Global economy cast in shadow by fears of a wider Middle East conflict

Finance ministers and government officials have warned that the threat of a wider Middle East conflict poses a new threat to the world economy, just as it is recovering from the shocks caused by Covid-19 (the Covid-19 virus) and the Ukraine War.

They said that a deterioration in regional tensions could have serious economic implications, as they concluded the IMF/World Bank meetings held this week in Morocco. Israel launched a massive bombardment on the Gaza Strip as it declared War on Hamas.

Bruno Le Maire is France’s Finance Minister. He said that if the conflict escalates or extends to the entire region, there will be serious consequences. The risks could range from rising energy prices, which would lead to inflation, to a drop in confidence.

Kristalina Georgeeva, head of the IMF warned that a “new dark cloud is forming on the not so sunny horizon of the global economic”, which reflected the fears of the delegates at the Marrakech conference, who were concerned about the prospects of the global economy in the medium term.

Jamie Dimon (JPMorgan’s chief executive) called it “the most dangerous period in the history of the world”. Heading into the meetings, officials had expressed relief that central banks had managed to Reduce inflation Without provoking outright economic recessions, the IMF warned in April of the possibility of a “hard landing” on the global economy.

Pierre-Olivier Gourinchas said that the IMF’s chief economist, Pierre-Olivier Gourinchas stated before the event, “Central banks appear to have tightened their monetary policy and curbed credit growth while cooling the labour market without overdoing”.

As delegates gathered, the mood became darker as wider implications of Israel-Hamas conflict mixed with persistent concerns about vulnerabilities in the global economic system. IMF analysis showed that long-term growth is deteriorating as countries struggle to improve productivity, trade barriers increase amid increasing political tensions and public debt increases around the globe.

The IMF’s forecasts for the short term — which were prepared before the Middle East violence broke out — did not show any obvious bright spots, other than a few countries like the US and India.

Joyce Chang, global head of research at JPMorgan said: “There is no accelerator here.” “I don’t think anyone believes that there will be a major catalyst in the next 12 months.”

Officials argued that the key economic threat following events on October 7 was an escalation in fighting between Israel and Gaza to a larger regional conflict. Not only would this hit confidence but could also add a new inflationary explosion to economies which are just beginning to recover after a series price shocks.

IMF estimates that a 10% increase in oil prices will raise global inflation to 0.4 percentage points.

Gita Gopinath said that the world is facing “a number of shocks”, including the Middle East conflict, and its possible implications for energy prices.

Gopinath said: “Debt is at record highs and we’re in a higher interest rate environment for longer. There are many things to consider. . . “What could possibly go wrong?”

Paschal Donohoe is the head of Eurogroup. He said that the biggest economic question was whether or not the conflict will have an effect on inflation expectations and how that might affect the price pressures in 2024. He predicted that Europe would continue to grow despite the conflict, but not at the pace he had expected. Janet Yellen said that she would stick to her call for a soft landing, telling reporters in this week’s report she did not expect conflict to be a major driver of global economic outlook.

Officials have stressed that the conflict occurred at a time of fragile global economic conditions.

Global economic growth is expected to be relatively low over the next few years, with a projected 3.1% in 2028. This compares to a five-year forecast of growth of 3.6% just before the pandemic and 4.9% before the onset the financial crisis.

According to the Fund, more than 80 percent of economies now face worse prospects compared to 15 years ago. The reasons for this range from slower productivity, to a decrease in population growth. Geopolitical tensions make this process even more likely. IMF estimates that merely increasing trade barriers could result in a global economic decline of up to 7 percent over time.

The global public debt ratio is expected to reach 100 percent of GDP by the end decade. The issue of debt sustainability has been raised at a time Chang called “uncomfortable”.

She explained that recent jitters on the largest financial market in the world — US Treasuries – were driving up borrowing costs globally, just as central banks were shrinking balance sheets and government debt was on the increase.

Christine Lagarde (President of the European Central Bank) highlighted the difficulty of these circumstances during one of the last panels at the annual meeting.

She said, “There are a lot of balls in the air.” “We don’t know exactly where they will land.”