The International Monetary Fund (IMF) and the World Bank have traditionally been seen as advocates of free trade, capitalism, and financial market wisdom. However, a contrarian view emerged during their spring meetings: investors are underestimating the economic damage resulting from the Iran conflict. Throughout various public forums, private dinners, and side events held in Washington this week, a consensus developed among participants that even if the U.S. and Iran quickly reach a lasting peace agreement, the conflict's impact on the global economy could worsen significantly before it improves.

Government officials and other attendees noted during the opening sessions that the world is experiencing far from an ordinary shock. They warned that what may truly take root are structural changes involving rising costs, extended trade routes, and heightened geopolitical uncertainty, which would slow global growth potential. Qatar's Finance Minister, Ali bin Ahmed Al Kuwari, stated bluntly at an IMF meeting on Wednesday, "We are only seeing the tip of the iceberg." He made these remarks as U.S. stock markets approached record highs while oil prices remained below $100 per barrel.

Al Kuwari, whose economy has been severely impacted by disruptions to liquefied natural gas exports, predicted that within the next one to two months, the current energy price shock could evolve into energy shortages in some countries—so severe they "cannot even light up the nation." He further warned that a food crisis triggered by fertilizer shortages would follow and emphasized that Qatar supplies nearly one-third of the world's helium, a necessity for semiconductor manufacturing, stating, "This war will have a huge economic impact; a crisis is coming."

U.S. administration officials have called for calm and restraint, urging major central banks in particular to adopt a wait-and-see approach and hold off on raising interest rates to combat inflation pressures. The U.S. view is that short-term pain is worth enduring as it could ultimately end the nuclear threat from Iran in the long run.

U.S. Treasury Secretary Scott Bessent attempted to characterize the conflict and the subsequent spike in prices as temporary, anticipating that energy costs would decline rapidly once hostilities cease. "This war will end—whether in three days, three weeks, or three months—it will end," he said, adding that "markets are looking to the future." However, this optimism found little broad acceptance at the IMF and World Bank meetings held just blocks away from the White House.

Bloomberg Economics noted, "The U.S. seeks to disengage from Iran's influence, and markets are betting it will succeed, but it must overcome hurdles such as control of the Strait of Hormuz, Iran's nuclear program, and conflict with Hezbollah in Lebanon." IMF Chief Economist Pierre-Olivier Gourinchas downgraded growth forecasts on Tuesday, predicting the slowest global expansion since the pandemic began, and indicated that further downgrades are likely. He stated that new U.S. blockades of the Strait of Hormuz and other developments mean the institution's "adverse" scenario—where global growth falls to 2.5% from a pre-war forecast of 3.3%—is increasingly probable. "With each passing day, with each additional day of energy supply disruption, we move one step closer to the adverse scenario," Gourinchas said.

European Central Bank President Christine Lagarde issued similar warnings regarding Europe's growth trajectory. The growing concern stems from a recognition that even if the U.S. and Iran quickly negotiate an end to the war, the six-week conflict will cast a long shadow over the global economy. World Bank President Ajay Banga stated on Tuesday, "Don't think of this as just one more month of pain. Think of it as a longer test because, even assuming the fighting stops and energy infrastructure suffers no further structural damage, it will take time for supply systems to stabilize."

Although oil prices have surged, the full brunt of what the International Energy Agency calls the largest energy shock in history has not yet been fully felt. Even though the Strait of Hormuz has been effectively closed for six weeks, the final shipments that departed the Persian Gulf before the conflict are only now reaching their destinations. "March was a very tough month for the world, both in terms of energy and the economy, and April is likely to be worse than March," said IEA Executive Director Fatih Birol during the spring meetings.

Amid such a gloomy atmosphere, participants expressed puzzlement over why U.S. stock markets, particularly the S&P 500, have rebounded so swiftly from initial wartime losses—hitting a record high on Tuesday even as the IMF downgraded its global growth outlook. On Wednesday, U.S. stocks remained near highs amid mixed signals, including potential extended cease-fire talks and continued slow transit through the Strait of Hormuz. For some attendees, the explanation is simple. "Markets are underestimating the severity of the situation," said Alexis Crow, Chief Economist at PwC U.S., who advises global corporate clients. Crow and others believe this is because markets fail to recognize the supply chain disruptions caused by the war.

Many market participants are wary of falling victim to a pattern some call "TACO"—an acronym suggesting a tendency to reverse aggressive moves when market reactions are unfavorable. Additionally, investors this week were driven by "FOMO" (fear of missing out), as signs of easing Middle East tensions, optimism about artificial intelligence technology, and expectations for U.S. corporate earnings prompted skeptics to abandon caution. "It's hard for investors to avoid the fear of missing out," said Matt Maley, Chief Market Strategist at Miller Tabak + Co.

IMF Managing Director Kristalina Georgieva suggested another reason for market optimism is the relative health of the U.S. economy and its status as an oil exporter, which insulates it somewhat from energy shocks. "But I would say the rest of the world is not in the same position; other regions are already suffering greatly," she added. When asked directly if markets should be more cautious, she responded, "They should be more cautious because supply chain disruptions are already quite significant."

Questions also persist in Washington about how much resilience the global economy retains after enduring tariff shocks, the pandemic, and the escalation of the Russia-Ukraine conflict. These shocks have driven up debt levels and diminished the capacity of many governments to handle another crisis in an increasingly fractured world. Pierre Cailleteau, Head of Sovereign Advisory at Lazard, said in an interview, "No one knows how far we are from a breaking point, but economic, financial, and social resilience is not infinite."

Although both the IMF and the World Bank emphasized they are prepared to respond to crises, there are calls for them to do more. Within the Fund, concerns about the severity of the crisis are spreading, with some warning that markets and certain policymakers are underestimating its impact. One informed source stated that the biggest worry is that ripple effects from the energy shock could spread to global financial markets. The source added that the challenge lies in communicating the right message without triggering panic.

Nigeria's Finance and Economy Minister, Olawale Edun, speaking on behalf of the Group of 24 on Tuesday, called for the IMF and World Bank to mobilize more resources. He pointed out that this crisis is hitting developing countries just as the U.S. and other wealthy nations have abruptly cut foreign aid, and while many poor nations are already spending more on debt servicing than they receive in aid or foreign direct investment.

Rebecca Patterson, a former executive at JPMorgan and Bridgewater Associates and now a senior fellow at the Council on Foreign Relations, noted that many investors are overlooking a key point: the current energy shock's impact could be similar to that of the COVID-19 pandemic. Just as the health crisis that swept the globe in 2020 was a "rolling contagion," Patterson said, regarding the fallout from the Iran war, "Asia felt the effects of energy supply disruptions first, Europe is now starting to feel it, and the U.S. will be next as the final ships from the Gulf region approach its shores."