The fragile global economy faces a new crisis in the war between Israel and Gaza

The International Monetary Fund said on Tuesday that the pace of global economic recovery is slowing, a warning that came as a new war in the Middle East threatens to upend a global economy already reeling from several years of overlapping crises.

The outbreak of fighting between Israel and Hamas over the weekend, which could sow seeds of unrest across the region, reflects how challenging it is to protect economies from increasingly frequent and unpredictable global shocks. The conflict cast a shadow over a gathering of senior economic policymakers in Morocco to attend the annual meetings of the International Monetary Fund and the World Bank.

Officials who planned to deal with the lingering economic effects of the pandemic and Russia’s war in Ukraine now face a new crisis.

“Economies are in a delicate state,” World Bank President Ajay Banga said in an interview on the sidelines of the annual meetings. “Going to war is not really helpful for central banks that are finally trying to find their way to a soft landing,” he said. Mr. Banga was referring to efforts by policymakers in the West to try to calm rapid inflation without causing a recession.

So far, the impact of the Middle East attacks on the global economy has been more limited than the impact of the war in Ukraine, Mr. Banga said. This conflict initially caused oil and food prices to rise, disrupting global markets given Russia’s role as the largest energy producer and Ukraine’s status as a major exporter of grains and fertilisers.

“But if this spreads in any way, it will become dangerous,” Banga added, saying such a development would lead to “a crisis of unimaginable scale.”

Oil markets are already tense. “The key question is what will happen to energy prices,” said Lucrezia Reichlin, a professor at London Business School and former director general for research at the European Central Bank.

Ms. Raichlin worries that another rise in oil prices will put pressure on the Fed and other central banks to keep raising interest rates, which she said have risen too much, too quickly.

Regarding energy prices, Ms. Raichlin said: “We have two fronts, Russia and now the Middle East.”

Pierre-Olivier Gourincha, chief economist at the International Monetary Fund, said it was too early to assess whether the recent jump in oil prices would continue. If so, he said, research shows that a 10 percent increase in oil prices would burden the global economy, reducing production by 0.15 percent and increasing inflation by 0.4 percent next year.

In its latest report on the global economic outlook, the International Monetary Fund emphasized the fragility of the economic recovery. It maintained its global growth forecast for this year at 3 percent and slightly lowered its forecast for 2024 to 2.9 percent. Although the International Monetary Fund raised its US production forecast for this year, it downgraded the eurozone and China while warning that distress in that country’s real estate sector was worsening.

“We see a global economy that is moving at a fast pace, and it is not taking off very quickly yet,” Mr. Gorinchas said. In the medium term, “the picture is bleaker,” he added, citing a range of risks including the potential for more major natural disasters caused by climate change.

The European economy in particular has become caught up in growing global tensions. Since Russia invaded Ukraine in February 2022, European governments have scrambled feverishly to free themselves from over-reliance on Russian natural gas.

They have largely succeeded by partly turning to suppliers in the Middle East.

Over the weekend, the European Union was quick to express its solidarity with Israel and condemned the surprise attack by Hamas, which controls Gaza.

Some oil suppliers may have a different view. Algeria, For example, which increased exports From natural gas to Italy, He criticized Israel’s response with air strikes on Gaza.

Even before the weekend’s events, the energy transition was having a negative impact on European economies. In the 20 countries In countries that use the euro, the Fund expects growth to slow to just 0.7 percent this year from 3.3 percent in 2022. Germany, Europe’s largest economy, is expected to contract by 0.5 percent.

High interest rates, persistent inflation and the fallout from rising energy prices are also expected to slow growth in Britain to 0.5 percent this year from 4.1 percent in 2022.

Sub-Saharan Africa is also experiencing a slowdown. Growth this year is expected to contract by 3.3 percent, although the outlook for next year is brighter, with growth expected to reach 4 percent.

Staggering debt looms over many of these countries. the Average debt It now stands at 60 percent of the region’s total production – double what it was a decade ago. High interest rates have contributed to higher repayment costs.

This next generation sovereign debt crisis is emerging in a world approaching a reassessment of global supply chains as well as growing geopolitical rivalries. Adding to the complications are estimates that over the next decade, Trillions of dollars New financing will be needed to mitigate the effects of devastating climate change in developing countries.

One of the biggest questions facing policymakers is what impact China’s stagnant economy might have on the rest of the world. The International Monetary Fund cut its growth forecast for China twice this year and said on Tuesday that consumer confidence there was “weak” and industrial production was weakening. He warned that countries that are part of the Asian industrial supply chain may experience this loss of momentum.

In an interview during her trip to the meetings, Treasury Secretary Janet L. Yellen said she believes China has the tools to address a “complex set of economic challenges” and she does not expect its slowdown to impact the U.S. economy.

“I think they have significant challenges that they need to address,” Ms. Yellen said. “I have not seen nor do I expect an extension to us.”