Yesterday, the International Monetary Fund happily reported that the world had weathered the recently settled Iran war surprisingly well. That same day, President Trump declared the cease-fire “over” and promised, “We’re going to hit them hard again tonight.” The United States resumed bombing Iran. For months, businesses and consumers all around the world have been trying to deal with a bizarre situation in which Trump’s war is both happening and not happening at once.
In quantum mechanics, alternate states of the world can be said to exist together in superposition—Schrödinger’s famous cat is both alive and dead at the same time. Contemporary geopolitics has a similar weirdness. The Strait of Hormuz has been declared simultaneously open and closed. Cease-fires coexist with intermittent bombings. America has decisively won the war, the Trump administration has insisted many times; all the while, it has been negotiating a diplomatic settlement that Iran both does and does not seem to want.
Many countries have been muddling along anyway. Unlike in its pessimistic April report, which had warned of a potential global recession, the IMF was sanguine yesterday in declaring that “the global economy as a whole has, so far, weathered the shock from the war better than feared.” Global GDP growth is now forecast to be 3 percent—less than the 3.3 percent forecast before the war actually began, but not much worse than the IMF’s April projection. Global inflation should be 4.7 percent, mostly because of the war-induced increases in oil and natural-gas prices. Even economies in Europe and Asia that were dependent on imported energy from the Middle East performed surprisingly well, for two reasons: Energy importers tapped their oil and gas reserves, preventing shortages, and the artificial-intelligence boom has kept equipment exporters such as China and South Korea growing much faster than expected.
Strikingly, the United States, a net exporter of energy, has inflicted war-related costs on the rest of the world without harming its growth trajectory at all. It is one of the few advanced economies that the IMF expects to grow faster in 2026 than it did in 2025. American consumers have grumbled about higher gas prices, but the S&P 500 is up almost 9 percent since the joint American-Israeli operation that started the war in February. Perhaps that is why, after delivering one stress test to the rest of the world, Trump is willing to deliver another by resuming hostilities. But a few more months of war-not-war could have more dire effects. The natural-gas reserves that Europe typically builds up in anticipation of winter are now very low. Reserves acted to dampen price pressure at the start of the war; now the impetus to refill them as the cold months approach could act to accelerate price pressure.
A protracted conflict could produce a disjunction, in which the global economy is both harmed and unharmed at the same time. The IMF’s headline growth projection yesterday, 3 percent, is not terrible. Yet the projection is a blend of two opposing states. Most countries will actually experience only one or the other. Economies involved in the AI boom will shrug off the effects of the war as equipment sales, rising stock indexes, and perhaps even growing worker productivity promote confidence among businesses and consumers. But for poorer economies uninvolved in technology supply chains and dependent on imported energy, the harms of war will be impossible to overlook. These economies will likely suffer shortages in the case of further oil and gas scarcity as reserves run out and they are outbid on the remaining supply. Food supplies could even be endangered. The Strait of Hormuz is a key conduit for materials needed for agricultural fertilizer—the cost of which has already surged. If these prices become even steeper, the IMF warns, South Asia and sub-Saharan Africa could experience serious food shortages.
Complicating matters further, war tends to increase inflation (as is currently happening) and increase debt, which pushes central banks of big economies to raise rates to stave off overheating, slowing down overall growth in those countries. The Federal Reserve has held rates steady this year instead of cutting; it may increase rates later in the year if the inflation risk seems large enough. These rate moves also draw investment to rich countries and away from emerging-market economies such as Egypt and Pakistan.
The grim reality may come to pass, because the memorandum of understanding that Iran and the United States signed last month appears to have unraveled. American sanctions on Iranian oil, temporarily lifted, have now snapped back into place. “Reescalation of geopolitical tensions would hurt growth and compound inflationary pressures,” the IMF warned, including new trade tensions and heightened risk of “social unrest and domestic political instability.” Then again, things can both be and not be. Shortly after America began its promised bombing run yesterday, Trump told reporters that the Iranians were begging for mercy. “They called a little while ago. They want to make a deal so badly,” he said. “I just don’t know if they’re worthy of making a deal.”
Source: Original Article
