Conflict and Oil Production Cuts Impact Middle East’s Economic Growth

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Due to restrictions on oil output and the conflict between Israel and Gaza, the International Monetary Fund has lowered its growth projection for the economies in the Middle East.

The World Economic Outlook, released by the Washington-based fund on Tuesday, indicated that although the global economy displayed resilience the previous year, it is currently in a “sticky spot” due to the slowing pace of disinflation and the impending potential of higher interest rates going forward.

According to its April forecast, the IMF has kept its global growth estimate for 2024 at 3.2% and predicts that the global economy would grow by 3.3% in 2025, a little quicker than in 2024.

IMF Chief Economist Pierre-Olivier Gourinchas stated that “under the hood, however, offsetting growth revisions have shifted the composition,” despite the fact that the economic outlook for this year and next is mostly intact.

Overall, there is still a balance of risks to the forecast. However, some short-term hazards are now more well-known.

The IMF stated that although inflation has been controlled globally, it still poses the greatest threat.

Although the IMF noted that there are risks to the upside, progress on disinflation has slowed in certain advanced economies, particularly the US, and global inflation is generally on track to decline to 5.9% this year from 6.7% last year.

“Global disinflation is gaining traction, but there will be roadblocks along the way.”

Additional obstacles to disinflation might compel central banks – such as the US Federal Reserve – to maintain higher borrowing rates for extended periods of time. This would jeopardize global growth by pushing the dollar higher and having negative knock-on effects for emerging and developing countries.

“A wide range of countries have seen a surge in inflation and a subsequent decline in prices due to global headline inflation shocks, primarily related to energy and food prices,” Mr. Gourinchas stated, citing mounting empirical evidence, some of which is our own.

Mr. Gourinchas stated that a wide range of countries have seen a surge in inflation and a subsequent decline in prices due to global headline inflation shocks, primarily related to energy and food prices.

He further stated that the good news is that inflation decreased without a recession when the headline shocks subsided. But the bad news is that, although total inflation has not decreased, energy and food price inflation has nearly returned to pre-pandemic levels in many nations.

The Slowdown in the Middle East’s Growth

While several Middle Eastern nations that import oil still worry about inflation, the ongoing conflict between Israel and Hamas has a negative impact on development prospects.

This year, the economies of the Middle East and North Africa are expected to be significantly uncertain due to the conflict’s potential to spread throughout the area.

The IMF reduced its projection for growth in the Middle East and Central Asia in 2024 by 0.6 percentage points to 2.7% in April, and it did so again this year, this time by 0.4% percentage points to 2.4% expansion.

Additionally, the fund updated its forecast for MENA’s economic growth in 2025, raising it to 4% from 0.4 percentage points.

The largest Arab economy, Saudi Arabia, has seen its growth estimate lowered by 0.9 percentage points to 1.7% for 2024 and by 1.3 percentage points to 4.7% for 2025.

According to the IMF, the adjustment reflects mainly the extension of oil production cuts.

The world’s largest oil exporter, Saudi Arabia, profited from the surge in crude prices, which have increased by almost 10% this year due to production reductions by the OPEC+ group.

OPEC+ decided last month to push out the 3.66 million barrels per day of output restrictions that were supposed to conclude this year to the end of 2025.

Eight OPEC+ members extended their voluntary production cutbacks by an additional 2.2 million barrels per day for an additional three months, to the end of September.

Growth of Advanced Economies

The IMF’s forecast for this year’s economic growth is less than the global economy’s historical growth average.

The fund stated that while growth in the first quarter surprised on the upside in several nations, there were big adverse shocks in the US and Japan.

In keeping with its April prediction, the IMF projects that advanced economies will grow by 1.7% overall this year and 1.8% the following year.

Due to the year’s slower-than-expected start, the US’s predicted growth for this year has been lowered to 2.6%, which is 0.1 percentage points less than what was predicted in April.

The largest economy in the world, the US, is predicted to grow by just 1.9% in 2025 as the labour market cools and consumption declines and fiscal policy begins to progressively tighten.

The IMF projects a moderate rebound of 0.9% this year in the euro area, an upward adjustment of 0.1 percentage points, propelled by strong momentum in services and higher-than-expected net exports in the first half of the year. The region’s activity looks to have bottomed out.

By 2025, the economy of the bloc is expected to grow by 1.5%.

Driving Force Behind Global Growth

The fund updated upward its growth predictions for China and India, which together account for about half of global growth, and stated that Asia’s developing market economies continue to be the “main engine for the global economy” this year.

The IMF raised its April projection by 0.1 percentage points to predict that developing and middle-income economies will grow by 4.2% this year and the following year.

The Chinese economy is expected to expand by 5% this year and 4.5% in 2025, which is 0.4 percentage points quicker than anticipated in April. The fund also projects that India’s GDP would grow by 7% this year, which is 0.2 percentage points faster than its April projections. In 2025, it is projected to expand by 6.5%.