IMF Chief Warns US-Iran War Energy Shock is Contained Yet Persistently Pressuring Global Markets

The head of the International Monetary Fund has stated that the energy price shock driven by the US-Iran war has so far been “large but contained”, while also warning that energy demand could generate further pressure. Managing director Kristalina Georgieva noted in prepared remarks in Singapore ahead of the IMF and World Bank annual meetings that even if the conflict in the Gulf were to end soon, high energy prices would likely persist for some time.

This year's gathering, held in Bangkok, takes place as supply disruptions from the war in the Middle East compound inflationary pressures, potentially pushing interest rates higher for advanced economies. The Federal Reserve and European Central Bank have already initiated rate increases, with the Bank of England expected to follow suit next month. The World Bank has projected that the Middle East economy will contract 2.1% in 2026 due to the Iran war.

Elevated energy prices and rising debt levels have propelled global borrowing costs to their highest levels in decades. The yield on the 10-year US Treasury traded at 5.307 per cent recently on Monday, marking its highest level since 2002, with similar pressures spreading to markets in Japan, France, Germany, and the UK.

Meanwhile, oil producers in the Middle East are working to establish alternative export routes. The UAE is fast-tracking construction of its West-East Pipeline to double export capacity through Fujairah by 2027, while Saudi Arabia has rerouted crude through the East-West Pipeline. Ship-tracking firm Kpler reported that the seven-day moving average for crude exports from the Gulf reached 18.3 million barrels per day on September 30.

Ms Georgieva commended the Gulf Co-operation Council's efforts to reroute energy supplies for averting a larger global economic shock. However, the World Bank released a separate report stating that GCC economies will contract by an average of 4.3 per cent this year. Additionally, ongoing supply disruptions in liquefied natural gas will severely impact buyers in Europe and Asia as winter approaches and reserves dwindle.

Addressing the positive economic forces, the IMF chief urged governments to unlock the productive gains of artificial intelligence. Describing the global economy as being pulled in two directions, she noted that the positive demand shock from AI is partially offsetting the fallout from the US-Iran conflict. She highlighted that AI is rapidly becoming a key driver of relative fortunes in the world economy.

In the US, AI investments in data centres, infrastructure, and chips are projected by Brookings analysts to reach $10.3 trillion between 2025 and 2032. While the S&P 500 reached a record-high of 7,800 driven by AI enthusiasm, Ms Georgieva cautioned countries to adopt regulation and supervision to prevent shocks if earnings fall short. US President Donald Trump has maintained a light regulatory touch to ensure leadership in the global AI race against China.

Gulf nations are also pursuing large-scale AI adoption, with the UAE targeting AI to contribute 20 per cent of its non-oil GDP by 2031. Ms Georgieva concluded that while AI could add up to half a percentage point of additional world growth annually, it risks widening economic inequality across the globe by bypassing most developing economies.