IMF cuts growth forecast for Middle East economies on oil caps and conflict

States face significant uncertainty as Gaza conflict threatens to spill into broader region

Beijing's central business district. The IMF says China and India have accounted for half of the global growth this year. Getty Images

The International Monetary Fund has cut its expansion forecast for Middle Eastern economies on the back of oil production caps and the Israel-Gaza war.

The world economy, which showed resilience last year, is in a “sticky spot” with the slowing pace of disinflation and prospects of a higher-for-longer interest rates regime looming large, the Washington-based fund said in the latest update of its World Economic Outlook on Tuesday.

The IMF has maintained its 2024 global growth projection at 3.2 per cent and expects the world economy to expand at a slightly faster pace of 3.3 per cent in 2025, in line with its forecast released in April.

Though the economic forecast is broadly unchanged for this year and next, “under the hood, however, offsetting growth revisions have shifted the composition”, IMF chief economist Pierre-Olivier Gourinchas said.

“Overall, risks to the outlook remain balanced … but some near-term risks have gained prominence.”

Inflation risk

Despite the global success in taming inflation, the IMF said it remains the biggest concern.

Global inflation is broadly on track to slow to 5.9 per cent this year, from 6.7 per cent last year, as projected, but in some advanced economies, especially the US, progress on disinflation has slowed “and risks are to the upside”, the IMF said.

“The momentum on global disinflation is slowing, signalling bumps along the path.”

Further challenges to disinflation could force central banks, including the US Federal Reserve, to keep borrowing costs higher for even longer, which would put overall growth at risk, with increased upward pressure on the dollar and harmful spillovers to emerging and developing economies.

IMF Chief Economist Pierre-Olivier Gourinchas. IMF photo

“Mounting empirical evidence, including some of our own, points to the importance of global headline inflation shocks – mostly energy and food prices – in driving the inflation surge and subsequent decline across a broad range of countries,” Mr Gourinchas said.

“The good news is that, as headline shocks receded, inflation came down without a recession. The bad news is that energy and food price inflation are now almost back to pre-pandemic levels in many countries, while overall inflation is not.”

Slower Middle East growth

Though inflation remains a concern in some oil-importing economies in the Middle East, the growth prospects are largely dented by the continuing conflict between Israel and Hamas.

Middle East and North African economies face a significant degree of uncertainty this year as the conflict threatens to spill into the broader region.

The IMF, which cut its 2024 Middle East and Central Asia growth forecast in April by 0.6 percentage points to 2.7 per cent, again lowered the projection by 0.4 percentage points to 2.4 per cent expansion this year.

The fund also revised its 2025 economic growth outlook for Mena by 0.4 percentage points to 4 per cent.

Growth forecast in Saudi Arabia, the biggest Arab economy, has also been revised downward by 0.9 percentage points to 1.7 per cent for 2024 and down 1.3 percentage points to 4.7 per cent growth in 2025.

“The adjustment reflects mainly the extension of oil production cuts,” the IMF said.

Saudi Arabia, the world's top exporter of oil, benefitted from the rally in crude prices that have risen about 10 per cent this year on the back of production cuts by the Opec+ group.

Last month, Opec+ agreed to extend output cuts of 3.66 million barrels per day, which were initially planned to end this year, until the end of 2025.

At the same time, the additional 2.2 million bpd voluntary production cuts of eight Opec+ member states were extended by three months until the end of September.

Indian artisans weave Banarasi silk sarees in Varanasi. The India economy is set to expand by 7 per cent this year. AFP

Advanced economies

The IMF’s projection for economic expansion this year is below the historical growth average of the world economy.

The fund said although the first quarter growth surprised on the upside in many countries, downside surprises in Japan and the US were notable.

“In the United States, after a sustained period of strong outperformance, a sharper-than-expected slowdown in growth reflected moderating consumption and a negative contribution from net trade,” the IMF said.

“In Japan, the negative growth surprise stemmed from temporary supply disruptions linked to the shutdown of a major automobile plant in the first quarter.”

The IMF expects advanced economies to overall expand by 1.7 per cent this year, and 1.8 per cent next, in line with its April forecast.

In the US, projected growth is revised downward to 2.6 per cent for this year, 0.1 percentage point lower than projected in April, reflecting the slower-than-expected start to the year.

Growth in the world’s biggest economy is expected to slow to 1.9 per cent in 2025 as the labour market cools and consumption moderates, with fiscal policy starting to tighten gradually.

In the euro area, activity appears to have bottomed out and the IMF expects a modest pickup of 0.9 per cent this year – an upward revision of 0.1 percentage point – driven by stronger momentum in services and higher-than-expected net exports in the first half of the year.

Growth in the economic bloc is projected to rise to 1.5 per cent in 2025.

Engine of global growth

The fund said Asia’s emerging market economies remain the “main engine for the global economy” this year, as it revised upwards growth projections for China and India that account for almost half of global growth.

The IMF expects emerging and middle-income economies to grow by 4.2 per cent this year and next, up 0.1 percentage point from its April forecast.

China’s economy is slated to grow by 5 per cent this year and 4.5 per cent in 2025, 0.4 percentage point faster than estimates in April.

“In China, resurgent domestic consumption propelled the positive upside in the first quarter, aided by what looked to be a temporary surge in exports belatedly reconnecting with last year’s rise in global demand,” the IMF said.

The fund expects India’s economy to expand by 7 per cent this year, 0.2 percentage points quicker than April estimates. It is set to grow by 6.5 per cent in 2025.