The global economy is both alive and dead

Yesterday, the International Monetary Fund happily announced that the world had weathered the recently settled war in Iran surprisingly well. The same day, President Trump declared the ceasefire “over” and promised, “We’re going to hit them hard again tonight.” The United States has resumed its bombing of Iran. For months, businesses and consumers around the world have been trying to cope with a bizarre situation in which Trump’s war is both happening and not happening at the same time.

In quantum mechanics, we can say that alternative states of the world exist together in superposition: Schrödinger’s famous cat is both alive and dead. Contemporary geopolitics presents a similar oddity. The Strait of Hormuz was simultaneously declared open and closed. Ceasefires coexist with intermittent bombings. America won the war decisively, the Trump administration has repeatedly insisted; All the while, he negotiates a diplomatic settlement that Iran wants and doesn’t seem to want.

Tom Nichols: Iran, not Trump, controls this war

In any case, many countries are muddled through confusion. Contrary to its pessimistic April report, which warned of a potential global recession, the IMF was optimistic yesterday, declaring that “the world economy as a whole has, so far, weathered the shock of war better than feared.” Global GDP growth is now estimated at 3%, lower than the 3.3% forecast before the war began, but not much worse than the IMF’s April projection. Global inflation is expected to be 4.7 percent, mainly due to war-induced increases in oil and natural gas prices. Even economies in Europe and Asia that relied on imported energy from the Middle East performed surprisingly well, for two reasons: energy importers tapped into their oil and gas reserves, avoiding shortages, and the artificial intelligence boom allowed equipment exporters like China and South Korea to grow much faster than expected.

Strikingly, the United States, a net energy exporter, 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 in 2025. U.S. consumers are complaining about rising gas prices, but the S&P 500 index is up nearly 9% since the joint U.S.-Israeli operation that sparked the war in February. This is perhaps the reason why, after having imposed a stress test on the rest of the world, Trump is ready to carry out another by resuming hostilities. But a few more months of war, no war, could have even more disastrous effects. The natural gas reserves that Europe usually builds up in preparation for winter are now very low. The reserves served to ease price pressure at the start of the war; now the incentive to restock them as the cold months approach could have the effect of accelerating price pressure.

Prolonged conflict could produce a disjuncture in which the global economy is both injured and unharmed. Yesterday’s IMF global growth forecast of 3 percent is not great. However, the projection is a mixture of two opposite states. Most countries will actually only experience one or the other. Economies involved in the AI ​​boom will shrug off the effects of war, as equipment sales, rising stock indexes, and perhaps even increased worker productivity will boost business and consumer confidence. But for poorer economies, not involved in technological supply chains and dependent on imported energy, the harms of war will be impossible to ignore. These economies will likely suffer shortages in the event of increased oil and gas shortages, as reserves are depleted and they are outbid for remaining supply. Food supplies could even be threatened. The Strait of Hormuz is a key channel for transporting materials needed to make agricultural fertilizers, the cost of which has already soared. If these prices become even higher, the IMF warns, South Asia and sub-Saharan Africa could experience serious food shortages.

Read: “We could sleepwalk back to war”

To further complicate matters, war tends to increase inflation (as it is now) and increase debt, which causes central banks in major economies to raise rates to avoid overheating, thereby slowing overall growth in those countries. The Federal Reserve has kept rates unchanged this year instead of cutting them; it could raise rates later in the year if the risk of inflation appears significant enough. These rate changes also attract investment to rich countries and away from emerging market economies like Egypt and Pakistan.

The grim reality may be coming true, as the memorandum of understanding that Iran and the United States signed last month appears to have collapsed. US sanctions on Iranian oil, temporarily lifted, are now reinstated. “A re-escalation of geopolitical tensions would harm growth and worsen inflationary pressures,” warns the IMF, including new trade tensions and an increased risk of “social unrest and domestic political instability.” Again, things can be and not be. Shortly after America began its promised bombing campaign yesterday, Trump told reporters that the Iranians were begging for mercy. “They called a little while ago. They want to make a deal so bad,” he said. “I just don’t know if they’re worth making a deal for.”

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