Escalation in Middle East Conflict Threatens Global Economic Recovery, Adding to Existing Challenges
The International Monetary Fund (IMF) issued a warning on Tuesday, signaling a deceleration in the global economic recovery. This alert comes amidst a new outbreak of hostilities in the Middle East, casting a shadow over the world economy, which has been grappling with a series of crises in recent years.
The eruption of clashes between Israel and Hamas over the weekend has introduced another layer of uncertainty into the global economy, illustrating the growing complexity of shielding economies from unpredictable and increasingly frequent global shocks. The conflict has also cast a pall over the annual meetings of the IMF and the World Bank in Morocco, where top economic policymakers were originally convened to address the lingering economic aftermath of the pandemic and Russia’s war in Ukraine.
Ajay Banga, President of the World Bank, expressed the fragile state of economies, stating, “Having war is really not helpful for central banks who are finally trying to find their way to a soft landing.” He was alluding to the challenges faced by policymakers in the West as they endeavor to curb rapid inflation without triggering a recession.
Mr. Banga pointed out that, at present, the impact of the Middle East conflict on the world economy is somewhat contained compared to the Ukraine war, which initially sent oil and food prices skyrocketing, causing turmoil in global markets due to Russia’s prominent role as an energy producer and Ukraine’s status as a major grain and fertilizer exporter. However, he cautioned that any further escalation could lead to “a crisis of unimaginable proportion.”
The uncertainty in oil markets has already been felt. Lucrezia Reichlin, a professor at the London Business School and former Director General of Research at the European Central Bank, emphasized the critical question of energy prices. She voiced concern that another surge in oil prices could compel the Federal Reserve and other central banks to raise interest rates further, which she believes have already increased too rapidly.
The IMF’s Chief Economist, Pierre-Olivier Gourinchas, stressed that it is too early to determine whether the recent surge in oil prices will be sustained. He noted that research indicates a 10 percent rise in oil prices could weigh down the global economy, resulting in a 0.15 percent reduction in output and a 0.4 percent increase in inflation next year.
The IMF’s latest World Economic Outlook underscores the fragility of the ongoing recovery. While it maintained the global growth outlook for this year at 3 percent, it slightly lowered its forecast for 2024 to 2.9 percent. Furthermore, the IMF upgraded its projection for the United States but downgraded those for the euro area and China. It also warned of worsening conditions in China’s real estate sector.
Pierre-Olivier Gourinchas remarked, “We see a global economy that is limping along, and it’s not quite sprinting yet.” Looking ahead, he highlighted a darker picture, citing various risks, including the likelihood of more significant natural disasters driven by climate change.
The European economy, in particular, finds itself caught in the crossfire of mounting global tensions. Since Russia’s invasion of Ukraine in February 2022, European governments have been striving to reduce their reliance on Russian natural gas. They have made significant progress by diversifying their energy sources, partially turning to suppliers in the Middle East.
Over the weekend, the European Union swiftly expressed solidarity with Israel and condemned the unexpected attack by Hamas, which controls Gaza.