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Wider Middle East conflict could re-ignite inflationary crisis, IMF warns

Washington-based fund says geopolitical tensions could trigger new commodity price spike

The annual Spring Meetings take place at the IMF headquarters in Washington this week: the fund’s latest assessment of the global economy was relatively upbeat. Photograph: Alex Wong/Getty Images

Eoin Burke-Kennedy
Tue Apr 16 2024 - 14:00

An escalation of the current Middle East conflict could reignite inflation and delay the expected reduction in interest rates with negative consequences for global growth, the International Monetary Fund (IMF) has warned.

In its latest World Economic Outlook report, the Washington-based fund also forecast that the Irish economy would grow in gross domestic product (GDP) terms by 1.5 per cent this year, down from a previous projection of 3.3 per cent, and by 2.5 per cent in 2025.

The IMF said global economic activity had been “surprisingly resilient” since October 2023 with employment and incomes holding up better than expected in the face of higher interest rates.

However, it cautioned that a new commodity price spike linked to a wider conflict in the Middle East “could complicate the ongoing disinflation process and delay central bank policy easing, with negative effects on global economic growth”.

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Oil prices surged at the end of last week ahead of an expected Iranian attack on Israel and remain volatile amid heightened geopolitical tensions and a possible Israeli response.

“Continued attacks in the Red Sea and the ongoing war in Ukraine also risk generating additional supply shocks adverse to the global recovery, the IMF said in its latest report timed to coincide with its and the World Bank’s Spring Meetings in Washington.

A slower-than-expected decline in core inflation as a result of ongoing labour market tightness or a faltering Chinese recovery could also change the outlook negatively.

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Outside of the possible risk factors, the IMF’s latest assessment of the global economy was relatively upbeat with the fund expecting the global economy to grow by 3.2 per cent in 2024 and 2025.

The projection for 2024 represents a marginal 0.1 per cent upward revision on its previous forecast. However, overall growth will remain low by historic standards.

Growth in the euro area is projected to recover from its low rate of an estimated 0.4 per cent in 2023, which reflected relatively high exposure to the war in Ukraine, to 0.8 per cent this year and 1.5 per cent in 2025. In the US, growth is projected to increase to 2.7 per cent in 2024, before slowing to 1.9 per cent in 2025, “as gradual fiscal tightening and a softening in labour markets slow aggregate demand”.

Much of the IMF’s report highlighted the resilience of the economic activity in face of tighter monetary policy.

“As global inflation descended from its peak, economic activity grew steadily, defying warnings of stagflation and global recession,” it said.

During 2022 and 2023, global real GDP (gross domestic product) rose by a cumulative 6.7 per cent, it said, noting this is 0.8 per cent higher than the forecasts made at the time of its October 2022 World Economic Outlook.

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“The United States and several large emerging market and middle-income economies displayed the greatest overperformance, with aggregate demand supported by stronger-than-expected private consumption amid still-tight – though easing – labour markets,” it said.

Households in advanced economies supported their spending by drawing down accumulated pandemic-era savings, it said.

However, as inflation converges toward target levels and central banks pivot towards policy easing, “a tightening of fiscal policies aimed at curbing high government debt levels, with higher taxes and lower government spending, is expected to weigh on growth”.

It indicated that the pace of expansion would remain low by historical standards as a result of factors including the long-term consequences of the pandemic, Russia’s invasion of Ukraine, weak growth in productivity and increasing geoeconomic fragmentation.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times

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