The global economy is at risk of derailing once again, this time due to the war in the Middle East. In its World Economic Outlook (WEO), the International Monetary Fund (IMF) predicts, in the worst-case scenario – with infrastructure damages and prolonged war – a slowdown in GDP growth to nearly 2%. “This would mean a near-global recession (growth rate below 2%), a phenomenon that has only occurred four times since 1980, the last two times corresponding to the global financial crisis and the COVID-19 pandemic.”
According to the report, “In the past year, obstacles related to rising trade barriers and increased uncertainty have been offset by favorable factors such as technological investments, accommodative financial conditions (notably the weakness of the US dollar), and supportive fiscal and monetary policies. The conflict in the Middle East poses a significant impediment to these favorable factors due to its impact on commodity markets, inflation expectations, and financial conditions.”
“The predominant risks of deterioration: geopolitical tensions could worsen further – turning the situation into the most severe energy crisis of modern times – or internal political tensions could explode,” warns the IMF in its World Economic Outlook.
“Political tensions could intertwine with changes in trade policies and other international policies. Regardless of geopolitical developments, trade conflicts could erupt,” the report cautions. “The crucial role of rare earths in global supply chains is a major point of friction.”
Furthermore, “A weakening of institutions, particularly central bank independence and monetary policy credibility, could increase inflation expectations, especially in a context of rising overall inflation due to a shock to consumer goods prices.” On a positive note, economic activity could benefit from a new push thanks to AI-related investments, and eventually transform into sustainable growth if a faster adoption of AI leads to strong productivity gains and increased business dynamism. Economic activity could also be supported by a new momentum in structural reforms and lasting easing of trade tensions, according to the IMF.
(Source: Adnkronos)
