Finance ministers and officials warn that just as the world is emerging from the shock of Covid-19 and the war in Ukraine, the specter of a wider conflict in the Middle East poses a new threat to the global economy.
Broader regional tensions will have a significant economic impact, they said at the end of an International Monetary Fund and World Bank meeting in Morocco this week. The biennial event comes as Israel declares war on Hamas and launches massive bombing of Gaza.
“If the conflict escalates or expands to the entire region, we will face serious consequences,” French Finance Minister Bruno Le Maire told the Financial Times. He added that risks include inflation caused by rising energy prices and an economic downturn. . Have confidence.
IMF Managing Director Kristalina Georgieva warned that “new dark clouds will appear on the sunniest horizon of the global economy”, reflecting the lukewarmness of Marrakech delegates about the medium-term outlook for the global economy. Not a hot concern.
On the other side of the Atlantic, JPMorgan CEO Jamie Dimon called this “the most dangerous time the world has seen in decades.”
Ahead of the meeting, officials expressed relief that central banks had succeeded in curbing inflation without triggering an outright recession, sidestepping a risk the International Monetary Fund flagged in April when it spoke of a possible “hard landing” for the global economy.
IMF chief economist Pierre-Olivier Gurinchas said before the event that central banks appeared to be tightening monetary policy, curbing credit growth and cooling the labor market, but “not excessively.” ”.
But as delegates met, the mood turned somber as the broader implications of Israel’s war with Hamas mixed with underlying anxiety about the continued fragility of the global economy. The IMF analysis noted that long-term growth trends are worsening as economies struggle to boost productivity, political tensions worsen and public debt rises, and barriers to free trade rise.
What is notable among the IMF’s short-term forecasts made before the outbreak of violence in the Middle East is the lack of clear bright spots, except for a few countries such as the United States or India.
“There’s no accelerator here,” said Joyce Chang, global head of research at JPMorgan Chase. “I don’t think anyone thinks there’s going to be a big catalyst in the next year or so.”
Officials believe the main economic danger after the events of October 7 is an escalation of fighting in Israel and Gaza into a broader regional conflict. That would not only undermine confidence but also trigger a new burst of inflation in an economy that is just beginning to recover from a series of price shocks.
The International Monetary Fund believes that a 10% increase in oil prices will lead to an increase in global inflation by approximately 0.4 percentage points.
Gita Gopinath, deputy managing director of the International Monetary Fund, said the world was facing “a number of shocks,” including conflict in the Middle East and its potential impact on energy prices.
Gopinath added: “Debt levels are at record levels and at the same time we’re in this longer-term higher interest rate environment. There’s a lot . . . that can go wrong.”
Eurogroup Chairman Paschal Donohoe told the Financial Times that the biggest economic question was whether the conflict would have an impact on inflation expectations and what that would mean for falling price pressures in 2024. Europe will continue to grow, he predicts, and conflicts continue, but more slowly than he would like.
U.S. Treasury Secretary Janet Yellen said she stood by her call for a soft landing, telling reporters this week that she did not expect the conflict to be “a major driver of the global economic outlook.”
But officials stressed that the conflict comes at a time when the world economy is in a fragile state.
The global economy is currently widely expected to grow at a relatively weak level over the medium term, at just 3.1% by 2028. By comparison, the five-year forecast before the outbreak was 3.6% and in 2028 it was 4.9%. One percent before the financial crisis.
The IMF said more than 80% of economies now face worse prospects than they did 15 years ago, due to factors including declining productivity and slower population growth.
On top of this, the global economy is fragmenting into competing blocs—a process that is difficult to reverse and that geopolitical tensions are more likely to reverse. The International Monetary Fund estimated earlier this year that increasing trade barriers alone could reduce global economic output by as much as 7% in the long term.
On top of this, fiscal risks will continue to rise as global public debt ratios climb to 100% of gross domestic product by the end of the decade. This has once again raised concerns about debt sustainability, with Zhang calling it an “inconvenient” period.
She explained that recent nervousness in the world’s largest financial market – U.S. Treasuries – is pushing up global borrowing costs, while central banks are shrinking their balance sheets and government debt issuance is increasing.
Speaking during the final panel discussion at the annual meeting, European Central Bank President Christine Lagarde highlighted how tricky the set of conditions created by these headwinds is.
“There were all these balls in the air,” she said. We’re not sure where they’ll land. ”
Additional reporting by Martin Arnold in Frankfurt
Svlook
