Mohamed El-Erian says the Iran war will aggravate ‘virtually every challenge’ the economy is facing. 5 ways the crisis could unfold

But while the market's overall upward momentum may be welcome news for many investors, one financial expert warns the global economy may not fare so well.

Following an April report from the International Monetary Fund, Mohamed El-Erian, chief economic adviser at Allianz, wrote on X, (2) "Reading between the lines, the message of today's IMF flagship report is sobering: Virtually every challenge facing the global economy is poised to intensify due to the fallout of the Middle East War."

And as he noted on CNBC (3), "While the markets have had relief, the economic side has not. And that is what worries me."

Here are some of his main concerns:

'Insufficient growth'

As the IMF's Global Economy in the Shadow of War report notes (4), global growth is projected to slow down to 3.1% this year and 3.2% in 2027, after hitting 3.4% in 2024-2025 (5). And that's assuming the conflict in the Middle East is "limited duration, intensity and scope."

"A longer or broader conflict, worsening geopolitical fragmentation, a reassessment of expectations surrounding artificial‑intelligence‑driven productivity, or renewed trade tensions could significantly weaken growth and destabilize financial markets," the IMF's report states.

'Burdensome cost of living'

Should the conflict in the Middle East drag on and continue to have a prolonged and volatile effect on oil prices, global inflation could increase. The cost of transportation alone has a major impact on the price of essential goods.

"If [the war goes on] longer, the impact on inflation is what would worry me most," Pierre Gramegna, managing director of the European Stability Mechanism, told CNBC (6).

"If it lasts a couple of months more, if the Strait of Hormuz is blocked or half-blocked, then we're going to have inflation that goes up more than 1%, maybe 1.5% this year. If it's even worse and it lasts longer [than that], inflation would go up 2.5% percent — that would trigger probably stagflation, and that's bad news for the world."

'Excessive inequality'

If those fears of rising inflation prove true, lower-income workers will feel the most pain.

When you're on a limited income, essential items such as food and gas take up a much larger portion of your take-home pay. You may already be buying the cheapest clothes available, skipping travel and investing little. High-income workers, on the other hand, can more easily cut back on luxuries without damaging their quality of life or their ability to save and invest. And they simply don't need to worry as much about price hikes for daily expenses.

As El-Erian noted on CNBC, "The problem is severe for low-income households. For the rest, they are able to absorb these higher prices for now. And the question becomes, how long do they continue?"

He also noted that the U.S. is the exception when it comes to the economic pain felt. "If you're in Asia, you're seeing the slowdown," he said, "because they're worried about genuine shortages, physical shortages. And they are slowing their economies down; they are putting sand in the wheel to try to lower their energy consumption."

'High deficits' and 'large debts'

If a prolonged war raises costs and threatens revenue, many countries throughout the world may be forced to borrow more in order to maintain services. At the same time, borrowing costs are on the rise, The Guardian reports (7).