Transcription
We are on the verge of a 1970s style global stagflation, warned the World Bank and the International Monetary Fund, the IMF. In this new environment, the economic and geopolitical dimensions of conflicts are deeply interconnected, and the consequences are increasingly unpredictable.
The global economy is now entering a period of heightened uncertainty as the war in the Middle East begins to ripple far beyond the region. According to the IMF, the war is expected to slow global growth and push inflation higher, regardless of how quickly it ends. Even in the most optimistic scenario, the economic impact is unavoidable.
This week, the IMF managing director, Kristalina Georgieva, indicated that even in the event of a swift resolution, which appears to be clearly out of reach, the global lender, the IMF that is, is likely to downgrade its growth projections globally while raising its inflation outlook. What was once projected as a relatively stable global growth rate of about 2.9% now appears to be too optimistic, with new estimates suggesting a reduction of anywhere between 0.3% in a baseline scenario and potentially more than 1% if the war continues.
So, what does that really mean? Well, this translates into a significant loss in global economic output, affecting countries across both developed and emerging markets. So, yes, nobody will be spared.
Now, on top of that, the impacts of the war in Iran could create a painful new reality for borrowers. For example, Kenneth Rogoff, a TAP economist and the former chief economist at the International Monetary Fund, said he believed interest rates were likely to remain painfully high in the aftermath of the Iran war. That's because higher oil prices are adding to a slew of inflationary pressures that already exist in the world economy. And so, the impact on long-term interest rates is unlikely to be easily reversed.
Here's what he said. He said, "I think the big thing is that interest rates are going to be higher." He pointed to long-dated Treasury yields and mortgage rates in particular. "I think they're going to stay higher, and it is painful. And yes, it will be painful for many, many borrowers who are barely making ends meet as it is."
A good indication of inflation expectations is the US Treasury yield. Take a look here. The 10-year US Treasury yield, the most salient reflection of borrowing costs in the economy, hovered around 4.3% on Tuesday, which is an increase of 37 basis points since late February.
At the center of this disruption lies the energy market. Of course, the supply shock has already reduced global oil availability by about 13%, and that is even without the possibility of the Bab el-Mandeb strait in the Red Sea being closed. The Middle East remains a critical hub for global oil and gas supplies, and any instability in the region quickly affects prices worldwide.
Rising energy costs, increased transportation and production expenses, as you know very well, which are then passed on to consumers in the form of higher prices. So, it does actually trickle down all the way to consumers, and it is affecting every single person.
The IMF warned that inflation could rise by as much as 0.9 percentage points due to these pressures. While this figure may appear modest to many people, its impact on the global economy is substantial, particularly for countries already struggling with high inflation and limited fiscal space.
Now, the duration of the conflict will play a decisive role in determining the scale of the economic damage. A shorter-lived conflict, which appears to be unlikely at this point in time, could allow markets to stabilize within a few months, with supply chains recovering and energy prices easing. Now, that is the best-case scenario. So, a couple of months to several months recovery time is the best-case scenario.
A prolonged war could actually extend disruptions for 6 to 8 months or even longer. In turn, this would, of course, deepen economic strain and delay recovery. The longer the conflict continues, the more entrenched these effects become in the global economy, and in turn, they increase the risk of sustained inflation, weaker growth, and weaker economies worldwide.
Of course, now, in response, the World Bank is already preparing to deploy significant financial support to affected countries. Most of them are emerging economies. Through its crisis response mechanisms, nations can actually access emergency funding to stabilize their economies. Around $30 billion could be dispersed within the next two to three months, with up to $70 billion available over a six-month period. This approach mirrors the rapid financial support that was provided during the pandemic back in 2019. So, this does demonstrate the institution's ability to act quite swiftly in times of global crisis.
Now, beyond the immediate economic consequences, the war reflects a broader transformation in global geopolitics as well as economic realities. The global economy is becoming more and more fragmented. It has significantly deteriorated in the past 14 months, and as highlighted by Rand think tank, the world is now shifting toward an era of gray zone conflicts, complex indirect confrontations that fall short of traditional warfare. These conflicts often involve proxy actors, blurred lines of engagement, and evolving strategic interests.
The traditional model of international cooperation that is based on shared values is now weakening. It is completely disrupted, and major powers are increasingly pursuing their interests, their main objectives, through indirect means. And so, that shift is driving changes in the foreign policies of global leaders as they adapt to a more fragmented and unpredictable global landscape, with the United States now being effectively the main disruptor of the global security architecture.
Modern warfare itself is evolving rapidly. According to Brian Jenkins of Rand, today's conflicts extend far beyond conventional military operations. They now incorporate cyber attacks, disinformation campaigns, espionage, and emerging technologies such as artificial intelligence. And so, these elements create a form of hybrid warfare that is harder to detect, to attribute, and then to counter. And these forms of hybrid warfare often include economic warfare. As a result, conflicts are becoming more persistent and less defined, and in turn, it works to increase their potential to disrupt global systems over longer periods of time.
In this new environment, the economic and geopolitical dimensions of conflicts are deeply interconnected. Even if the current war in Iran ends quickly, which it won't, based on what we're seeing today, its effects on growth, on inflation, and global stability will linger for a long time. The world is not only facing a temporary crisis, but also it is adapting to a new reality, one where economic shocks, geopolitical tensions, and technological warfare are increasingly intertwined.
The global economy is being reshaped by war-driven geoeconomic fragmentation that is centered on energy inflation and strategic choke points. The combination of energy shocks, rising rates, and geopolitical conflict creates a high probability stagflation environment with long-term consequences.
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