The war between Israel and Hamas fuels doubts about the world economy

The global economy has been in a “polycrisis” for years, to use a term coined by Jean-Claude Juncker, former president of the European Commission. The war between Israel and Gaza has shaken the meetings of the International Monetary Fund (IMF) and the World Bank, held this week in the Moroccan city of Marrakech, as doubts grow about the progress of a weak global economy. The organization headed by Kristalina Georgieva says it is closely monitoring the evolution of the conflict due to fears that it will lead to a rise in inflation if the production and distribution of oil is hindered. Meanwhile, U.S. Treasury Secretary Janet Yellen stated this Wednesday at a news conference in Morocco that for now the impact of this crisis is limited. “I still see as the base case for the United States a so-called soft landing,” Yellen said in response to questions from reporters, although she admitted: “The situation in Israel raises additional concerns.”

The leaders who met in Marrakech, in general, are still reluctant to talk about the economic consequences of the conflict. “We are focused on human lives,” Yellen responded to the first of the questions about the economic impact of the war. However, the war is taking place at a time of fragility in global activity. The world continues to grow, but it is “limping, not sprinting,” in the words of IMF chief economist Pierre-Olivier Gourinchas. And the multiple shocks, from the Covid-19 pandemic to the war in Ukraine, have painted a medium-term outlook that the fund defines as “mediocre.”

The main concern that is palpable in the meeting halls is that the conflict will continue to escalate and end up generating another inflationary surge just when inflation was calming down and central banks had practically ended their cycles of interest rate increases. The IMF’s first deputy managing director, Gita Gopinath, clearly pointed out the risk of a rebound in inflation. “If it turns into a wider conflict and that causes oil prices to go up, that does have an effect on the economies,” she explained in an interview with Bloomberg Television. The prices of a barrel of Brent — the benchmark in Europe — dropped in the middle of the afternoon Wednesday after having skyrocketed by up to 5% since the outbreak of the conflict.

Impact on prices

Although the IMF indicates that the effect of the war will be greater in the region, concerns about a rise in crude oil prices is spreading rapidly. The Washington-based body has developed literature on some of the possible outcomes. According to Gourinchas, a 10% increase in oil prices would reduce global Gross Domestic Product (GDP) by around 0.2% and increase global inflation by between two and four tenths of a percentage point. “We see spikes in in energy prices and oil prices. We’ve seen that in previous crises and previous conflicts. And of course, this reflects the potential risk that there could be disruption either in production or transport of oil in the region,” he said at the launch of the World Economic Outlook (WEO) in Marrakech.

Central bankers are also viewing this new hotspot of geopolitical tension with concern, especially since they believe that now would be the time to see the effects of their rate increases. The best economic response is peace, said the president of the European Central Bank (ECB), Christine Lagarde, at the start of the meetings. “It is not a political statement, but a reality. An economy can be destroyed in a matter of a week by war.”

World Bank President Ajay Banga lamented in an interview with Reuters that just when central banks were starting to feel a little more confident that there was an opportunity for a soft landing, this conflict has made things harder. “It’s a humanitarian tragedy and it’s an economic shock we don’t need.” International organizations, in any case, still trust in a de-escalation of the conflict that will avoid more pain and not add more questions to the path of economic recovery.

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