The closure of the Strait of Hormuz is like a ticking time bomb for the global economy. The International Monetary Fund (IMF) has already cut its forecast for global growth this year from 3.4 percent to 3.1 percent. If the flow of crude oil and natural gas isn’t restored until next year, the IMF expects growth to fall to 2 percent, a rare occurrence in recent decades, with inflation rising to 6 percent. Apart from the countries directly involved in the conflict, energy importers and low-income countries will face the brunt of the pain.
How bad can things get, and what can countries do to protect themselves? On the latest episode of FP Live, I spoke with Gita Gopinath, an economics professor at Harvard University who was formerly the first deputy managing director of the IMF. Subscribers can watch the full discussion on the video box atop this page. What follows here is a condensed and lightly edited transcript of our conversation.
Ravi Agrawal: The IMF projections were from a couple of weeks ago. The Strait of Hormuz is still essentially shut down. There’s no real sign of when it will properly open up. What is your sense now of how bad all of this could get for global growth?
Gita Gopinath: The IMF very helpfully provided scenarios because there is a very high level of uncertainty around how this conflict is going to evolve. They had a reference scenario where growth drops to about 3.1 percent, which is about a 0.3 percentage-point drop, not that much. You do have inflation going up some more, about 60 to 80 basis points for the world. The problem, of course, is that’s the best-case scenario. It was based on the assumption that this conflict would end relatively quickly, which was a reasonable assumption one could make.
Now if this continues, regardless of the fact that there are no bombs falling, the shipping standstill through the strait has much more durable implications than the reference scenario. The IMF provided what they called an “adverse scenario,” in which we see oil averaging about $100 a barrel for this year, as opposed to the assumption in the reference scenario, which is more like $82 a barrel. If oil is about $100 a barrel and you have some more tightening of financial conditions, then we are looking at a global economy that’s going to grow at only 2.5 percent.
Now, it’s not common for the world economy to slow that much. If it gets even worse and we see oil averaging $110 a barrel this year, and this becomes a much more disrupted situation with bigger hits to energy infrastructure, that means oil will stay very high for the next year or two and financial conditions will get a whole lot worse. Then we’re looking at the world economy growing at 2 percent, which is an extremely rare occurrence. It’s hard to think of a risk at this point that says that the world can be better than a 3.1 percent forecast. The risk seems squarely to the downside at this current point.
RA: And the impacts are really felt differently depending on where you are geographically, but also on whether you import or export your energy. I’d like us to look at this chart from the IMF, which explores how energy exporters fare better than importers, but even within those groups, it is lower-income countries that struggle the most.
RA: You were just in India last week. Talk a little bit about how a country like that is facing the economic pressure from the war. I’ve heard about restaurants shutting down, people rationing fuel. India, to be clear, is in much better fiscal shape than many of its neighbors.
GG: Among the major economies, India is one of the countries that is being affected because of its heavy reliance on the Middle East for imports of oil, natural gas, and also liquefied petroleum gas (LPG), which is for cooking purposes. There’s also a reliance on the Middle East as a hub for sending their goods to other parts of the world and on remittances from the region. So there are multiple channels through which India gets affected.
What we’re seeing most directly is the pressure on the currency, because the expectation is that as the import bill grows, the current account deficit grows. In the absence of strong portfolio inflows into India, that’s going to put pressure on the rupee. As of now, the government has held off on passing through price increases to fuel pumps. I don’t think that’s going to be sustainable for that much longer, because it requires some very high subsidies to hold this up. At some point, you should expect to see that showing up also in headline inflation.
But again, to my point about the different trends hitting countries, one thing that did get better over the last few months for India was the average tariff rate from the United States went down from 50 percent to 10 percent. That is a positive tailwind for India.
RA: Since you mentioned tariffs, let’s zoom out. What was the state of the economy writ large before this latest energy shock? Between the COVID-19 pandemic, the war in Ukraine, and then [U.S.] President [Donald] Trump’s unilateral tariffs on most countries on Earth, there were many reasons already for countries to feel economic stress, whether through disrupted energy supplies, disrupted supply chains more generally, or a sense of unease about relying on the global trading system to remain free and open.
GG: Over the last couple of years, we’ve seen a buildup of big structural shifts. One is geoeconomic fragmentation, but the other is AI development.
The one thing that’s been constant and is quite critical to why we remain in a world where growth is not heavily impaired is that financial conditions have been good. Even after all these shocks, we’ve seen only slight tightening. But by any historical standard, these are very good financial conditions. Look at measures, including the stock market. The U.S. stock market is back at a record high. Corporate borrowing spreads have gone up, but it’s only a tiny amount in 2025, because the dollar depreciated, which was also a favorable financial condition for emerging and developing countries.
So whether this current energy crisis spills over into something much bigger depends crucially on whether it gets amplified through a severe tightening of financial conditions. That is very important. In the absence of a severe tightening of financial conditions, the direct effects of oil and gas prices going up—obviously some countries are much harder hit than others—are still quite well contained for the global economy as a whole.
RA: And everything here is so interconnected. I learned that because nylon and polyester come from petroleum products, the price of thread has doubled in Bangladesh. Universities have been shut down in many countries in South and Southeast Asia. The Philippines declared a national energy emergency. Many airlines around the world, especially in Asia, are cutting flights because jet fuel prices have doubled. At what point do these compound and then, as people consume less, turn into a slowdown? At what point do we start worrying about a recession?
GG: You’re right that there’s much more than just oil and gas—many of the products that oil and gas produce are being affected. You’re seeing an effect on sulfur: Fertilizer prices have gone up by a lot, and that’s going to have an effect on food prices six months down the line. The price of naphtha has gone up, as has helium, which is a byproduct of LNG [liquefied natural gas] production. All of that is affecting the supply in the world market.
The expectation as of now is that there will be a relatively quick end to this whole situation—without much more permanent damage to energy facilities—and that therefore this may not have a big effect. We could see some slowing down, which is what the IMF has in its reference forecast, for some countries more than others. The negative impact on low-income countries is much bigger if energy and food prices go up.
For most other major large economies in the world, these effects are meaningful, but not at this current juncture. It’s not something that we can see pushing the world into any kind of recession.
RA: If the Strait of Hormuz remains shut for another month or two, which countries should we be most worried about?
GG: I would be looking at the countries that have programs with the IMF and are energy importers. Take Sri Lanka, which went through a very bad crisis and was on the path of recovery. This kind of a shock is a nightmare situation for a country like that. With increased jet fuel prices, travel is going to become much more expensive, which means tourism will be affected in the region. Pakistan is another country in a fragile situation. Nigeria is being impacted, too. So countries that have fragility in their system and have a program with the IMF are the countries that I expect will be most deeply distressed.
In other parts of the world, you’re going to have more inflation than what’s being projected at this time. That can be very painful. Cost of living goes up, and there’s already a huge affordability problem in many countries including the U.S. As inflation goes up, if you don’t have the income to pay for basic necessities, you’re going to cut back on consumption, and that affects growth further. Then we’re getting to the adverse scenario of the World Economic Outlook, where you have growth going down to 2.5 percent, which is not a common phenomenon for the world economy.
RA: It’s very clear to me that we are in an era now of immense geopolitical risk. This Iran conflict, in my mind, is not the last such conflict we’ll see in the coming years. So what is the recommendation for countries to become more resilient? And were we too reliant on globalization and on the proliferation of cheap goods through that?
GG: Energy independence is going to be critical. Thankfully, for many countries, there are alternatives such as renewables that can be invested in and developed even more. The cost of required inputs is much cheaper than it used to be. You need to make sure that your grids are updated and that they can actually get the energy through these renewables, so there’s work to be done there. But it just seems like a no-brainer in terms of developing alternative sources of energy at home, and renewables are a great source for that.
As to geoeconomic fragmentation, in the glass-half-full version, it’s helpful to note that over 70 percent of global trade is conducted under the rules of the World Trade Organization. This is an important difference between now and the 1920s, when you had tit-for-tat tariffs and the Great Depression, and every country went into isolation. This time around, you haven’t seen very big rounds of tit-for-tat tariffs; it’s basically been the U.S., and China has responded, but most other countries haven’t. I think it’s because of the recognition that there are lots of benefits from global trade.
RA: Among the countries that may emerge from the current energy shocks as winners is actually the United States. It’s now the world’s undisputed energy superpower, biggest crude producer, and biggest natural gas producer. As you’ve mentioned, it’s an AI superpower, which means that the stock market has been on a tear. In a sense, some of that feels almost decoupled from the rest of the world. Talk a little bit about the advantages America has right now.
GG: The U.S. is doing incredibly well because of where it’s at, the front of the AI race. China is also up there, but outside of these two countries, there are not many other regions of the world that have this much dynamism when it comes to AI. Looking at growth in 2025, AI offset the drag that came from tariffs almost one-to-one.
And despite everything that’s happened over the last 24 months, the U.S. remains the part of the world where people want to hold equities. Net capital inflows into the U.S. in 2025 were at a record high, and the desire to hold U.S. equities is at a record high. So while we did see some rotation out in 2025 to other regions, including to emerging markets, most of that rotation was mostly in the form of bond flows—buying debt—as opposed to equities or foreign direct investment.
So we have unbalanced growth. The U.S. is seen as the country where productivity growth is high—there’s AI dynamism, deregulation, and a sense of growth opportunities—compared to the rest of the world. Because of these unbalanced growth dynamics, the world’s savings are resting on fairly narrow foundations. Unless we see much more growth dynamism in other parts of the world, including in Europe and emerging and developing countries—having a good story of reform and fiscal prudence—we are going to see this imbalance.
GG: Russia’s war against Ukraine was already taking a toll on Russia before this conflict came about. So in the absence of the conflict [in Iran], they would have been in a much worse place, because of oil prices going up and the fact that countries are being allowed to buy from Russia and they’re making these windfall profits from it. But as the longer story goes, Russia made some bad choices. The decision to invade Ukraine has been tremendously costly. It has led to an allocation of resources to this war economy, which has affected their productivity and the more critical investments that they need to make. It’s also affected the number of people who are staying in Russia and willing to work and contribute to the country; there’s been an exodus of people out of Russia. So for all those reasons, this is not going to end well.