IMF warns escalating Middle East crisis could trigger new inflation shock, even as it points to better picture for UK

The IMF has warned that escalation in the Middle East could trigger a new inflationary shock.

In its latest assessment of the global economy, the international body hailed the ‘remarkable resilience’ of the past two years.

The report pointed to a generally improved picture for the UK, although it marginally reduced forecasts for growth this year and next.

But the IMF raised concerns that tensions in the Middle East and the Ukraine war risked pushing up food and energy prices again.

The IMF said the global economy has had an ‘eventful’ journey in the years since the Covid-19 pandemic.

Russia’s war in Ukraine triggered a global energy and food crisis and a spike in inflation, followed by central banks around the world raising interest rates.

Pierre-Olivier Gourinchas, the IMF’s director of research, said: “Yet, despite many gloomy predictions, the world avoided recession, the banking system proved largely resilient and major emerging market economies did not suffer sudden stops.”

The current risks to the global outlook are more or less balanced, meaning there could be both positive and negative surprises that distort forecasts, according to the IMF.

In terms of threats, the economists warned that the Israel-Hamas conflict could escalate further into the Middle East, while continued attacks on ships in the Red Sea and the ongoing war in Ukraine risk further price increases.

This could cause food, energy and transport costs to rise around the world, with lower income countries being hit harder.

Other risks include a possible slow recovery of China’s troubled property sector, which would have a knock-on effect on global trading partners.

On the other hand, the outlook may improve as a result of elections in many countries this year, which could lead to tax cuts and a short-term boost to economic activity.

The IMF said global output will grow by 3.2 percent this year, an upgrade of 0.1 percentage point from its previous report in January.

The body’s forecasts for Britain have been notoriously volatile, but it expects growth to hit 0.5 percent this year, down slightly from the 0.6 percent growth forecast in January.

This would make Britain the second weakest performer across the G7 group of advanced economies, after Germany, which will grow by just 0.2 percent this year.

The G7 also includes France, Italy, Japan, Canada and the United States.

Growth is expected to improve to 1.5 percent by 2025, with Britain’s position reversing to sit among the top three performers in the G7, according to the finance body’s predictions.

This will be driven by inflation slowing and household incomes recovering from a prolonged squeeze on the cost of living.

Chancellor Jeremy Hunt insists the UK economy is turning a corner

The IMF predicted that Britain will see average CPI inflation of 2.5 percent this year, before reaching the Bank of England’s target of 2 percent over 2025.

The group said the immediate priority for central banks around the world is to ‘ensure that inflation falls smoothly, by neither easing policies too soon nor delaying too long and causing shortfalls in targets’.

A Treasury spokesman said: ‘Today’s report shows that we are winning the battle against high inflation, with the IMF predicting it will fall much faster than previously expected.

‘The forecast for medium-term growth is optimistic, but like all our peers, UK growth in the short term has been affected by higher interest rates, with Germany, France and Italy all experiencing larger downgrades than the UK.

‘With inflation falling, wages rising and the economy turning a corner, we have been able to cut taxes for 29 million people as part of our plan to reward work and grow the economy.’