Energy: the fuel that powers the shock
The duration and intensity of the war will be decisive, says the Fund.
The longer the conflict lasts and the greater the destruction of facilities for extracting, refining and transporting oil, gas and other products derived from this industry, the more difficult it will be to normalize the energy supply, the more difficult it will be to return to what was before.
As things stand in the Middle East and in the producing countries of the Persian Gulf, this recovery could take “a long time”, say several analysts in these markets.
But the first impact, already seen in the case of gas stations, is felt in prices.
According to the IMF, more expensive energy increases production costs, affects transport, industry and services and is interrupting the supply flows of various goods.
One of the most critical are fertilizers, which are thus compromising the future production of agricultural goods, including food.
This translates into higher inflation and loss of household purchasing power.
There is also a risk that this initial shock will be amplified. If companies and workers try to compensate for losses through price and wage increases, an inflationary spiral could emerge, especially in countries where inflation was already above central banks’ objectives.
Prolonged energy crisis could lead to a financial crisis
Furthermore, fears of a prolonged energy crisis will increase instability in financial markets.
Uncertainty can lead to falls in asset prices, capital flight, rising interest rates and tightening credit conditions, holding back investment and consumption.
Even in a scenario considered moderate, with a short-lived conflict and a rise of around 19% in energy prices, global growth is expected to slow to 3.1% this year, says the IMF.
Global inflation could rise to 4.4%, interrupting the downward trend observed in recent years.
If the power supply is affected for longer, the impact will be more serious.
In a negative scenario, says the IMF, global growth could fall to 2.5% and inflation rise to 5.4%.
And in an extreme scenario, with prolonged energy disruptions, the world economy could grow by just 2%, with inflation above 6%.
Most vulnerable countries
Energy importing countries are among the most exposed. Low-income economies and developing countries, with fewer financial resources, will be most affected by rising energy and food prices.
Even producing countries in the Gulf region face losses due to the destruction of infrastructure, interruptions in production, difficulties in exports and a drop in tourism and investment. The decline in remittances sent by migrant workers will also affect several countries.
The situation is reminiscent of the 2022 crisis, after the invasion of Ukraine, when rising energy prices drove global inflation to multi-decade highs.
This time, however, the context is more fragile: the cost of living is already high and families and companies are more sensitive to new increases.
What to do? Rising interest rates, certainly
The IMF warns that central banks can tolerate temporary shocks in energy prices, but only if inflation expectations remain controlled or anchored, that is, if people do not express great fears about the permanence of inflation.
But if that doesn’t happen, monetary authorities will have to raise interest rates much more to curb inflation, and it is expected that this process will inflict damage on economic growth.
With more expensive credit, investment tends to decline and so does consumption, due to the growing cost of interest and debt.
Furthermore, continues the Washington institution, governments can help but must “avoid widespread measures, such as broad subsidies or price controls, which are expensive and ineffective.”
Public support “must be temporary and targeted at the most vulnerable, preserving price signals that encourage energy savings and increased supply.”
But, “despite recent signs of a temporary ceasefire”, the risk of a new energy crisis remains high.
The world economy remains very dependent on unstable regions for energy supply and reinforces the urgency of diversifying sources, accelerating renewable energy and strengthening international cooperation to limit economic damage, argues the Fund.
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