The escalating tensions in the Middle East, particularly stemming from the Israeli war on Gaza and subsequent turmoil in the Red Sea, Yemen, and Lebanon, are casting a shadow on the global economic landscape.
The Organization for Economic Cooperation and Development (OECD) has unveiled revised expectations for the global economy, challenging previous concerns while acknowledging the complex dynamics at play.
The latest assessment by the organization cautiously embraces optimism while remaining mindful of looming uncertainties. The OECD anticipates global growth to reach 2.9%, a positive adjustment from its previous forecast of 2.7% in November last year. This upward adjustment is attributed to the resilience exhibited by the global economy amid challenges, offering a glimmer of stability.
However, this resilience is particularly tied to improved economic outlooks for the United States, serving as a counterbalance to concerns over economic weakness in the Euro area.
Despite the unexpected strength of global growth in 2023, reaching 3.1% driven by reduced inflation and robust performance in the United States and emerging markets, indications now point to “some moderation” in growth.
High interest rates are impacting lending and real estate markets along with weakened global trade, according to the OECD.
Yet, delving into the organization’s updated outlook reveals a nuanced landscape where optimism contends with the shadows cast by Middle East tensions.
Middle East Tensions: Clouding Economic Promise
While global economic prospects seem promising in general, the OECD report paints a warning about the impact of Middle East tensions.
According to the organization, the Israeli war on Gaza and disruptions in shipping lanes in the Red Sea pose a significant threat. The report emphasized that “escalating geopolitical tensions represent a major threat to activity and inflation in the near term,” highlighting the potential consequences of these disruptions.
Attacks on ships in the Red Sea by Houthi rebels, including those linked to Israel, have heightened fears. This has led to a substantial increase in shipping costs, affecting production schedules in Europe, particularly for automotive companies. The recent surge in shipping costs has nearly doubled, and if sustained, it could have lasting effects on consumer price inflation.
OECD estimates that if shipping costs continue to rise, annual import price inflation in member countries could increase by approximately 5 percentage points, contributing 0.4 percentage points to consumer price inflation after a year.
Optimistic Outlook Linked to Global Dynamics
These optimistic expectations hinge on the supportive role of the US economy, which is anticipated to grow at a rate of 2.1% in 2024 and 1.7% in 2025, according to the organization’s report. However, growth expectations for the Euro area have been lowered to 0.6% from the previous 0.9%. Forecasts for China, the world’s second-largest economy, remain unchanged at 4.7%. Additionally, declining inflation levels are expected to boost wage growth, leading to reductions in interest rates. The OECD anticipates the US Federal Reserve to move in the second quarter, with the European Central Bank following suit in the third quarter.
Central Banks Navigate Uncertain Waters
Amid the emergence of uncertainty and potential inflationary pressures, the OECD emphasized the importance of ensuring that central banks fully contain inflation before considering interest rate reductions.
The report stressed the need for prudent monetary policy to overcome emerging complexities resulting from various tensions and their potential impact on global economic stability.
This cautionary message from the OECD aligns with recent statements from central bank leaders. Jerome Powell, the chair of the Federal Reserve, underscored the importance of avoiding premature interest rate cuts, stating, “Moving too early poses the risk that the task is not yet fully completed.” Similarly, the Bank of England tempered its expectations of early interest rate cuts, emphasizing the need for further evidence of sustained inflation decline.
While global economic forecasts remain positive, concerns about inflation persist. The OECD warned that despite a decrease in inflation in major economies, it is “premature to be confident about fully containing core price pressures.”
Call for Cautious Action
As the OECD reaffirms the importance of prudent monetary policies and the role of central banks in containing inflation, the Israeli war and tensions in the Middle East underscore the need for a comprehensive approach to addressing global economic stability.
With far-reaching impacts transcending geographical boundaries, the Israeli war on Gaza serves as a stark reminder that geopolitical tensions can swiftly translate into global economic challenges, affecting trade, production schedules, and market sentiments overall.
While the world holds onto the hope offered by optimistic economic expectations, the Israeli war on Gaza signals that the global economy exists in a delicate balance, susceptible to disruption by geopolitical events.
Overcoming these challenges requires a precise understanding of the interplay between political actions and economic repercussions, reinforcing the necessity for cautious and strategic decision-making on the global stage.
