World Economic Recovery at Risk Due to Conflict in the Middle East, Says IMF

The IMF’s latest World Economic Outlook emphasizes the fragility of the ongoing economic recovery. While it maintains its global growth forecast for this year at 3 per cent, it has slightly lowered the projection for 2024 to 2.9 per cent.

The International Monetary Fund (IMF) issued a warning on Tuesday, stating that the global economic recovery is losing momentum. This warning comes as a new conflict in the Middle East threatens to disrupt the world economy, which has already been grappling with multiple crises over the past few years.

The eruption of hostilities between Israel and Hamas, which began over the weekend, presents a significant challenge in safeguarding economies from increasingly frequent and unpredictable global shocks. The ongoing conflict has cast a shadow over the annual meetings of the IMF and the World Bank in Morocco, where top economic policymakers had initially intended to address the persistent economic impacts of the pandemic and Russia’s war in Ukraine.

Ajay Banga, President of the World Bank, expressed concern over the delicate state of economies in this situation. He noted that the outbreak of war complicates the efforts of central banks to navigate a path toward a “soft landing,” particularly as they attempt to manage inflation without triggering a recession.

Banga acknowledged that, at present, the impact of the Middle East conflict on the global economy is less severe than the war in Ukraine. However, he emphasized the potential dangers if the conflict were to escalate, describing it as “a crisis of unimaginable proportion.”

The oil markets are already exhibiting signs of unease. The outcome of the conflict holds critical implications for energy prices, and experts are closely monitoring the situation. Another surge in oil prices could exert pressure on central banks, including the Federal Reserve, to further raise interest rates.

The IMF’s latest World Economic Outlook emphasizes the fragility of the ongoing economic recovery. While it maintains its global growth forecast for this year at 3 per cent, it has slightly lowered the projection for 2024 to 2.9 per cent. Notably, the report upgrades the output outlook for the United States for this year but downgrades expectations for the euro area and China. It also raises concerns about the deteriorating situation in China’s real estate sector.

Pierre-Oliver Gourinchas, the chief economist at the IMF, described the global economy as “limping along” and highlighted recent volatility in commodity prices. He expressed apprehension regarding the increasing signs of “geoeconomic fragmentation” and its potential to hinder global economic activity.

Europe’s economy finds itself caught in the crossfire of growing global tensions. European governments have been working to reduce their dependence on Russian natural gas since Russia’s invasion of Ukraine in 2022. They have been partially successful in diversifying energy sources to the Middle East.

The recent outbreak of conflict has had varied reactions among oil suppliers. For instance, Algeria, which has increased its natural gas exports to Italy, criticized Israel for responding with airstrikes on Gaza.

Even prior to these events, the energy transition has been taking a toll on European economies. The IMF anticipates that growth in the 20 eurozone countries will slow to just 0.7 per cent this year, down from 3.3 per cent in 2022. Germany, the largest European economy, is expected to contract by 0.5 per cent.

The combination of high-interest rates, persistent inflation, and rising energy prices is projected to slow down economic growth in the UK, from 4.1 per cent in 2022 to 0.5 per cent this year.

Sub-Saharan Africa is also grappling with a slowdown in growth, which is forecast to contract by 3.3 per cent this year, although the outlook for next year is more positive, with an expected growth rate of 4 per cent.

Many of these nations face the specter of mounting debt, which now accounts for 60 per cent of the region’s total output, double what it was a decade ago. Soaring interest rates have contributed to the increasing cost of debt repayment.

The current global landscape is characterized by a reappraisal of global supply chains and growing geopolitical rivalries. In addition to these complexities, estimates indicate that trillions of dollars in new financing will be required in the next decade to mitigate the devastating effects of climate change in developing countries.

A major concern for policymakers is the potential impact of China’s slowing economy on the rest of the world. The IMF has revised its growth outlook for China twice this year and has pointed out that consumer confidence is “subdued” while industrial production is weakening. This raises concerns about countries that are part of the Asian industrial supply chain being exposed to this loss of momentum.

While acknowledging China’s economic challenges, Treasury Secretary Janet L. Yellen stated that she does not expect the Chinese slowdown to have a significant impact on the U.S. economy, emphasizing that China possesses the tools to address its economic challenges.

As the world grapples with ongoing crises and increasing uncertainty, central banks and governments face the arduous task of steering their economies through these turbulent times. The delicate balance between managing inflation, navigating international conflicts, and addressing the lasting impacts of the pandemic is proving to be a formidable challenge. The global economy remains in a state of uncertainty, requiring careful and adept management by leaders and policymakers.