The war between Israel and Gaza puts the global economy under control

The International Monetary Fund said on Tuesday that the pace of global economic recovery is slowing. This warning came at a time when a new war in the Middle East threatens to upend the global economy, which is already suffering from several years of overlapping crises.

The outbreak of fighting between Israel and Hamas over the weekend, which could spread chaos across the region, reflects how difficult it is to protect economies from global shocks that are becoming more frequent and unpredictable. The conflict overshadowed the meeting of key economic policy makers in Morocco, during the annual meetings of the International Monetary Fund and the World Bank.

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

“Economies are in a delicate state,” World Bank President Ajay Banga said in an interview on the sidelines of the annual meetings. Going to war does little to help central banks, which are finally trying to find their way to a solution Soft landing” he said. Banga was referring to efforts by Western policymakers as they try to calm rapid inflation without sparking a recession.

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

“But if this spreads in any way, it will become dangerous,” Banga added, considering that such a development would lead to “a crisis of unimaginable proportions.”

Oil markets are already tense. “The key question is what will happen to energy prices,” said Lucrezia Reichlin, a professor at London Business School and former director general for research at the European Central Bank.

Raichlin worries that another rise in oil prices will put pressure on the Fed and other central banks to continue raising interest rates, which she says have risen too much, too quickly.

Regarding energy prices, Richlin said: “We have two fronts, Russia and now the Middle East.”

Pierre-Olivier Gourincha, chief economist at the International Monetary Fund, said it was too early to assess whether the recent rise in oil prices would continue. If so, studies indicate that a 10 percent increase in oil prices will constitute a burden on the global economy, as it will reduce production by 0.15 percent and increase inflation by 0.4 percent next year.

In its latest World Economic Outlook report, the International Monetary Fund highlights the fragility of the economic recovery. It maintains its global growth forecast for this year at 3 percent and slightly lowers its forecast for 2024 to 2.9 percent. Although the International Monetary Fund improved its forecasts for production in the United States this year, it lowered its forecasts for the eurozone and China, while warning of the worsening difficulties facing the real estate sector in that country.

“We see a global economy that is faltering and unable yet to take off,” Gorinchas said. In the medium term, “prospects are bleaker,” he added, pointing to a number of risks, including the potential for more large-scale natural disasters caused by climate change.

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

They achieved this largely by partly turning to suppliers in the Middle East.

Over the weekend, the European Union was quick to express its solidarity with Israel and condemned the surprise attack by Hamas, which controls Gaza.

Some oil suppliers may have a different opinion. AlgeriaFor example, which increased exports From natural gas to ItalyHe criticized Israel for its response with air strikes on Gaza.

Even before the weekend’s events, the energy transition had already affected European economies. In the 20 countries In countries that use the euro, the International Monetary Fund expects growth to slow to just 0.7 percent this year, down from 3.3 percent in 2022. Germany, Europe’s largest economy, will contract by 0.5 percent.

Higher interest rates, persistent inflation and the impact of rising energy prices will also slow UK growth, from 4.1 per cent in 2022 to 0.5 per cent this year.

Sub-Saharan Africa is also affected by the slowdown. Growth is expected to contract by 3.3 percent this year, although the outlook for next year is brighter, with growth expected at 4 percent.

Crippling debts loom over many of these countries. the Average debt It now amounts to 60 percent of the region’s total production. This is double what it was a decade ago. The increase in interest rates has contributed to higher consumption costs.

This new generation of sovereign debt crises is unfolding in a world facing a reassessment of global supply chains, as well as increasing geopolitical rivalries. Adding to the complications are estimates that they will be needed in the next decade Billions of dollars In new financing to mitigate the effects of devastating climate change in developing countries.

One of the biggest questions facing policymakers is what impact China’s stagnant economy might have on the rest of the world. The International Monetary Fund cut its growth forecast for China twice this year, declaring on Tuesday that consumer confidence was “weak” and industrial production was weakening. He warned that countries that are part of the Asian industrial supply chain may experience this loss of momentum.

In an interview during her trip to the meetings, US Treasury Secretary Janet Yellen said she believes China has the tools to confront a “complex set of economic challenges” and that she does not expect its slowdown to be a burden on the US economy.

“I think they have significant challenges that they need to address,” Yellen said. “I have not seen and do not expect infection towards us.”

Alan Rappaport is an economic policy reporter based in Washington. He covers the US Treasury and writes about taxes, trade and financial issues. He previously worked at The Financial Times and The Economist. More from Alan Rappaport

Patricia Cohen is a global economics correspondent based in London. Since joining The Times in 1997, he has also written about theatre, books and ideas. She is an author In Our Prime: The Fascinating History and Promising Future of the Middle Ages. More from Patricia Cohen