Fragile global economy faces new crisis in Israel-Gaza war | ET REALITY


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

The outbreak of fighting between Israel and Hamas over the weekend, which could sow disruption across the region, reflects how difficult it has become to protect economies from increasingly frequent and unpredictable global shocks. The conflict has overshadowed a meeting of senior economic policymakers in Morocco for the annual meetings of the IMF and World Bank.

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

“Economies are in a delicate state,” Ajay Banga, president of the World Bank, said in an interview on the sidelines of the annual meetings. “Having a war doesn’t really help central banks who are finally trying to find their way to a soft landing,” he said. Banga was referring to efforts by Western authorities to try to cool rapid inflation without triggering a recession.

Banga said that so far, the impact of the Middle East conflict on the world economy is more limited than the war in Ukraine. That conflict initially caused oil and food prices to soar, roiling global markets given Russia’s role as a leading energy producer and Ukraine’s status as a major grain and fertilizer exporter.

“But if this were to spread in any way, then it would become dangerous,” Banga added, stating that such an evolution would result in “a crisis of unimaginable proportions.”

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

Reichlin worries that another rise in oil prices will pressure the Federal Reserve and other central banks to further raise interest rates, which she says have risen too much, too fast.

As for energy prices, Ms. Reichlin said, “we have two fronts, Russia and now the Middle East.”

In its latest World Economic Outlook report, the IMF highlighted the fragility of the recovery. It kept its global growth outlook for this year at 3 percent and slightly reduced its forecast for 2024 to 2.9 percent. Although the IMF improved its production projection in the United States for this year, it downgraded the rating for the euro zone and China, while warning that difficulties in that nation’s real estate sector are worsening.

“We see a global economy that is limping along and is not yet accelerating,” said Pierre-Olivier Gourinchas, the IMF’s chief economist, who pointed to recent volatility in commodity prices as a problem. “The broader issue here is geoeconomic fragmentation, which is something that affects us, and we see increasing signs of that, and we are concerned that it may also slow down global economic activity.”

The European economy, in particular, is caught in the middle of rising global tensions. Since Russia invaded Ukraine in February 2022, European governments have frantically struggled to free themselves from over-reliance on Russian natural gas.

They have largely achieved this by turning, in part, to suppliers in the Middle East.

Over the weekend, the European Union quickly expressed solidarity with Israel and condemned the surprise attack by Hamas, which controls Gaza.

Some oil suppliers may have a different opinion. Algeria, For example, it has increased its exports of natural gas for Italy, He criticized Israel for responding with airstrikes on Gaza.

Even before the weekend’s events, the energy transition had taken its toll on European economies. In it 20 countries that use the euro, the Fund predicts 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 0.7 percent. 5 percent.

High interest rates, persistent inflation and aftershocks from spiraling energy prices are also expected to slow growth in Britain to 0.5 percent this year from 4.1 percent in 2022.

Sub-Saharan Africa is also caught in the slowdown. Growth is expected to contract this year by 3.3 percent, although the outlook for next year is brighter, when growth is forecast to be 4 percent.

Staggering debt looms over many of these nations. He average debt Today it represents 60 percent of the region’s total production, double what it was a decade ago. Higher interest rates have contributed to higher repayment costs.

This next generation of sovereign debt crises is unfolding in a world that is coming to terms with a reassessment of global supply chains, as well as growing geopolitical rivalries. Adding to the complexities are estimates that in the next decade, billions of dollars More funding will be needed to mitigate devastating climate change in developing countries.

One of the biggest questions facing policymakers 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, saying on Tuesday that consumer confidence there is “moderate” and that industrial production is weakening. He warned that countries that are part of the Asian industrial supply chain could be exposed to this loss of momentum.

In an interview on her flight to the meetings, Treasury Secretary Janet L. Yellen said she believes China has the tools to address a “complex set of economic challenges” and that she does not expect its slowdown to hurt the U.S. economy. .

“I think they face significant challenges that they need to address,” Yellen said. “I haven’t seen it and I don’t expect it to impact us.”

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