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.

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.

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