Global economy weakened by Israel-Gaza war faces new crisis

The International Monetary Fund said on Tuesday that the pace of the global economic recovery is slowing, a warning that comes as a new war in the Middle East adds to the world economy already reeling from years of overlapping crises.

The eruption of fighting between Israel and Hamas over the weekend, which could cause disruption across the region, shows how challenging it has become to protect economies from frequent and unpredictable global shocks. The conflict has loomed large over the gathering of top economic policymakers in Morocco for the annual meetings of the IMF and World Bank.

Officials who had planned to deal with the pandemic and the lingering economic effects of Russia’s war in Ukraine now face a new crisis.

“The economy is in a fragile state,” World Bank President Ajay Banga said in an interview on the sidelines of its annual meetings. “Having a war is really not helpful to central banks that are ultimately trying to find their way to a soft landing,” he said. Mr Banga was referring to efforts by policymakers in the West to reduce hyperinflation without precipitating recession.

Mr Banga said that so far the impact of the Middle East attacks on the world economy has been more limited than the war in Ukraine. That conflict initially sent oil and food prices soaring, sending global markets reeling, given Russia’s role as a top energy producer and Ukraine’s position as a major exporter of grain and fertilizer.

“But if it spreads in any way it becomes dangerous,” Mr Banga said, adding that such a development would result in a “crisis of unimaginable proportions”.

Oil markets are already troubled. “The main question is what’s going to happen to energy prices,” said Lucrezia Reichlin, a London Business School professor and former director general of research at the European Central Bank.

Ms. Reichlin worries that another rise in oil prices will put pressure on the Federal Reserve and other central banks to further raise interest rates, which she said have risen too quickly.

As far as energy prices are concerned, Ms. Reichlin said, “We have two fronts, Russia and now the Middle East.”

IMF chief economist Pierre-Olivier Gourinchas said it was too early to assess whether the recent surge in oil prices would last. If that were to happen, he said, research shows a 10 percent increase in oil prices would hit the global economy, reducing output by 0.15 percent and increasing inflation by 0.4 percent next year.

In its latest World Economic Outlook, the IMF underlined the fragility of the recovery. It maintained its global growth outlook for this year at 3 percent and slightly lowered its forecast for 2024 to 2.9 percent. Although the IMF upgraded its forecast for output in the United States for this year, it downgraded those in the euro zone and China, warning that the crisis in that country’s real estate sector is worsening.

“We see a global economy that is slowing, and it is not yet fully gaining momentum,” Mr. Gourinchas said. In the medium term, “the picture is darker,” he said, citing a number of risks, including the possibility of more major natural disasters caused by climate change.

Especially Europe’s economy is stuck amidst increasing global tension. Since Russia invaded Ukraine in February 2022, European governments have become desperate to free themselves from overdependence on Russian natural gas.

They have succeeded to a large extent partly by turning to suppliers in the Middle East.

Over the weekend, the EU swiftly expressed solidarity with Israel and condemned the sudden attack by Hamas, which controls Gaza.

Some oil suppliers may take a different view. For example, Algeria, which has increased natural gas exports to Italy, criticized Israel for responding to airstrikes on Gaza.

Even before the weekend’s events, the energy transition had taken a heavy toll on European economies. Among the 20 countries that use the euro, the fund estimates growth will slow to just 0.7 percent this year from 3.3 percent in 2022. Germany, Europe’s largest economy, is expected to contract by 0.5 percent.

Britain’s growth rate is expected to slow to 0.5 percent this year from 4.1 percent in 2022 due to the shock of high interest rates, persistent inflation and rising energy prices.

Sub-Saharan Africa is also in the grip of recession. The growth rate this year is expected to decline to 3.3 percent, although the outlook for next year is better, when the growth rate is expected to be 4 percent.

Many of these countries are facing huge debts. Average debt now stands at 60 percent of the sector’s total output – double what it was a decade ago. Higher interest rates have contributed to rising repayment costs.

This next generation of sovereign debt crises is playing out in a world that is coming to terms with the redefinition of global supply chains in addition to growing geopolitical rivalries. Complexities also include estimates that within the next decade, trillions of dollars in new financing will be needed to mitigate catastrophic climate change in developing countries.

The biggest question facing policy makers is what impact China’s sluggish economy will have on the rest of the world. The IMF has lowered its growth outlook for China twice this year and said on Tuesday that consumer confidence there is “low” and industrial output is weakening. It warned that countries that are part of the Asian industrial supply chain could face this loss of momentum.

In an interview on her flight to the meetings, Treasury Secretary Janet L. Yellen said she believed China had the tools to deal with a “complex set of economic challenges” and that she did not expect it to slow down. Will affect the American economy.

“I think they have significant challenges that they have to address,” Ms. Yellen said. “I have not seen and do not expect any impact on us.”

Leave a Comment

“The Untold Story: Yung Miami’s Response to Jimmy Butler’s Advances During an NBA Playoff Game” “Unveiling the Secrets: 15 Astonishing Facts About the PGA Championship”