Editor's note: Zhang Jianping, a special commentator for CGTN, is the deputy director of the academic committee of the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce. Li Junyi is a master's student in International Business at the School of Economics, Peking University. The article reflects the authors' opinions and not necessarily the views of CGTN.

The IMF and the World Bank Group are convening their Spring Meetings from April 13 to 18. Released on April 14, the World Economic Outlook and Global Financial Stability Report provided the latest diagnosis of the global economy's health. While both reports duly warned against real-economy shocks and financial market vulnerabilities triggered by Middle East conflicts, whether their baseline projections fully reflect the rapidly evolving complex landscape remains to be seen.

In its latest report, the IMF assumes the conflict will conclude within weeks and that energy production will return to normal by mid-2026. Under this baseline scenario, global growth is projected at 3.1% for 2026 and 3.2% for 2027. Although this marks a 0.2% downward revision from January's forecast, the 3.1% growth expectation may still prove optimistic given the harsh realities of escalating US-Iran hostilities, shipping disruptions in the Strait of Hormuz and international oil prices approaching $100 per barrel. Current developments indicate that risks of a prolonged and further intensified conflict are mounting, posing a severe test to these underlying assumptions.

It is worth noting that the World Bank warned at the beginning of the year that global growth could fall to 2.3to 2.4% in 2026 – close to the IMF's adverse scenario of 2.5% – marking a significant gap with the Fund's 3.1% baseline. This gap reflects a fundamental divergence in assumptions about the conflict's duration: While the IMF's baseline scenario assumes hostilities will subside within weeks, the World Bank appears to have already factored in prolonged impacts in its baseline forecast. Should the conflict become protracted and keep energy prices persistently elevated, the IMF's adverse scenario of 2.5% becomes far more probable, with global trade growth facing a steep decline and supply chain restructuring costs requiring a systemic reassessment.

Global inflation is facing renewed upward pressure. The IMF has raised its global headline inflation projection for 2026 to 4.4%, up 0.7% from its previous forecast. However, given the current elevated energy prices and tightening energy supplies across multiple economies, this projection may still prove conservative.

Significantly, the United States, as a major party to the Middle East crisis, continues to grapple with sticky core inflation above 3% – a clear sign that energy market volatility from military operations is creating headwinds for its own economy. This inflationary boomerang effect of military choices adds fresh layers of complexity to global economic coordination and leaves central banks in major economies facing tougher trade-offs as they confront the specter of stagflation.

The financial transmission channel warrants equal attention. Since the conflict erupted, global risk sentiment has shifted into risk-off territory, with climbing energy prices fueling inflation expectations, driving up bond yields and triggering a broad-based pullback in equity markets – culminating in a measurable tightening of financial conditions.

Of particular concern is the weakening of the traditional hedge between equities and bonds amid more frequent supply shocks in recent years. Under stress scenarios, stocks and bonds could decline in tandem, amplifying the potential risks of cross-asset deleveraging.

Meanwhile, non-bank financial intermediaries may amplify market volatility through multiple channels. The IMF also highlights that trading structures such as short-volatility strategies and leveraged ETFs risk exacerbating price moves when volatility spikes. Collectively, these amplification channels threaten to turn market turbulence into wider financial stability concerns if the conflict drags on or shocks deepen.

Faced with the stark trade-off between taming inflation and supporting growth, the IMF has proposed a three-pillar comprehensive policy framework encompassing calibrated monetary policy, reinforced macroprudential policies and fiscal sustainability. Yet the effective implementation of this framework faces practical constraints: Decisive tightening is warranted should inflation expectations become de-anchored, yet significant tightening of financial conditions could equally snuff out the recovery.

More fundamentally, the efficacy of all policy tools hinges upon the conflict being effectively contained. Against the persistent threat of a blockade in the Strait of Hormuz, monetary policy operations confront a stagflation dilemma, while elevated debt levels constrain fiscal maneuvering room.

The global economy has reached a decisive crossroads. If the US-Iran conflict drags into the second half of the year, the World Bank's 2.3to 2.4% growth forecast may prove the optimistic case, and the IMF's "severe scenario" could become the uncomfortable reality.

The international community needs to stay on high alert, recognizing that ending the fighting is paramount to preserving global economic stability. Only by securing a swift political settlement, coupled with finely tuned domestic policies and strengthened international cooperation, can the world economy steer toward a soft landing and steer clear of a low-growth, high-inflation trap.

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