A report by the Organization for Economic Cooperation... Economic optimism and warning of tensions in the Middle East

The Organization of Cooperation expects global growth to reach 2.9%, compared to its previous forecast last November of 2.7% (Shutterstock)

The increasing tensions in the Middle East, especially resulting from the Israeli war on Gaza, and the subsequent tensions in the Red Sea, Yemen and Lebanon, have clouded the global economic scene.

The Organization for Economic Co-operation and Development (OECD) unveiled revised forecasts for the global economy, challenging previous concerns but acknowledging the complex dynamics at play.

The organization's latest assessment is cautiously optimistic while remaining alert to looming uncertainties. The organization expects global growth to reach 2.9%, which is a positive adjustment from its previous forecast last November, which was 2.7%.

This upward adjustment is based on the resilience shown by the global economy amid challenges, providing a glimmer of stability. However, this resilience is particularly linked to the improving US economic outlook, which acts as a counterbalance to concerns about economic weakness in the Eurozone.

Although the unexpected strength of global growth in 2023 reached 3.1%, supported by low inflation and strong performance in the United States and emerging markets, indicators now point to “some moderation” in growth.

High interest rates are affecting lending and real estate markets, along with weak global trade, according to the Organization for Economic Cooperation and Development.

But a deeper dive into the organization's updated forecasts reveals a delicate landscape, where optimism competes with the shadow cast by tensions in the Middle East.

Tensions in the Middle East...a cloud over economic promise

Despite the generally promising global economic outlook, the OECD report sounds like a warning about the impact of tensions in the Middle East.

According to the organization, the Israeli war on Gaza, and the subsequent disturbances in shipping lanes in the Red Sea, pose a major threat.

The report stressed that “escalating geopolitical tensions pose a significant risk to activity and inflation in the near term,” highlighting the potential consequences of these disturbances.

The attacks launched by the Houthi group on ships in the Red Sea, targeting ships linked to Israel, led to escalating fears. American and British forces responded by launching strikes against the group, which has since declared that American and British interests constitute legitimate targets for them as well.

These tensions led to a significant rise in shipping costs, affecting production schedules in Europe, especially for car manufacturers. The recent increase in shipping costs has increased by almost 100%, and if it continues could have lasting effects on consumer price inflation.

OECD: If shipping costs continue to rise, inflation in import prices could rise by about 5 percentage points. (European)

The OECD estimates that if the rise in shipping costs continues, annual import price inflation in OECD countries could rise by about 5 percentage points, contributing 0.4 percentage points to consumer price inflation after a year.

Optimistic expectations linked to global dynamics

These optimistic expectations are based on the US economy that supports them, which is expected to grow at a rate of 2.1% in 2024 and 1.7% in 2025, according to the organization’s report. But growth expectations for the euro area were lowered to 0.6% from 0.9% previously. Expectations for China, the second largest economy in the world, remained unchanged at 4.7%. While lower levels of inflation are expected to boost wage growth, which in turn leads to cuts in interest rates. The Organization for Economic Cooperation and Development expects the US Federal Reserve to act in the second quarter, and the European Central Bank to follow suit in the third quarter.

Central banks are navigating uncertain waters

As uncertainty and potential inflationary pressures emerge, the OECD stressed the importance of central banks ensuring that inflation is fully contained, before considering interest rate cuts.

The report stressed the need for a wise monetary policy to overcome the complexities arising from various tensions, and their potential impact on global economic stability.

The OECD warning is consistent with recent statements by central bank leaders. Jerome Powell, Chairman of the US Federal Reserve, expressed the importance of avoiding premature interest rate cuts, saying, “The risk of moving too early is that the task is not completely completed.” The Bank of England similarly tempered its expectations for early interest rate cuts, stressing the need for more evidence of continued low inflation.

Jerome Powell, Chairman of the US Federal Reserve, expressed the importance of avoiding early interest rate cuts (Reuters)

Although the global economic outlook remains positive, concerns about inflation remain. The OECD warned that although inflation has fallen in major economies, it is “too early to be certain that underlying price pressures have been fully contained.”

A call for cautious action

While the Organization for Economic Cooperation and Development stresses the importance of prudent monetary policies and the role played by central banks in containing inflation, the Israeli war and tensions in the Middle East underscore the need for a comprehensive approach in dealing with the stability of the global economy.

With impacts that transcend geography, the Israeli war on Gaza has become a stark reminder that geopolitical tensions can quickly translate into global economic challenges, affecting trade, production schedules and overall market sentiment.

The Israeli war on Gaza indicates that the global economy lives in a delicate balance that is easily disrupted by geopolitical events. (French)

While the world clings to the hope provided by optimistic economic forecasts, the Israeli war on Gaza indicates that the global economy lives in a delicate balance, easily disrupted by geopolitical events.

Overcoming these challenges requires a precise understanding of the interrelationship between political actions and economic repercussions, which reinforces the necessity of making careful and strategic decisions on the global stage.

Source: Al Jazeera