The world's governments lack sufficient fiscal capacity to respond to an economic downturn triggered by an oil shock from prolonged war in Iran, according to Gita Gopinath, the IMF's former chief economist. Speaking Tuesday, Gopinath warned that fiscal space has been depleted globally, leaving policymakers with limited tools to combat potential economic fallout.

Oil market volatility could severely impact global growth if conflict escalates in the Middle East. Governments have already deployed massive fiscal stimulus during the pandemic and subsequent crises, reducing their ability to borrow and spend in future emergencies. This leaves central banks as the primary responders, though monetary policy has its own limitations.

The warning highlights growing concerns about global economic resilience. With fiscal buffers exhausted and interest rates already low in many countries, the world may be less prepared than ever for a major economic shock. Gopinath's assessment suggests policymakers need to consider alternative strategies for managing future crises.