The global market is too optimistic! The IMF and World Bank remind: do not underestimate the economic impact of war.

The International Monetary Fund (IMF) and the World Bank have always been symbols of free trade, capitalism, and financial market wisdom. But at their spring meeting, a counter-mainstream view emerged: investors underestimated the economic losses brought about by the Iran war. Throughout various public forums, private dinners, and sideline activities held in Washington this week, participants gradually reached a consensus - even if the US and Iran quickly reach a lasting peace agreement, the impact of this conflict on the global economy may worsen significantly before improving. Government officials and others attending the meeting expressed during the opening period that the world is experiencing far from ordinary shocks. They warned that what could potentially take root is structural changes, involving rising costs, longer trade routes, and increased geopolitical uncertainty, leading to a slowdown in global growth. Qatar's Finance Minister Ali bin Ahmed Al Kuwari bluntly stated at the IMF meeting on Wednesday, "What we're seeing is just the tip of the iceberg. At the time, the US stock market was approaching historic highs, while oil prices were below $100 per barrel. Kuwari's economy has been severely affected by the export of liquefied natural gas. He predicted that in the next one to two months, the current energy price shock will turn into energy shortages in some countries, "and even countries will not be able to light up." He warned that the food crisis caused by fertilizer shortages will soon follow, emphasizing that Qatar supplies nearly one-third of the world's helium (a semiconductor manufacturing essential): "This war will have a huge economic impact, and the crisis is imminent." Trump administration officials called for all parties to remain calm and restrained, especially major central banks should adopt a wait-and-see approach, and hold off on raising interest rates to combat inflation pressures. The US believes that the short-term pain is worth enduring as it will ultimately end the Iranian nuclear threat. Temporary Shock US Treasury Secretary Scott Bezent tried to describe the conflict and the resulting surge in prices as temporary phenomena, expecting energy costs to quickly fall after hostilities end. This war will end, in three days, three weeks, three months, but it will end, he said, adding that the market is looking ahead. However, this optimism was not widely accepted at the IMF and World Bank meetings just a few blocks away from the White House. Bloomberg Economics research pointed out: "The US seeks to escape Iran's influence, and the market bets that it can succeed, but obstacles such as control of the Strait of Hormuz, Iran's nuclear program, and conflicts with Hezbollah in Lebanon need to be overcome. IMF Chief Economist Pierre-Olivier Gourinchas downgraded growth expectations on Tuesday and predicted the slowest global growth since the outbreak of the pandemic, expecting more downgrades in the future. He stated that the new blockade of the Strait of Hormuz by the US and other developments suggest that the "adverse" scenario set by the institution (i.e., global economic growth is reduced from the pre-war prediction of 3.3% to 2.5%) is increasingly likely to occur. "Every day that the energy supply is interrupted for one more day, we are one step closer to the adverse scenario," Gourinchas said. European Central Bank President Christine Lagarde also issued a similar warning about the growth path in Europe. Rising concerns stem from a realization that even if the US and Iran quickly end the war through negotiations, this six-week conflict will cast a longer shadow on the global economy. World Bank President Arjay Banga said on Tuesday, "Don't just see this as a month of pain. See it as a test of longer time, because even if we assume that the fighting stops and energy facilities no longer suffer structural damage, the supply system will take time to stabilize." Despite the surge in oil prices, all the pains of what the International Energy Agency calls the largest energy shock in history have not yet fully emerged. Although the Strait of Hormuz has been closed for six weeks, the last batch of goods departing from the Persian Gulf before the war is just now arriving at their destinations. "From both an energy and economic perspective, March is a very difficult month for the world, and April is likely to be even worse," International Energy Agency Director Fatih Birol said at the spring meeting. Stock Market Rebound In such a gloomy atmosphere, participants are puzzled why the US stock market (especially the S&P 500) can rebound so quickly from the initial wartime losses - on Tuesday, when the IMF downgraded global growth expectations, the index hit a new all-time high. On Wednesday, with complex signals of a possible extension of the ceasefire and slow passage through the Strait of Hormuz, the US stock market remained near its highs. For some participants, the answer is simple. The market underestimated the seriousness of the situation," said Alexis Clow, Chief Economist for PwC US, who advises global corporate clients. Clow and others believe this is because the market has not recognized the disruptions to the supply chain caused by the war. Many market participants do not want to become victims of Trump's "TACO" - an acronym for "Trump Always Caves Under Pressure," meaning he backs down from aggressive moves when the market reacts poorly. Additionally, this week investors were driven by "FOMO" (fear of missing out) - signs of easing tensions in the Middle East, optimism about artificial intelligence technology, and expectations of US corporate profitability pushing skeptics to abandon caution. Investors find it hard to avoid fear, said Matt Maley, Chief Market Strategist at Miller Tabak + Co. IMF Managing Director Kristalina Georgieva said another reason for the market's optimism is the relatively robust US economy and its minimal impact from energy shocks as an oil exporting country. But I have to say, the same cannot be said for other regions of the world, where there has been immense suffering, she said. When asked directly whether the market should be more cautious, she responded, Yes, it should be more cautious, as the supply chain disruptions have become quite significant. There are also concerns in Washington: after experiencing tariff shocks, the pandemic, and escalating Russia-Ukraine conflict, how much resilience can the global economy maintain? These shocks have led to a rise in debt levels and weakened the ability of many governments to cope with another crisis in an increasingly fragmented world. Pierre Cayeteau, head of the sovereign advisory team at Lazards Investment Bank, said in an interview, No one knows how far we are from the breaking point, but economic, financial, and social resilience are not unlimited. Although the IMF and the World Bank have emphasized that they are prepared to deal with the crisis, there have been calls for them to take more action. Concerns about the severity of the crisis are spreading within the organization, with some warning that the market and some policymakers are underestimating its impact. One insider said the biggest concern is that the energy shock could lead to a chain reaction spreading to global financial markets. The insider added that the challenge is how to convey the correct information without causing panic. Nigerian Minister of Finance and Economy Olawale Edun spoke on behalf of the G24 on Tuesday, urging the IMF and World Bank to mobilize more resources. He pointed out that this crisis is hitting developing countries at a time when the US and other wealthy countries are suddenly cutting back on foreign aid, and many poor countries are spending more on debt repayment than they receive in aid or foreign direct investment. Rebecca Patterson, a former employee of J.P. Morgan and Bridgewater Fund and now a senior research fellow at the Council on Foreign Relations, said a point that many investors overlook is that the impact of the current energy shock may be similar to the COVID-19 pandemic. Just as the health crisis swept the world in 2020, this is a rolling contagion. Regarding the follow-up effects of the Iran war, Patterson said, Asia is the first to feel the impact of energy supply disruptions, and now Europe is beginning to feel it as well. The US will be next, as the last ships departing from the Gulf region are about to arrive.