IMF warns that rising oil prices caused by war in the Middle East could hamper global recovery
The International Monetary Fund has warned that a rise in oil prices caused by war in the Middle East could hamper the already “limping” global economic recovery.
World Bank President Ajay Banga said the conflict was “an economic shock we don’t need.”
Israel’s war with Hamas adds to the turbulence in financial markets, already convulsed by concerns about “higher for longer” interest rates.
IMF chief economist Pierre-Olivier Gourinchas said a 10 percent rise in oil prices could shave 0.15 percent off GDP growth next year and add 0.4 percentage points to global inflation. .
He added that oil prices had already risen about 4 percent in recent days.
IMF chief economist Pierre-Olivier Gourinchas (pictured) said a 10% rise in oil prices could shave 0.15% off GDP growth next year and add 0.4 percentage points to global inflation.
Gas prices in the UK and Europe also rose yesterday.
‘This is something we often see in situations where there is geopolitical instability in the region: we see spikes in energy and oil prices.
This reflects potential risks of disruptions to oil production or transportation in the region. But it’s really too early to jump to conclusions.’
On the other hand, Banga said the conflict between Israel and Hamas would make it more difficult for some countries to achieve so-called “soft landings” (reducing inflation without causing a recession) if it widens.
“It is a humanitarian tragedy and an economic shock that we do not need,” Banga added. The war was sparked when Hamas attacked Israel over the weekend, killing and kidnapping civilians.
He noted that central banks were “starting to feel a little more confident that there was an opportunity for a soft landing, and this just makes it more difficult.” The comments came during the joint annual meetings of the IMF and the World Bank in Marrakesh, Morocco.
The IMF presented its latest World Economic Outlook: a mixed picture as the global economy continues to heal from Covid “wounds” with a “slow and uneven” recovery. The report said the prospect of a “soft landing” was increasingly likely.
But with average annual growth in the coming years expected to be the lowest in decades, Gourinchas added: “The global economy is limping along, not accelerating.”
Economists at Deutsche Bank had said the global economic climate had a “striking number of parallels” with the 1970s: with high inflation, rising energy prices and growing industrial unrest.
“Over the weekend, the attacks on Israel showed how geopolitical risk can return unexpectedly,” they added. The IMF’s global financial stability report highlighted the risks posed by rising expectations that interest rates will remain high for longer.
A new, tougher stress test for 900 lenders in 29 countries – devised after the collapse of Credit Suisse and a host of regional US firms, including Silicon Valley Bank – found that 5 per cent will be vulnerable to stress.
That figure rises to 30 percent in the “severe but plausible” worst-case scenario of low growth and high inflation, known as “stagflation.”
The IMF did not say which banks might be in trouble, but included both small and large lenders.
Tobias Adrian, its head of the money and capital markets department, called for stricter supervision and said there was an “urgent need” for banks to improve capital levels.
But he played down fears about recent turmoil in bond markets, saying the sell-off has been “orderly.”