Economic Risks Overshadow Geopolitics, IMF Finds

The International Monetary Fund (IMF) in its World Economic Outlook expects oil prices to hold above $80 next year, but noted that any upside pressure from geopolitics would be offset by weak demand in China and the United States.

The IMF forecast global economic growth at 3.2% for both 2024 and 2025. Supply-chain issues and emerging trends in protectionist trade policies could undermine broader growth, however.

Growth is slowing following a near-global effort to dampen the inflationary pressures that emerged during the post-vaccine stage of the COVID-19 pandemic. The IMF said that global inflation hit 6.7% in 2023 but is expected to move to 4.3% by next year "with advanced economies returning to their inflation targets sooner than emerging market and developing economies."

The United States, the world's largest economy, is targeting a 2% increase in annual inflation, curbing growth through tighter lending policies. Overly-aggressive policies from the world's central banks, however, could backfire and slow the economy to the point of triggering mass layoffs.

The IMF said risks, however, are tilted to the downside. On geopolitical issues, the bank said an escalation to conflict in the Middle East is certain to have sweeping impacts on the global economy, with an expected spike in crude oil prices causing at least some of the damage.

In a separate note, Ole Hanson, the head of commodity strategy at Saxo Bank in Denmark, said the most immediate threat is from a potential Israeli response to the October 1 missile attack from Iran.

"Such an attack may lead to further destabilization, and if Iran's energy infrastructure is damaged, it raises the risk of supply concerns from a region that accounts for about a third of world output," he wrote Wednesday.

Shipping lanes in the region are already under threat from the Iranian-backed Houthi rebel group in Yemen. For the IMF, however, it's the risk of weak demand from China and the United States, which combine for 40% of the total global demand, that's greater than the risk of war.

The IMF said it expects the price of oil to average $81.30 per barrel for 2024. The price for Brent crude oil, the global benchmark, was trading at around $75 per barrel on Wednesday. By 2029, the IMF expects the price of oil to fall to $67 per barrel, a level not seen since the worst of the COVID-19 pandemic. Brent averaged $82 per barrel last year.

As no major energy installations have been targeted directly in a Middle East conflict raging for more than a year, most other reporting agencies, such as the Organization of the Petroleum Exporting Countries, are focused more on the economy than geopolitical risk.

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