How two wars are squeezing global growth and prices - critical summary review

Every few months, three institutions publish estimates of how much the world economy will grow and how fast prices will rise: the International Monetary Fund, which lends to countries in financial trouble; the World Bank, which lends for development; and the OECD, the Paris-based Organisation for Economic Co-operation and Development. When they revise those estimates, they say why.

The numbers are not an abstraction. They describe the same forces that reach the petrol pump, the price of food at the supermarket and the interest charged on a loan. Over the past year, as a war in the Middle East piled on top of effects of Russia's invasion of Ukraine that had not yet faded, all three have repeatedly cut growth forecasts and raised inflation forecasts, naming the conflicts as the cause. The IMF is about to publish a new edition of its World Economic Outlook at meetings in Bangkok, and its managing director, Kristalina Georgieva, has already said where the deepest downgrades will fall: on economies devastated by war, among them Ukraine and Gulf countries hit by Iranian attacks.

Why a war in the Middle East reaches the supermarket

The war began at the end of February, with attacks by the United States and Israel on Iran. Its main economic channel is a narrow stretch of water. The Strait of Hormuz, flanked by Iran on one side and Oman on the other, normally carries around a fifth of the world's daily output of oil and liquefied natural gas, according to the US Energy Information Administration. Tehran imposed a blockade on it, and the IMF says the passage remains closed to traffic.

Energy prices moved first. European gas futures jumped, and motorists in Germany, the United Kingdom and the United States were quickly paying more at the pump. Food followed, through fertilizers: Gulf countries are a production hub for urea, sulphur and other inputs. "Fertilizers are not just another raw material: almost half of global food production depends on them," Svein Tore Holsether, chief executive of the Norwegian chemicals company Yara International, told CNN.

Then came the cargo itself. Carriers suspended shipments to the region, containers began piling up at Indian ports, rice destined for the Middle East sat stuck, and air cargo capacity shrank as regional airspace was restricted. The OECD warned that the economic effects of this conflict will probably be felt for a long time, including after it ends, because of interconnected supply chains and integrated energy markets.

None of it landed on a calm economy. The IMF notes that sharp jumps in the price of everyday essentials used to be rare, especially worldwide, but have been a recurring source of economic and social strain over the past five years, after Russia's invasion of Ukraine in 2022 and this year's war in the Middle East.

What the IMF, the World Bank and the OECD have confirmed

The OECD was the first of the big international bodies to formally update its projections after the fighting started. It said it would have revised global growth up had the conflict not escalated; instead it cut. In its updated report, titled "Under pressure", it projected world growth slowing from 3.4% last year to 2.8%, with inflation across the G20 group of large economies rising to 4%. "The energy shock from the conflict in the Middle East is real and serious," the organisation's secretary-general, Mathias Cormann, said when presenting it. "It is generating higher costs and uncertainty for households and businesses around the world."

The World Bank's half-yearly outlook put growth at 2.5% this year, down from 2.9% last year and the weakest pace since the start of the pandemic. It lowered forecasts for two-thirds of countries, with the deepest cuts falling on Middle Eastern economies whose energy exports were hit.

The effect on prices is already visible in official data. Consumer inflation in the United States reached 4.2% in May, against 2.4% before the war began, and the European Central Bank raised interest rates, becoming the first central bank to lift borrowing costs in the wake of the conflict. At the IMF, a projection of 3.3% global growth this year, made before the escalation, had been cut to 3% by July.

The counterpoint: more resilient than feared

The same reports carry a second finding. "So far, the global economy as a whole has withstood the shock of the war better than feared," the IMF said in an update to its outlook, crediting demand from the technology sector with partly offsetting the war-related loss of energy supply. Deniz Igan, who heads the fund's world economic studies division, told Reuters that the release of strategic oil reserves and commercial stocks, gains in energy efficiency and a private sector that quickly found alternative routes and sources had helped cover the shortfall.

In September, IMF spokeswoman Julie Kozack said that after six months of war the global economy had proved resilient, with some countries drawing on reserves and others switching energy sources or curbing demand, and that growth remained on track for about 3%. Oil supply also rose where analysts did not expect it, with output increasing in Brazil, Guyana, Canada, Norway and the United States, while China leaned on stockpiles and shifted power generation away from oil and gas.

Some forecasts went up. The IMF raised its projection for Brazil to 1.9% from 1.6%, attributing the improvement to the country's position as a net energy exporter, and its figures for China were nudged higher while the United States was left unchanged. The World Bank's chief economist, Indermit Gill, has said the largest economies, the United States, China and India, remain relatively shielded, and that developing countries face the harder test.

The lasting mark on prices and on poverty

Research published by the IMF as a chapter of the coming outlook argues that sharp spikes in food and energy prices are likely to become more common, and that they leave a mark. Short and medium-term inflation expectations rose significantly during such episodes and stayed well above pre-crisis levels even three years after one began, which in turn could feed through into higher interest rates.

A new model built to capture the higher inflation faced by poorer households, which spend a larger share of their budgets on essentials, found a gap of 0.8 percentage point against the standard inflation measure. That suggests 23 million more people fell below the extreme poverty line from 2021 to 2024 than previously calculated. "In short, cost-of-living crises affect price stability, reduce living standards and worsen inequality," said Chiara Maggi, the IMF economist who co-led the study. The fund's recommendation is targeted transfers, which protect the most vulnerable while preserving price signals; price controls and consumption tax cuts, it says, cost governments several times more, and producer subsidies far more still.

Risks still on the radar: debt, interest rates and another shock

Georgieva said oil prices remain at $100 a barrel and that futures contracts point to high prices into next year. "Even if the war in the Gulf ends soon, the problem of high energy prices will probably persist for some time," she said. Higher energy costs push up inflation, policy rates and bond yields, and she noted that ten-year government yields in the United States, Germany and Japan are at their highest in years and still climbing.

Public debt is the second worry. The IMF says it stands at its highest level since the Second World War and should pass 100% of GDP before the end of the decade, with Georgieva pointing to advanced economies, led by the United States, as the "worst offenders". Gill has warned that a serious escalation could drag global growth down to 1.3%, and that the Bank's figures already showed 40% of low and middle-income countries in debt distress or at high risk of it. "It is simply a slow-motion disaster," he said, describing governments diverting money from education and health to service debt.

Igan put the remaining risk plainly: a new conflict would catch the global economy in a worse position than the first time, because countries have already run down much of their reserves. Georgieva added a risk that has nothing to do with the wars, warning that disappointment with the artificial intelligence investment boom could turn into a far-reaching shock.

What to do with this information

Follow the next bulletins rather than the headlines about them. The IMF's World Economic Outlook is being presented at the Bangkok meetings, and the World Bank and the OECD keep adjusting their own projections. When reading them, look for the assumption behind the number: the fund's July forecast assumed the Strait of Hormuz would start reopening in mid-July and return to pre-war conditions by March next year, and the strait is still blocked. Oil and fertilizer prices are the two series that decide whether the next revision goes up or down.

Closer to home, watch whether inflation and interest rates where you live are reflecting this imported energy shock. The OECD has asked central banks to stay vigilant, the European Central Bank has already raised rates, and the IMF has urged policymakers to keep their focus on price stability. And treat the resilience shown so far as conditional, not settled: the same institutions that recorded it say reserves have been drawn down and that a renewed escalation would find the world with less room to absorb it.

In your own bills this year, which increase have you been treating as a local problem when it may have arrived from a shipping lane on the other side of the world?