On Tuesday, the International Monetary Fund (IMF) cautioned that the global economic recovery is losing momentum. This warning comes as a new conflict in the Middle East further complicates an already struggling world economy.Thank you for reading this post, don't forget to subscribe!
The recent outbreak of violence between Israel and Hamas has the potential to disrupt the entire region, highlighting the challenges of safeguarding economies from frequent and unpredictable global shocks. This conflict looms large over the annual meetings of the IMF and World Bank held in Morocco, where top economic policymakers had planned to address the ongoing pandemic and the enduring economic repercussions of Russia’s war in Ukraine.
Officials now find themselves faced with yet another crisis. “The economy is in a delicate state,” commented Ajay Banga, President of the World Bank, during an interview at the meetings. He added, “Having a war is not conducive to central banks that are trying to navigate a gentle landing,” referring to the efforts of Western policymakers to counter hyperinflation without causing a recession.
Banga acknowledged that, thus far, the impact of the Middle East conflict on the global economy has been less significant than the war in Ukraine. Initially, the Ukrainian conflict caused oil and food prices to surge, leading to turmoil in global markets. Russia’s position as a major energy producer and Ukraine’s role as a major exporter of grain and fertilizer contributed to the market turbulence.
“But if the conflict spreads in any way, it becomes perilous,” added Banga, warning that such a development would result in a “crisis of unimaginable proportions.”
Already, oil markets are facing difficulties. “The main concern is the future of energy prices,” stated Lucrezia Reichlin, a professor at London Business School and former Director General of Research at the European Central Bank.
Reichlin expressed worries that a further increase in oil prices will intensify pressure on the Federal Reserve and other central banks to raise interest rates, which she believes have already risen too rapidly.
Regarding energy prices, Reichlin remarked, “We have two fronts to contend with: Russia and now the Middle East.”
IMF Chief Economist Pierre-Olivier Gourinchas stated that it is too early to determine the lasting impact of the recent surge in oil prices. However, research indicates that a 10 percent hike in oil prices would have adverse effects on the global economy, including a 0.15 percent reduction in output and a 0.4 percent increase in inflation next year.
In its latest World Economic Outlook, the IMF emphasized the fragile nature of the ongoing recovery. While maintaining its global growth forecast for this year at 3 percent, the IMF slightly lowered its projection for 2024 to 2.9 percent. The report also warned of deteriorating output levels in the eurozone and China, with the real estate sector crisis in China being a cause for concern.
“The global economy is experiencing a slowdown and has yet to regain full momentum,” remarked Gourinchas. He added that, in the medium term, the situation becomes even more challenging, citing various risks such as the potential for major natural disasters resulting from climate change.
Europe’s economy, in particular, finds itself in the midst of escalating global tensions. Since Russia’s invasion of Ukraine in February 2022, European governments have been desperate to reduce their reliance on Russian natural gas.
To a large extent, they have succeeded by turning to suppliers in the Middle East.
Over the weekend, the EU swiftly expressed solidarity with Israel and condemned Hamas for launching sudden attacks from Gaza.
However, different opinions exist among oil suppliers. For instance, Algeria, which has increased exports of natural gas to Italy, criticized Israel’s response to the airstrikes in Gaza.
Even before the events of the weekend, the energy transition had already taken a toll on European economies. Among the 20 countries using the euro, the fund estimates that growth will slow to a mere 0.7 percent this year, compared to 3.3 percent in 2022. Furthermore, Germany, the largest economy in Europe, is expected to experience a contraction of 0.5 percent.
Due to the repercussions of high interest rates, persistent inflation, and rising energy prices, the growth rate in the United Kingdom is projected to slow to 0.5 percent this year from 4.1 percent in 2022.
Sub-Saharan Africa is also grappling with a recession. The growth rate for this year is anticipated to decline to 3.3 percent, with a more optimistic outlook for next year at 4 percent growth.
Many of these countries are burdened with substantial debts. On average, debt now accounts for 60 percent of the sector’s total output, double what it was a decade ago. Higher interest rates have contributed to the rising costs of debt repayment.
This new wave of sovereign debt crises unfolds against a backdrop of global supply chain redefinition and increasing geopolitical rivalries. The complexities are further compounded by estimations that trillions of dollars in new financing will be required within the next decade to mitigate the catastrophic effects of climate change on developing countries.
The biggest concern for policymakers is the potential impact of China’s slumping economy on the rest of the world. The IMF has downgraded its growth outlook for China twice this year, noting low consumer confidence and weakening industrial output. The organization also warned that countries within the Asian industrial supply chain may experience a loss of momentum.
During an interview on her flight to the meetings, Treasury Secretary Janet L. Yellen expressed her belief that China possesses the necessary tools to address the “complex set of economic challenges” it faces. She stated that she does not expect China to slow down and asserted that it will not impact the United States economy.