Earlier this year, there was a glimmer of hope regarding progress in the global economic outlook. However, this optimism quickly faded and was replaced by renewed uncertainty about the future of world economies.
The main causes behind this gloomier outlook were banking crises, particularly the U.S. bankruptcies that spread to Switzerland, persistently high inflation rates that compelled central banks worldwide to continue with monetary tightening policies, and the lack of clarity surrounding the resolution of the Russian-Ukrainian war. Consequently, the International Monetary Fund has declared that the global economy is in a “difficult recovery” phase.
To elaborate, the U.S. financial sector turmoil resulted in three U.S. banks filing for bankruptcy. Meanwhile, UBS swiftly took over its rival Credit Suisse in Switzerland, all while central banks raised interest rates to combat inflation. It is concerning that the sharp tightening of monetary policy in the last twelve months is beginning to have severe adverse effects on the financial sector.
Read: IMF warns of financial turmoil to hit global growth
Despite some progress, many countries are still far from returning to normalcy. Inflation is projected to remain high globally in 2023, with the IMF estimating it to be around 7 percent. This projection does not include the impact of volatile food and energy prices, which can inaccurately define core inflation.
The global economy is at a critical juncture, with low historical growth, evolving financial risks, and the threat of rising inflation. However, there is hope for a global economic recovery, and the IMF acknowledges the possibility of a path to recovery, albeit with some bumps along the way.
Recent bank instability has been a significant wake-up call, highlighting the fragility of the current economic situation. Downside risks are prevalent, and uncertainty regarding the global economic outlook is intensifying.
However, this stance should not dissuade central banks from their efforts to combat inflation. According to the IMF, prematurely abandoning their fight against inflation could have a detrimental effect, such as decreasing yields, leading to unnecessary economic stimulation, and complicating the responsibilities of monetary authorities. Therefore, monetary policy should remain focused on curbing inflation, while remaining flexible enough to respond quickly to any financial developments.
Despite this, the IMF believes that the recent banking turmoil may provide some relief by slowing overall activity through reduced lending by banks. As a result, there may be a partial reduction in the need for further monetary tightening to achieve the same policy objective.
Is stagnation inevitable?
The Federal Reserve expressed concern about a potential regional liquidity crisis in the minutes of its March 21-22 meeting. They anticipate a moderate recession beginning later this year, followed by a rebound over the next two years.
The IMF not only predicts economic prospects for the next few years but also warns of potential worsening conditions. They caution that the global economy is entering a “precarious phase” of low growth and high financial risk.
Similarly, the World Bank published a report focusing on “Weakening Long-Term Growth Prospects” and warns of a “lost decade in the making.” It predicts that scant growth in the first decade of the 21st Century “will extend to the remainder of the current decade.”
Although global inflation has fallen due to decreased energy and food prices, core inflation, which excludes these volatile components, has yet to peak in many countries. Therefore, central banks are unlikely to back down from raising interest rates, which could delay potential economic growth.
As a result of these factors, the IMF has reduced its forecast for global economic growth by 0.1 percentage points for this year and next to 2.8 percent and 3 percent, respectively.
What about the countries of the region?
The MENA region faces four major challenges, including tackling inflation, potential rate hikes impacting economic growth, uncertainty in global markets, and geopolitical tensions.
According to the IMF, the recent OPEC+ oil production cuts may negatively impact the economic growth of the region. However, oil-exporting countries are expected to continue experiencing robust growth rates of around 4.5 percent, thanks to an anticipated increase in oil prices that will have a positive effect on their balance of payments and public finances.
In 2023, the growth rate of regional oil exporters is projected to slow down to 3.1 percent, compared to 5.7 percent in 2022, with the non-oil sector expected to be the primary driver of overall growth.
Due to hawkish macroeconomic stabilization policies, OPEC+ production cuts, and the fallout from recent global financial conditions, the IMF has revised its growth forecast for the Middle East and Central Asia region downwards to 3.1 percent in 2023, from 5.3 percent in the previous year.
The IMF has identified Iraq and Egypt as the Arab economies with the highest growth potential in 2023, both with an overall economic growth expectation of 3.7 percent.
However, the IMF has revised its forecast for Egypt, lowering it by 0.3 percent for this year and the next. The country’s economic growth for the fiscal year 2022-2023, which ends in June, is expected to reach 3.7 percent, and for the following fiscal year, it is expected to reach 5 percent.
On the other hand, Saudi Arabia’s efforts to diversify its economy and boost its non-oil sector have prompted the IMF to increase its growth forecast for the country from 2.6 percent to 3.1 percent in its January report.
Despite the global financial and banking crises, the Middle East seems to have been less affected. Moody’s predicts that Gulf banks will be relatively unaffected by the collapse of some banks in the United States and Switzerland due to their flexibility. Standard & Poor’s also believes that most Gulf banks are capable of managing any contagion risks that may arise from bank failures, given that their exposure to the U.S. is less than 5 percent of their total assets.
However, there are concerns that the region will be impacted by global financial instability and mounting debt challenges, particularly in emerging economies, as well as volatility in global markets. Additionally, there are worries that any escalation in the Russian-Ukrainian conflict could further increase uncertainty in energy markets, which would have repercussions for the region.
In conclusion, the economic progress of China and India is eagerly awaited, with both countries expected to achieve growth rates of 5.2 percent and 5.9 percent, respectively, this year. The International Monetary Fund’s Managing Director, Kristalina Georgieva, has noted that these two nations could contribute “half of global economic growth,” while World Bank President David Malpass has referred to them as “exceptions” to the general trend of global economic slowdown.
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