“Middle East Conflict Risks Inflation, Warns IMF”

The International Monetary Fund (IMF) has issued a warning that the intensification of the ongoing conflict in the Middle East could provoke a resurgence in inflation and impede the anticipated reduction in interest rates, negatively impacting global economic growth. In its recent Global Economic Outlook report, the IMF commented that the global economy demonstrated an unexpected resilience post October 2023, with employment and income faring better than predicted in an environment of increasing interest rates.

Nevertheless, the IMF signalled that a surge in commodity prices, resulting from expanding conflict in the Middle East, might disrupt the current progress in subduing inflation and affect the ease of central bank policies, thus causing a negative impact on global economic growth.

The price of oil witnessed a considerable increase in anticipation of a probable Iranian attack on Israel last week and continues to fluctuate due to increased geopolitical tensions coupled with the prospect of an Israelian retaliation. The IMF, in its recent report scheduled to align with its annual Spring Meetings in Washington with the World Bank, stated that the ongoing attacks in the Red Sea and the unresolved war in Ukraine also pose the risk of further supply disturbances that could undermine the global recovery.

The prognosis for 2024 suggests a slight 0.1% increase from the IMF’s prior forecast, albeit the general growth remains below average by historical measures. The economic growth in the Eurozone is expected to bounce back from its marginal rate of an estimated 0.4% in 2023, significantly impacted by the Ukraine war, to 0.8% in the current year, and further to 1.5% in 2025. Meanwhile, the US is projected to witness a growth boost to 2.7% in 2024, followed by a reduction to 1.9% in 2025, the deceleration resulting from a careful fiscal tightening and a slackening in labour markets impeding the overall demand.

The IMF report primarily emphasises the robustness of economic activity in the face of stringent monetary policies.

Despite warnings of stagflation and a global recession, the world economy managed to grow steadily as the pinnacle of global inflation was left behind. From 2022 to 2023, the world’s actual GDP increased by an aggregate of 6.7%, surpassing the forecasts made during the World Economic Outlook in October 2022 by 0.8 percentage points.

This economic growth was particularly noticeable in the United States and several large middle-income economies and emerging markets. This surge was fuelled by a robust private consumption, which was stronger than anticipated, especially in the context of the ever-tightening, but gradually easing, labour markets.

Due to the pandemic, households in developed countries amassed savings, some of which were used to maintain their spending levels. Yet, as inflation begins to approach target values and central banks move towards easing policies, fiscal measures to curb high government debt levels – such as increased taxes and decreased government spending – could potentially dampen economic growth.

The report suggests that the speed of growth will remain below historical averages owing to a variety of factors. These include the long-lasting effects of the pandemic, weak productivity growth, the ongoing geopolitical crisis in Ukraine and increasing geoeconomic fragmentation. The global economy, despite overcoming the predicted stagflation and recession, must still contend with these unique challenges.

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