Wars cause large and persistent economic losses in countries where fighting takes place, with output declining by roughly 7% over five years on average, and economic scars lasting for more than a decade, the International Monetary Fund said in research released on Wednesday.

The IMF examined the cost of active conflicts - now at the highest levels since the end of World War Two - and the macroeconomic consequences of sharp increases in military spending in two chapters of its forthcoming World Economic Outlook. The full report will be released next Tuesday.

The chapters do not address the Middle East war or the two-week ceasefire announced by U.S. President Donald Trump late on Tuesday, but offer a comprehensive look at wartime economies back to 1946, and weapons spending data from 164 countries.

In 2024, the latest year for which data is available, more than 35 countries experienced conflict in their territory and about 45% of the world's population lived in countries affected by conflict.

"Beyond their devastating human toll, wars impose large and lasting economic costs, and pose difficult macroeconomic trade-offs, especially for those countries where the fighting is taking place," the IMF said in a blog released at the same time.

Countries engaged in foreign conflicts can avert physical destruction on their own soil and avoid large economic losses, but neighboring countries or key trading partners will feel the shock, the IMF said.

"Output losses from conflicts persist even after a decade and typically exceed those associated with financial crises or severe natural disasters," the IMF chapter said.

The IMF is poised to cut its global growth forecast and raise its inflation predictions as a result of the Iran war, Managing Director Kristalina Georgieva told Reuters on Monday.

On Tuesday, World Bank President Ajay Banga said the war would result in some degree of slower growth and higher inflation, regardless of how quickly it ended.

The IMF said conflicts contributed to sustained exchange rate depreciation, reserve losses and rising inflation, as widening external imbalances amplified macroeconomic stress.

MILITARY SPENDING SURGES GLOBALLY

Rising geopolitical tensions and more frequent conflicts have sparked big jumps in military spending, with about half of the world's countries increasing their military budgets over the past five years, and more increases coming as NATO countries boost weapons spending to 5% of GDP by 2035.

Arms sales by the world's largest weapons makers - many of whom are based in the U.S. - have doubled in real terms over two decades, the IMF found.

The IMF authors found that large defense spending booms had become more frequent, especially in emerging-market and developing economies, with typical booms lasting 2-1/2 years and military spending surging by about 2.7% of GDP.

About two-thirds of these military buildups were financed by higher deficits, which could boost economic activity in the medium term, but also increased inflation and created medium-term challenges, the IMF said. That meant buildups needed to be closely coordinated with monetary policy, the IMF said.

MILITARY BUILDUPS STRAIN BUDGETS

On average, fiscal deficits worsened by about 2.6 percentage points of GDP and public debt increased by about 7 percentage points within three years of the start of a buildup.

About one-quarter of those buildups were financed by reprioritizing spending, often leading to a sharp decline in government spending on social programs, said Andresa Lagerborg, an IMF economist, in a taped discussion about the chapter.

Output gains were also smaller when the arms were purchased from foreign suppliers, the IMF said. Focusing on public investment in equipment and infrastructure would expand market size, support economies of scale and strengthen industrial capacity while limiting the loss of orders to overseas suppliers, it said.

IMF economist Hippolyte Balima, one of the key authors of the chapters, said the data also showed that peace was fragile, with about 40% of countries relapsing into conflict within five years.

Early steps to stabilize economies, restructure debt, secure international support and implement domestic reforms were critical to lay the groundwork for solid recoveries, Balima said.

-Reporting by Andrea Shalal in Washington; Editing by Matthew Lewis/Reuters