The specter of wider conflict in the Middle East poses a new threat to the global economy just as the world emerges from the shocks caused by Covid-19 and the Ukraine war, finance ministers and officials warned.
Greater regional tensions would have a significant economic impact, they said as they wrapped up IMF and World Bank meetings in Morocco this week. The biennial events came as Israel declared war on Hamas and launched a heavy bombardment of the Gaza Strip.
“If we are faced with an escalation or spread of the conflict across the region, we will face serious consequences,” Bruno Le Maire, France’s finance minister, told the Financial Times, adding that the risks of higher energy prices fuel inflation, even a decline, were enough in confidence.
Kristalina Georgieva, the head of the IMF, warned of a “new cloud on the not exactly sunniest horizon for the global economy,” echoing the fears of delegates in Marrakech that the medium-term outlook for the global economy is mediocre.
Across the Atlantic, JPMorgan Chief Executive Jamie Dimon called this “the most dangerous time the world has seen in decades.”
Kristalina Georgieva, the head of the IMF, warned of a “new cloud on the not exactly sunniest horizon for the global economy” © Filip Singer/EPA-EFE/ShutterstockEarlier in the meetings, officials had expressed relief that central banks had managed to contain inflation without triggering outright recessions – thereby avoiding a risk that the IMF had flagged in April he spoke of a possible “hard landing” for the global economy.
Central banks appeared to have tightened monetary policy, curbed credit growth and cooled the labor market “without overdoing it,” said Pierre-Olivier Gourinchas, chief economist at the IMF before the event.
But as delegates gathered, the mood soured as the broader impact of the Israel-Hamas war mixed with underlying concerns about persistent vulnerabilities in the global economy. The IMF analysis pointed out that longer-term growth trends are deteriorating as economies struggle to increase productivity, obstacles to free trade increase amid rising political tensions and public debt rises worldwide.
Notable in the IMF’s short-term forecasts, made before the outbreak of violence in the Middle East, was the lack of obvious bright spots beyond a handful of countries such as the US or India.
“There is no accelerator here,” said Joyce Chang, head of global research at JPMorgan. “I don’t think anyone feels like there’s going to be a big catalyst in the next year or so.”
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According to officials, the greatest economic danger after the events of October 7th is an escalation of fighting in Israel and Gaza into a larger regional conflict. This could not only hit confidence but also lead to a new burst of inflation in economies that are just beginning to recover from a series of price shocks.
The IMF estimates that a 10 percent increase in oil prices would increase global inflation by about 0.4 percentage points.
IMF deputy chief Gita Gopinath said the world was facing “a large number of shocks,” including the Middle East conflict and its potential impact on energy prices.
Gopinath added: “The debt is at record levels and at the same time we are interested in increasing it in the longer term.” [rate] Environment. There’s a lot. . . This could go wrong.”
Paschal Donohoe, the head of the Eurogroup, told the Financial Times that the big economic question was whether the conflict would have an impact on inflation expectations and what that could mean for reducing price pressures in 2024. Europe will continue to grow The conflict continues, he predicted, but at a slower pace than he had hoped.
Janet Yellen, the U.S. Treasury Secretary, said she was sticking with her soft landing, telling reporters this week she did not expect the conflict to be a “likely key driver of the global economic outlook.”
However, officials stressed that the conflict came at a time when the global economy was in a fragile state.
It is now widely expected that the global economy will grow at a relatively weak level in the medium term, reaching just 3.1 percent in 2028. In comparison, growth over the next five years was expected to be 3.6 percent just before the pandemic and 4.9 percent before the onset of the financial crisis.
According to the fund, the outlook for more than 80 percent of economies is worse today than it was 15 years ago, for reasons ranging from lower productivity to a slowdown in population growth.
Added to this is the fragmentation of the global economy into competing blocs – a process that is difficult to reverse and is made even more likely by geopolitical tensions. The IMF estimated at the beginning of the year that increasing trade barriers alone could reduce global economic output by up to 7 percent in the long term.
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In addition, there are increasing fiscal risks as the global government debt ratio rises towards 100 percent of gross domestic product by the end of the decade. That has revived concerns about debt sustainability at a time Chang described as “uncomfortable.”
Recent turmoil in the world’s largest financial market, U.S. Treasury bonds, has pushed up global borrowing costs as central banks reduced their balance sheets and government bond issuance increased, she said.
Christine Lagarde, President of the European Central Bank, emphasized the difficult circumstances of these headwinds in her speech at one of the final panels of the annual meeting.
“There are all these balls in the air,” she said. We’re not entirely sure where they’ll end up.”
Additional reporting by Martin Arnold in Frankfurt