchmark forecast projects global growth to reach 3.1 percent in 2026 and 3.2 percent in 2027 – below 3.4 percent in 2024-25, stabilizing at the lower level over the medium term. This would be well below the average of 3.7 percent in the period 2000-2019. This latest forecast for global growth in 2026 is only 0.2 percentage points below the published forecast in January 2026. But, the WEO notes, without the war, growth would have been adjusted upwards this year. Moreover, inflation is expected to reach 4.4 percent this year.
However, in the Fund’s adverse scenario, global growth would slow to 2.5 percent in 2026 and inflation would reach 5.4 percent. In the even more severe scenario, global growth would be reduced to around 2 percent this year, while inflation would reach 5.8 percent. The economic impact of the war thus depends on what happens next: a cessation of hostilities and reopening of the Strait of Hormuz in the near future, at the benign end, or a protracted and destructive conflict, at best.
The costs of war are also unevenly distributed; the burden is heavier in the conflict zone, for commodity importers and countries with pre-existing vulnerabilities. Needless to say, none of this seems to worry those who started it.
If we look at an even broader picture, we can identify more worrying and also more uplifting possibilities. Regarding the former, as the Fund notes, “downside risks dominate”. We are, as Mark Carney has pointed outin an era of ‘rupture’. The forces at work do not seem so different from those of the 1914-1945 period, with enormous shifts in relative power and ideological and technological upheavals. Even today we see many risks: geopolitical tensions; shocks in the supply of essential raw materials; trade disruptions; disappointment with the profitability of – and therefore a collapse in investment in – AI; long-term budget deficits and ever-increasing accumulations of government debt; and damage to key institutions, especially central banks, and a resulting destabilization of inflation expectations. What needs to be added to that list – albeit not by the IMF – is the collapse of the US as a benign hegemon: the language And postures of those promoting this war are the coup.
Yet there are also positive sides. As the IMF rightly emphasizes: “Before the war, the world economy performed better than expected.” In particular, growth in technology exports, boosted by the AI boom, helped offset the negative impact of Trump’s tariffs. The impact of the latter was also offset by the rapid reorientation of global trade in response to the US-China trade war. Moreover, US protectionism has not yet spread globally.
More recently, Viktor Orbán’s electoral defeat in Hungary suggests that his political style – the marriage of corruption with culture wars – adopted by Trump and promoted by Putin can be defeated, provided the elections are reasonably free, not least because this does not work. Moreover, just as the world does not want to follow Trump’s protectionism, it also does not want to follow (yet) his newfound belligerence. There is still a demand for cooperation and peaceful relations. Humanity has not yet completely given up everything it has learned to the follies of aggressive nationalism or so-called holy wars.
The IMF describes a world far removed from the one its creators hoped for in 1944. But the WEO shows that such a world has not yet died. What is at stake is not just peace and prosperity, but a concept of civilization. Putin and Trump have no idea about that. However, some still forget.
