The recovery is “limping along” amid the threat of another Middle East war
The International Monetary Fund’s chief has warned that the Middle East conflict, triggered by Hamas’ terrorist attack on Israel, is “a new cloud” over the global economic situation.
Kristalina Georgeeva stated that officials are closely monitoring the developments in the area amid an escalating war which has driven up oil prices, and shaken financial markets.
The UK economy has already been struggling. Official data released on Thursday showed that the UK only managed a 0.2pc growth in August. This raises fears of recession. In the US, fuel prices have increased. This has put pressure on inflation.
The IMF managing director stated that economies all over the world have already experienced a number of shocks, including the pandemic in Ukraine and the soaring price spikes.
The Fund cut its forecasts for global growth and warned that the recovery is “limping along”. amid threats of a Middle East war.
“This is very clearly a new cloud in what is not a sunny horizon for the global economy.” “This is a new cloud that darkens this horizon, which is not necessary,” said Ms Georgieva at a conference of the IMF’s annual meetings in Morocco.
She warned that the new normal for governments is to experience economic and financial shocks as they run out of fiscal firepower.
She warned that higher interest rates for a longer period of time could cause more market turmoil, as “a sharp further tightening” of financial conditions hits the markets and nonbanks.
Ms Georgieva stated that officials at the Fund were now forced to “think unthinkable”, in terms of preparing themselves for future shocks, and their role as lender of last recourse.
She said: “We’re experiencing severe shocks, which are now the new norm for a weak world, weakened by slow growth and economic fragmentation.”
The IMF chief also warned that the central banks will have to maintain higher interest rates for longer in order to contain inflation and dampen growth.
Ms Georgieva stated: “Inflation has decreased but is still above target in a number of countries.” Interest rates will need to stay higher longer, putting more pressure on the already weak growth.
Economists warn that higher interest rates are slowing down the UK’s growth.
The GDP increased by 0.2pc, a slight improvement over July’s 0.6pc decline, but it is still a slow pace of growth.
The Office for National Statistics reported that manufacturing output fell by 0.8pc and construction output was down by 0.5pc. However, the dominant services sector, which grew by 0.4pc, has returned to growth.
The 0.2pc increase in GDP is a partial recovery after the 0.6pc decline in GDP that occurred in July when teachers’ and doctors’ strikes slowed growth.
Swati Dhingra is a member of Bank of England’s Monetary Policy Committee. She said that the economy had “already flatlined”.
She told BBC that “when you’re as slow as we are now, chances of recession and not recession will be pretty evenly balanced.” “So, we need to be ready for that.”
Sandra Horsfield, an analyst at Investec, said that the economy will likely slip into a mild recession this winter. The economy may shrink or remain flat in the third-quarter of the year.
She said that this is likely to be welcomed as a sign by the Bank of England, that the harsh medicine of rapid rate increases is beginning to take effect, without, thus far, hinting at an economic recession.
The US inflation rate remained at 3.7pc, instead of falling as economists expected. Higher fuel prices kept pressure on household budgets.
Bond yields are rising amid fears that stubborn inflation will require the Federal Reserve to raise interest rates for longer.
Huw Pill is the Bank of England chief economist. He said that businesses are reducing their hiring and instead giving pay increases to existing employees. This could indicate a new inflationary pressure on the job market.
He said to a panel at Marrakech that “increased labour hoarding is occurring due to the difficulty in recruiting and the possible reemergence of insider/outsider dynamics when it comes wage setting.
We certainly see a large discrepancy in what we’re told by surveys about new hires and their salaries compared to what incumbents are paid. This type of discrepancy could indicate that the labour market is acting differently.