Israel-Gaza Conflict: Triggers a New Global Economic Crisis

  • Conflict in the Middle East could make it harder to rein in inflation at a time when global output is “limping along.”

The International Monetary Fund (I.M.F.) has issued a warning about a slowdown in the global economic recovery just as a new conflict in the Middle East, the Israel-Gaza war, threatens to disrupt an already fragile world economy. The eruption of fighting between Israel and Hamas over the weekend has raised concerns about the ability to shield economies from unpredictable global shocks, casting a shadow over the annual meetings of the I.M.F. and the World Bank in Morocco.

Economic policymakers attending these meetings had initially planned to address the lingering economic effects of the pandemic and Russia’s war in Ukraine, but they now face a new crisis. Ajay Banga, President of the World Bank, expressed the precarious state of economies, stating that the outbreak of war is unhelpful for central banks seeking a soft landing while addressing rapid inflation without triggering a recession.

While the impact of the Israel-Gaza conflict on the global economy is currently less severe than the war in Ukraine, concerns persist. Another escalation could lead to a crisis of unprecedented proportions, particularly in oil markets, which are already experiencing uncertainty.

Lucrezia Reichlin, a former director general of research at the European Central Bank, highlighted the dual concerns about energy prices related to Russia and the Middle East. Further increases in oil prices could put pressure on central banks to raise interest rates rapidly, potentially impeding economic recovery.

Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, pointed out that it is too early to predict whether the recent surge in oil prices will be sustained. He mentioned that a 10 percent increase in oil prices could weigh down the global economy, reducing output by 0.15 percent and increasing inflation by 0.4 percent next year.

In its latest World Economic Outlook, the I.M.F. emphasized the fragility of the global economic recovery. The organization maintained its global growth forecast for this year at 3 percent but slightly lowered its 2024 projection to 2.9 percent. The I.M.F. also downgraded its outlook for the euro area and China while warning about worsening distress in China’s real estate sector.

Europe’s economy finds itself caught in the midst of growing global tensions. Since Russia’s invasion of Ukraine in February 2022, European nations have been working to reduce their dependence on Russian natural gas, partly by turning to Middle Eastern suppliers. The European Union expressed solidarity with Israel and condemned the surprise attack from Hamas over the weekend, but some oil suppliers took a different view. Algeria, for instance, criticized Israel’s airstrikes on Gaza.

Even before the Israel-Gaza conflict, the energy transition had impacted European economies. The I.M.F. predicts that economic growth in the eurozone will slow to just 0.7 percent in 2023 from 3.3 percent in 2022. Germany, Europe’s largest economy, is expected to contract by 0.5 percent. High interest rates, persistent inflation, and the aftermath of surging energy prices are also anticipated to slow down growth in the United Kingdom.

Sub-Saharan Africa is similarly affected, with a projected economic contraction of 3.3 percent in 2023. However, there is hope for a brighter outlook in 2024, with a forecasted growth rate of 4 percent. Many of these nations face the challenge of staggering debt, which now amounts to 60 percent of the region’s total output, double what it was a decade ago, with higher interest rates contributing to increased repayment costs.

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