The IMF’s latest World Economic Outlook has forced it to admit that things have changed since its previous update in January when it blissfully hoped things would be OK. Now there is mostly darkness and despair.

The IMF’s January report was titled “Steady amid Divergent Forces”; whereas the latest outlook is headlined “Global Economy in the Shadow of War” and begins “the global outlook has abruptly darkened following the outbreak of war in the Middle East on February 28, 2026.”

Far be it for me to gloat, but my suggestion in January that “steady” was not a word to describe the global economy unless you were desperately trying to make the madness of Donald Trump seem normal has aged quite well.

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As ever, the IMF remains unwilling to name Donald Trump. While it is more than happy to note the “lingering effects of the persistent rise in energy prices since Russia’s invasion of Ukraine”, the IMF only talks about “the Middle East conflict” as though it sprang out of nowhere.

And as ever, the IMF refuses to acknowledge the changed reality of the world.

It remains stuck in a situation where the biggest concern about inflation is wages.

It notes sensibly that “the standard policy response to a surge in energy prices is for central banks to look through” – ie not raise interest rates because interest rates do not affect world oil and gas prices.

However, it quickly adds that this should only happen “as long as inflation expectations remain well anchored”. Should inflation expectations rise, the IMF warns of (you guessed it) “wage and price spirals”.

Oddly the IMF makes no mention of profit and price spirals. This is despite in 2023 its own research noted “rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy”.

You might think the most recent energy price spike may be of use for looking at the current energy price spike.

But no, the IMF remains fixated on wages and the need to raise interest rates to keep those inflation expectations down.

So even while the deputy governor of the RBA, Andrew Hauser, noted in a talk in New York that “long-term inflation expectations have not picked up”, speculators still assume the RBA will raise the cash rate in May. Alas I think they’re right.

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The three scenarios are a bit like Starbuck coffee sizes where even the smallest sounds huge. Here even the best case is terrible.

The current “bad scenario” is where Trump, Israel and Iran come to an agreement pretty soon and so global growth only slows “moderately”.

Then there is the “adverse scenario” where things carry on for the rest of the year and oil stays around US$100 per barrel.

Finally, the “severe scenario” is where nothing is resolved, oil prices reach $125 in 2027, gas prices increase by 200% over the same period, and food prices increase by 5% in 2026 and 10% in 2027.

Even under the current bad scenario, the global economy is expected to slow compared to what the IMF forecast in January. But under the adverse and severe scenarios the global economy grows by just 2.0% this year and 2.2% next year.

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For context over the past 40 years, the global economy has grown slower than 2.2% only three times – 1992 (global recession), 2009 (the GFC) and 2020 (Covid).

The IMF doesn’t forecast what will happen to each country under the different scenarios, but even under the current scenario Australia’s economy is expected to grower slower than expected in October last year:

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The IMF has downgraded Australia’s growth by more than most. Even under the most optimistic scenario growth is 0.5% worse than was forecast last October – a bigger downgrade than all G7 nations.

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Thanks Donald.

The IMF is not forecasting a recession – inflation and unemployment (under the best scenario) do not rise greatly:

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But the IMF warns against governments doing popular things like “energy caps or subsidies, designed to protect households and firms”. It worries, like the RBA does, that such policies will increase inflation because we’ll all suddenly have so much more money to spend.

This is not a concern for the government’s fuel excise halving, because petrol prices remain well above what they were before the US and Israel began bombing Iran:

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Should the war continue, the government will be under pressure to deliver relief to households but to also not blow the budget doing so.

Fortunately, the IMF also points the way.

It notes that “gas prices are expected to be affected more than oil prices because of the technical complexity of restarting production and the comparatively lower level of reserves to fall back on”.

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Just because the IMF has forgotten about profit-driven inflation, does not mean the Australian government should.

Gas companies exporting LNG from Australia will be cheering on the war as it keeps gas prices – and their profits – ever higher.

Right now, the senate is investigating changing the way gas is taxed. An ACTU proposal for a 25% tax on exports would raise roughly $17bn a year.

That is more than enough to offset any temporary measures that would not only assist households but help keep us out of a recession should things turn “adverse” or “severe”.

• Greg Jericho is a Guardian columnist and chief economist at the Australia Institute