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The International Monetary Fund on Tuesday said it expects global growth to slow from last year’s 3.5 percent to 3 percent this year and 2.9 percent in 2024. The economic recovery from the coronavirus pandemic and Russia’s invasion of Ukraine has been “slow and uneven,” the group said.
“The global economy is limping along, not sprinting,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a news conference.
The attacks came at a time when gas prices were starting to fall, bringing relief to drivers and putting more money in their pockets for other spending. But the conflict in the Middle East threatens to push those prices back up, depending on the direction it takes and how aggressively Israel and the Ubite move to punish Iran.
The geopolitics guiding gas prices were already delicate before the attacks on Israel, which have created more instability.
Prices were coming down amid a shift to cheaper winter blends of gasoline and the completion of repairs at key U.S. refineries in the West and Midwest that had been offline.
This is a time of year when demand generally drops, easing cost pressures. Many gas stations had not yet passed along those savings to consumers, meaning the stations were prepared to absorb the slight bump in the price of oil that followed the attacks on Israel.
But the hostilities in the Middle East create a challenging landscape for the Biden administration to navigate as it works to keep prices down heading into an election year.
The Federal Reserve has been aggressively raising interest rates since last year, in the hope of slowing the U.S. economy enough to bring down price growth. Inflation, at 3.7 percent, has fallen markedly from last summer’s high of 9.1 percent, though higher oil prices could quickly thwart progress.
“This is the last thing the global economy needed,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former IMF chief economist. “We already see some signs of declining momentum, notably outside the U.S. Adding a new geopolitical shock just adds to the pressure on inflation and, perhaps even more damaging, a big rise in global uncertainty. We don’t know to what extent this conflict may escalate and spread.”
And although the U.S. economy has shown remarkable resilience, it continues to face higher borrowing costs and slowing consumer spending.
Goldman Sachs economists this week said they expect inflation to pick up in major world economies as a result of rising oil prices
“There are already a whole bunch of risks in the global economy and the situation in the Middle East is one more,” said Desmond Lachman, a senior fellow at the American Enterprise Institute and a former deputy director at the IMF. “This could lift up the price of oil and make it difficult for the Fed to back off raising interest rates if they fret about inflation getting stuck.”
Even so, most analysts are not — at the moment — predicting major price surges in oil. Rystad continues to project the cost of a barrel of Brent crude won’t go above $91, just a few dollars more than it is today. Goldman Sachs predicts it will top out at $100 by next June.
“The U.S. needs to look at what’s happening abroad, and it’s not good,” Lachman said. “You’ve got China, the world’s second-largest economy, moving to decidedly slower economic growth, which is a big drag on the rest of the economy. Germany is in recession. Europe’s jacking up interest rates. It’s not a very pretty picture.”
Gourinchas, of the IMF, stressed that it is too soon to tell how new tensions in the Middle East might affect the world economy. But he noted that a 10 percent rise in oil prices would increase global inflation by 0.4 percentage points and cut economic growth by 0.15 percent, according to IMF research.
“We are monitoring closely the situation,” he said. “It’s really too early to jump to any conclusion here.”
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