IMF Worsens Outlook for ‘limping’ World Economy. Further Uncertainty Due to Mideast War
The International Monetary Fund (IMF) has issued a warning, stating that the global economy has lost momentum due to higher interest rates, the invasion of Ukraine, widening geopolitical tensions, and is now facing new uncertainties arising from the conflict between Israel and Hamas militants.
The IMF anticipates that global economic growth will slow to 2.9% in 2024, down from the expected 3% for this year. This forecast for the upcoming year is a slight decrease from the 3% projected in July.
This deceleration comes at a time when the world has not fully recovered from the short-lived but devastating COVID-19 recession in 2020. Now, it faces potential repercussions from the Middle East conflict, particularly in terms of oil prices.
Several previous shocks, including the pandemic and Russia’s war in Ukraine, have led to a reduction in global economic output of approximately $3.7 trillion over the past three years compared to pre-COVID trends.
“The global economy is limping along, not sprinting,” remarked IMF Chief Economist Pierre-Olivier Gourinchas during a news conference at the organization’s annual meeting in Marrakech, Morocco.
The IMF’s projection of 3% growth for this year is a decline from the 3.5% recorded in 2022 but remains unchanged from its July estimates.
Gourinchas cautioned that it’s too early to assess the impact of the recent war between Israel and Hamas on global economic growth, noting that oil prices have increased by about 4% in the past few days. He highlighted the potential risk of disruptions in oil production or transportation in the region.
A sustained 10% rise in oil prices would reduce global economic growth by 0.15% and increase global inflation by 0.4%, Gourinchas explained.
However, he emphasized that it’s premature to draw any conclusions at this stage.
So far, the increase in oil prices has been relatively mild, according to Commerzbank commodities analyst Carsten Fritsch. He pointed out that key oil-producing countries like Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq have not expressed support for Hamas, making it unlikely for them to restrict oil supply in response to the conflict.
The world economy has displayed remarkable resilience amid central banks’ aggressive interest rate hikes to combat rising inflation. These measures have helped alleviate inflationary pressures without causing significant unemployment, a combination that aligns with the concept of a “soft landing.”
The IMF anticipates a decrease in global consumer price inflation from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024.
The United States stands out in the IMF’s latest World Economic Outlook, with an upgraded growth forecast of 2.1% for this year (matching 2022) and 1.5% for 2024 (a significant increase from the 1% predicted in July). The U.S., as an energy exporter, has been less affected by rising oil prices, and consumers have been more willing to spend savings accumulated during the pandemic.
In contrast, the outlook is gloomier for the Eurozone, with a downgrade in growth to 0.7% for this year and 1.2% for 2024. The German economy is projected to contract by 0.5% this year before recovering to 0.9% growth in the following year.
The Chinese economy, the world’s second-largest, is expected to grow by 5% this year and 4.2% in 2024, both downgrades from previous July estimates. China’s economy was anticipated to rebound this year following the end of stringent “zero-COVID” lockdowns that had stifled growth in 2022. However, issues in the country’s housing market have posed challenges.
The IMF expressed concern about the emergence of geopolitical blocs that could impede international trade and global economic growth. Sanctions on Russia for the Ukraine invasion and efforts to reduce reliance on Chinese imports have contributed to these concerns.
The organization highlighted that in the previous year, countries imposed nearly 3,000 new trade restrictions, a significant increase from fewer than 1,000 in 2019. The IMF anticipates international trade to grow by only 0.9% this year and 3.5% in 2024, a considerable drop from the annual average of 4.9% recorded between 2000 and 2019.
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