The International Monetary Fund (IMF) has identified the US budget deficit as a major threat to the global economy. The organization also shared concerns about escalating tensions in the Middle East and highlighted the potential these situations have to destabilize international markets.

Fiscal challenges and global implications

The US budget deficit is expected to rise to 7.1 percent next year, according to the IMF’s Fiscal Monitor. This figure is remarkably three times higher than the average of other advanced economies, indicating a significant imbalance that could emerge across the world.

In the same breath, the IMF also highlighted the problems in China, where the government is grappling with the twin threats of weakening demand and an ongoing housing crisis. These economic challenges are not limited to the US and China; Britain and Italy are also on the verge of correcting their spending and revenue gaps.

The IMF’s World Economic Outlook presented the US as a crucial driver of global economic growth this year, with a growth rate of 2.7 percent – ​​twice that of any other G7 country. Despite this positive outlook, the IMF warned of persistent inflation that could hamper the Federal Reserve’s ability to cut rates, a situation acknowledged by Fed Chairman Jay Powell.

Recent spikes in retail sales indicate the Fed could scale back interest rate cuts, which has sent shockwaves through global financial markets and led to significant losses in European stock indexes.

Tensions in the Middle East and economic consequences

The Vix index, often called Wall Street’s “fear meter,” has risen to levels not seen since the Hamas-fueled conflict in Gaza, signaling growing market concern about stability in the Middle East -East. The IMF warned that the conflict between Israel and Hamas could have lasting consequences for the economies of the Middle East and North Africa, with Gaza’s economy described as “wiped out” and significant impacts also being felt in the West Bank .

For 2024, the IMF expects the growth rate in the Middle East and North Africa, including Pakistan, to slow to 2.6 percent, down from its previous forecast of 3.3 percent. The ongoing political unrest has injected a high degree of uncertainty into these markets.

The October 7 Hamas attack and subsequent military responses resulted in thousands of casualties and exacerbated regional instability. This unrest has spilled over into the wider region, with Iran carrying out its first direct attack on Israel in retaliation for an Israeli airstrike, further simmering regional tensions.

The tourism sector in the Levant has taken a major hit, with significant cancellations in Jordan and Lebanon. In addition, the Houthi rebels’ activities in the Red Sea have disrupted key maritime trade routes, drastically reducing traffic through the Suez Canal and quadrupling shipping costs from China to the Mediterranean.

The economies of Jordan and Egypt have shown resilience, supported by financial assistance from the IMF, in stark contrast to the economic situation in Lebanon. Richer Gulf states, such as Saudi Arabia and the UAE, have fared better thanks to their diversified revenue sources and controlled oil production, although they still face slowing economic growth.

Jihad Azour of the IMF’s Middle East and Central Asia Department stressed that the erosion of stability poses a serious risk to the region’s medium-term economic prospects, citing long-term trade disruptions as a major concern. He pointed out that youth unemployment rates are alarmingly high, with overall growth lagging behind historical averages.

Ongoing conflicts, exacerbated by the COVID-19 pandemic and other global crises, have hampered economic recovery in the Middle East, with growth stalling at 1.6 percent last year. Kristalina Georgieva of the IMF noted that the dire situation in Sudan and Yemen, exacerbated by global conflicts such as those in Ukraine and Gaza, continues to require all the international support and attention it can get.


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