The IMF yesterday cut its growth projection for the world economy again, saying an artificial intelligence (AI) boom has not fully offset the fallout from war in the Middle East.Global economic growth is now estimated at 3 percent this year, the IMF said, down from 3.1 percent in its April forecast.The estimate was made before fresh exchanges of fire between the US and Iran.
The IMF logo is pictured at its headquarters in Washington on Nov. 24, 2024.
It is the second time this year that the fund has lowered its overall growth expectations.Meanwhile, global inflation is anticipated to accelerate to 4.7 percent this year, a higher level than earlier projected.
Still, the overall growth slowdown is modest, as momentum in AI — driven by demand — has partially offset the effects of the war.The IMF said it expects global growth to pick up next year to 3.4 percent.The fund’s forecasts are “broadly unchanged” cumulatively for the next two years, said Deniz Igan division chief at the IMF’s research department, describing the bounce-back as “a V-shaped recovery.” The delayed recovery from the war on Iran, longer disruptions and higher prices is part of the reason the global economy is expected to take a bigger hit this year, she added.The IMF flagged that fallout varies widely.“Energy exporters outside the conflict zone benefit from favorable terms of trade, whereas economies plugged into the technology-led upturn experience stronger activity even if they are energy importers,” the fund said. “In contrast, activity weakens for energy importers with limited participation in the technology value chain.”US-Israeli strikes targeting Iran since Feb. 28 sparked Tehran’s retaliation in virtually blocking off the Strait of Hormuz, while plunging the Middle East into war. As traffic stalled in the key waterway for energy transit, global oil prices soared — weighing on economies.Oil and gas shipments resumed as a temporary US-Iran deal paused hostilities, but temperatures are again rising.Igan — speaking before hostilities resumed, sparked by Iranian attacks on ships in the strait — said that she expected the normalization of traffic through the waterway by next year.Although the world economy has weathered the shock from the war better than feared so far, the IMF said: “The global picture blurs glaring differences across countries.”Retail gasoline costs jumped by 30 percent in emerging Asia after the onset of war, and only by 15 percent in Latin America.While the US economy is still set to expand 2.3 percent this year, growth in the Middle East and central Asia was downgraded by 1.2 percentage points to 0.7 percent.The downgrade is “consistent with a longer closure of the Strait of Hormuz,” the IMF said, adding that it expects a larger rebound in the future.The eurozone is set to grow 0.9 percent this year, also a downward revision. Growth in France is pegged at 0.6 percent — 0.3 percentage points lower than earlier expected.The world’s second biggest economy, China, saw its growth projection adjusted upward slightly to 4.6 percent.Yet, the effects of the war have not fully passed through, the IMF said.The release of strategic reserves has provided some relief amid reduced energy flows, but there could still be weakness ahead.The IMF also said that the possibility of a “renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices and weigh on financial conditions.”Trade fragmentation could accelerate too, risking higher prices, it said.Nonetheless, there were some bright spots, the IMF said.There was a “positive surprise” from some economies key to the global technology supply chain, despite their exposure to disruptions from the war.The top four net exporters of AI-related hardware — Taiwan, South Korea, Thailand and Malaysia — saw resilient growth.Expectations of higher inflation this year merely mark a pause, “not a break from the disinflation trend,” Igan added.
