/ world today news/ After October 7, when Hamas attacked Israel from Gaza, the world began to enter a phase of increased turbulence. There are many scenarios for the further development of events in the region and in the world. Among the most optimistic, according to which the warring parties will manage to separate and sit down at the negotiating table. To the most pessimistic, which can briefly be called “the beginning of the third world war.”
Naturally, many of the forecasts for the economic development of the world made this year by international organizations (IMF, World Bank, OECD, etc.) are already hopelessly outdated. They need to be corrected. But in the conditions of such high political and military uncertainty, which continues throughout October, it is still useless to make quantitative adjustments to the forecasts.
Thus, the IMF published a forecast on its website, according to which this year and the following years until 2028 inclusive, global GDP growth will be approximately 3% per year (for the group of developing countries – approximately 4%, for the group of economically developed countries – about 2 percent). Apparently, these indicators will not be achieved.
The head of the IMF, Kristalina Georgieva, noted in the middle of the month that the conflict is already affecting the economies of Egypt, Lebanon and Jordan. S&P has already revised its outlook on Israel’s credit rating from “stable” to “negative” and forecast a 5% contraction in the country’s GDP in the fourth quarter of 2023 from the third.
The conflict will inevitably affect Saudi Arabia. With the current tension, Riyadh plans to delay the implementation of a number of large-scale projects. The most unpleasant surprises are expected from Iran. After all, in his hands is the Strait of Hormuz, whose importance to maritime shipping and international trade is even greater than the Suez Canal. If Tehran were to close the strait, it would cut off supplies of black gold to many economies and raise global oil prices.
Rising oil prices will be a factor in fueling inflation, which most countries in the world have not been able to overcome. Another important inflationary factor may come into play – military spending. From my point of view, even if the Middle East “cloud” passes and there is no large-scale “thunderstorm”, many countries will respond by increasing their defense spending.
There are more and more such “clouds” in the world, and it is not known which of them may end in a “thunderstorm”. We must prepare for a “thunderstorm”. According to a report by the Stockholm International Peace Research Institute (SIPRI), last year total global defense spending set a new record, reaching $2.24 trillion. But this year looks set to set a new record.
I have already written about the fact that the majority of countries in the world have deficit government budgets, measured at a few percent of their gross domestic product (see: “Interest costs eat up government budgets”). An increase in military spending, as the historical experience of the last century shows, almost inevitably increases the budget deficit (this is especially evident when a country is involved in a war). And growing budget deficits, in turn, contribute to accelerating inflation.
Well, if inflation accelerates, then central banks, acting on the same template (or rather according to the instructions of the IMF defining the method of “inflation targeting”), will raise the base rate. And the increase in the prime rate will lead to an even greater paralysis of the economy.
Based on these assumptions, we can conclude that the IMF’s forecasts for economic development for the period up to 2028 will have to be adjusted. There will be no declared 3 percent annual GDP growth. Maybe there will be no growth at all. And the fund will have to change the plus sign to a minus sign.
Let me remind you that in 2019 the IMF gave a forecast according to which the global GDP in 2020 is expected to grow by 3.5%. In January 2020, the IMF adjusted its forecast to 3.3%. And in April 2020, the IMF already radically revised its forecast for the year, changing it from plus to minus, predicting a decline in world GDP by 3.0%. In October 2020, the IMF once again adjusted its forecast, according to which the decline in world GDP should have been as much as 4.4%. In 2021, the IMF gave the actual value of the decline in world GDP as 4.3%.
The then turbulence of the world economy, caused by the so-called covid pandemic, can be repeated now. And the fund will revise its forecasts several times a year.
The Future Investment Initiative (FII) Investment Forum has just concluded in Saudi Arabia. IMF director Kristalina Georgieva spoke at it on October 25. She warned that the war between Israel and Hamas is already affecting the economies of Middle Eastern countries and could cause long-term economic damage across the region.
She mainly talks about the problems of the Middle East. But then they affect the world economic situation. I pay special attention to her words that interest rates in the world have risen sharply and have become a brake on economic development:
„We’ve spent the last 20 years, frankly, living in a fantasy world from an interest rate perspective. How can you have zero or even negative interest rates and still create savings and keep economies running? In fact, it would be normal for rates to be in positive territory – the problem is that it happened too quickly and the jump is too high.”
– said the economist.
Georgieva noted that the IMF “not happy with such a quick transition from zero to five percent interest rates – but we got it done.” There is no chance of a rate cut, the “plane” of the world economy will begin to fall into an “air pocket”, and the director of the IMF urged all “passengers” to buckle up: “So now we’re here, our appeal to everyone is: fasten your seat belts. Make sure you understand that the (higher) interest rates are here to stay.”
Here we can add that interest rates will not only remain at their current levels, but will most likely continue to rise. Central banks will continue to fight rising inflation by raising key interest rates. For example, on October 24, the head of the leading Wall Street bank JPMorgan Chase, Jamie Dimon, at the same FII investment forum, warned of a potential scenario in which the federal funds rate (ie the Fed’s main rate) could exceed 7 % (currently 5.25-5.5%).
The banker noted that “this may be the most dangerous time the world has seen in decades.” However, his speech criticized not only the US Federal Reserve, but also other central banks that actively continue to raise key interest rates. “Fiscal spending is higher than ever in peacetime and there is a sense of omnipotence, that central banks and governments can handle anything… I am wary of what will happen next year.”
PS On the matter of the continued increase in prime rates.
Today, the Bank of Russia at a meeting of the board of directors decided to increase the base rate from 13.0 to 15.0 percent. That is, eight “steps” at a time (one “step” = 0.25%). For most market participants and observers, this decision was unexpected.
The increase itself was expected, but everyone was sure it would be up to 14 percent. The central bank beat expectations twice. The Bank of Russia motivated its radical decision by the fact that the rate of inflation in the Russian economy continues to grow.
On December 15, the next scheduled meeting of the board of directors of the Central Bank of the Russian Federation on the issue of the basic rate is expected. Experts expect that a decision will be made on another increase in interest rates, although not so radical.
The IMF, in its forecast for the world economy for the period 2024-2028, determined that the GDP growth rate of the Russian Federation will be approximately 1% per year. But, I note, this forecast was made even before the sharp increase in the main rate from 8.5 to 12% on August 15 by the Bank of Russia.
Then on September 15, it was increased to 13%. And today – 15%. Taking this into account, the IMF, when it revises its forecast for the world economy, will certainly revise its forecast for Russia. We can expect updated estimates of annual GDP growth in the Russian Federation to be below 1 percent.
Translation: ES
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