Israel-Hamas war looms over slowing world economy

The outlook for the global economy is getting worse.

International economic agencies are coalescing around slower growth projections after a year of interest rate hikes from central banks, even as the U.S. economy has so far defied a long-predicted downturn.

The International Monetary Fund (IMF) on Tuesday said global growth will slow from 3.5 percent in 2022 to 3 percent in 2023 and 2.9 percent in 2024, a 0.1 percentage point downgrade for 2024 from the group’s July estimate.

“Part of the slowdown is the result of the tighter monetary policy necessary to bring inflation down. This is starting to bite,” Pierre-Olivier Gourinchas, economic counselor with the IMF, said in the fund’s latest report.

Economists are once again worried about commodities and energy specifically, which is in the spotlight because of renewed conflict in the Middle East, just as it was after Russia’s invasion of Ukraine in February 2022.

And another Federal Reserve rate hike could boost the pressure on the global economy as it faces rising Middle East tensions and slowing growth.

The U.S. economy has “surprised on the upside, with resilient consumption and investment,” Gourinchas noted as he warned about drags like the Chinese real estate market, the lapsing of pandemic-era social safety net programs and the risk of additional commodity shocks that prolonged inflation in 2022.

The IMF’s sentiments were echoed in recent forecasts from the group of developed economies in the Organization for Economic Cooperation and Development (OECD) as well as the United Nations Conference on Trade and Development (UNCTAD).

The OECD is also expecting 3 percent growth for the global economy in 2023 along with 2.7-percent growth in 2024, arguing like the IMF that “the impact of tighter monetary policy is becoming increasingly visible.”

“With uncertainty about the strength and speed of monetary policy transmission and the persistence of inflation, a key question is whether the policy tightening that has already been undertaken is sufficient to bring inflation smoothly back towards target,” OECD economists said in their September interim report.

Economists with UNCTAD struck a more pessimistic tone, putting the 2023 global growth outlook at 2.4 percent, but seeing the economy move in an upward direction in 2024.

“The world economy is flying at ‘stall speed,’ with projections of a modest growth of 2.4 percent in 2023, meeting the definition of a global recession,” they said.

“Central banks must strengthen international coordination with a greater focus on long-term financial sustainability for the private and public sectors, and not just on price stability.”

But Fed officials are still focused on their 2 percent inflation target in spite of the risks of a downturn.

“Vigilance and agility are paramount to finishing the job — the job being, of course, to restore price stability as gently as we can,” Mary Daly said to the Economic Club of New York last week.

Inflation proved stubborn over the last tightening cycle due in part to commodity shocks that prolonged higher prices through initial supply disruptions boosted by stimulus-driven demand.

The prospect of a broader Middle East conflict triggered by the war between Israel and Hamas is also driving inflation fears across markets.

“Commodity prices could become more volatile under renewed geopolitical tensions,” the IMF warned Tuesday. “Since June, oil prices have increased by about 25 percent, on the back of extended supply cuts from OPEC+ (the Organization of the Petroleum Exporting Countries plus selected nonmembers) countries.”

“Adverse supply shocks in global commodity markets might reoccur,” OECD economists said in September, adding that “a renewed spike in energy prices would give new impetus to headline inflation.”

U.N. economists noted that the production cuts ordered by OPEC+ have been countered by OECD countries through production increases and reserve releases.

“Despite the announced rounds of production cuts by OPEC+ countries in April 2023 — representing a reduction of over 1 million barrels per day — a significant increase in oil production from non-OPEC+ countries as well as a substantial release of strategic petroleum reserves by OECD member countries have more than offset the agreed OPEC+ cuts,” they said.

Analysts say that as long as the current conflict between Israel and Hamas stays localized and fails to draw in regional actors in Lebanon and Hamas supporters in Iran, energy markets should avoid major volatility.

“Since oil is not produced in Israel or the Gaza Strip, the outbreak of hostilities and its impact on the broader global oil and energy markets should be limited in scope and duration. As long as the conflict remains contained and does not directly involve Iran, the price of oil should ease back toward pre-conflict levels,” RSM US economist Joe Brusuelas wrote in an analysis.

West Texas Intermediate crude oil was trading down around $85 a barrel Tuesday after spiking above $87 in the immediate aftermath of the surprise attack by Hamas. Oil prices had been declining, falling as low as $82 a barrel last week off a recent high of more than $93 in September.