‘New cloud darkening’ over global economy after Hamas attack on Israel, says IMF

The head of the International Monetary Fund has warned the Middle East conflict triggered by a Hamas terrorist attack in Israel is a “new cloud darkening” over the global economy.

Kristalina Georgieva said officials were closely monitoring developments in the region amid an escalating conflict that has pushed up oil prices and rattled financial markets.

It comes as the economy is already struggling, with official data on Thursday showing the UK eked out growth of 0.2pc in August, raising fears of recession. Separately, higher fuel costs in the US put more pressure on inflation.

The IMF’s managing director said economies around the world had already dealt with a series of shocks since 2020, including the pandemic and soaring prices triggered by the war in Ukraine.

The Fund trimmed its forecast for global growth this week and warned that the recovery was “limping along” amid the threat of a new Middle East war.

“Very clearly this is a new cloud on what is not the sunniest horizon for the world economy. A new cloud darkening this horizon that is of course not needed,” Ms Georgieva said at a press conference at the IMF annual meetings in Morocco.

While she added it was “too early” to determine the impact on the global economy, she warned that economic and financial shocks were becoming the “new normal” as governments run out of fiscal firepower to fight crises.

She also warned that higher for longer interest rates could trigger more market turmoil as a “sharp further tightening of financial conditions” hits markets and non-banks.

Ms Georgieva said officials at the Fund had now been forced to “think the unthinkable” in terms of preparing for future shocks and its role as the lender of last resort.

She said: “We are experiencing severe shocks that are now becoming the new normal for a world that is weakened by weak growth and economic fragmentation.”

The IMF boss also warned that central banks would have to keep interest rates higher for longer to keep a lid on inflation, dampening growth further.

Ms Georgieva said: “Inflation is down but still above target in many countries. So interest rates will have to remain higher for longer, throwing more cold water on already anaemic growth.”

Higher interest rates in the UK are dragging down growth, with economists warning of a growing risk of recession.

GDP grew by 0.2pc in August, an improvement on July’s 0.6pc drop, but still a poor pace of growth.

The Office for National Statistics said manufacturing output dropped 0.8pc in August and construction was down 0.5pc, but the services industry, which dominates the economy, returned to growth, with output up 0.4pc.

Overall the 0.2pc rise in GDP represents a partial recovery from the 0.6pc drop in GDP in July, when strikes, including by teachers and doctors, hit growth hard.

Swati Dhingra, a member of the Bank of England’s Monetary Policy Committee, said the economy has “already flatlined”.

“When you’re growing as slowly as we’re growing now, the chances of recession or not recession are going to be pretty equally balanced,” she told the BBC. “So we should be prepared for that.”

Sandra Horsfield at Investec said the economy is likely to slip into a shallow recession this winter, with the economy either shrinking or staying flat in the third quarter of the year.

She said: “This is likely to be welcomed by the Bank of England as an indication that the tough medicine of very rapid rate rises is starting to take effect – without, so far, hinting at a deep recession.”

In the US, inflation held steady at 3.7pc instead of dropping as economists had expected, with higher fuel costs keeping pressure on households.

Bond yields have moved higher amid concerns that the stubborn inflation means that the Federal Reserve will need to keep interest rates higher for longer.

Meanwhile Huw Pill, the Bank of England’s chief economist, said businesses are cooling on hiring in favour of giving existing staff pay rises, suggesting a potential new inflationary pressure in the jobs market.

He told a panel in Marrakech: “Increasingly, given the difficulties in recruiting we’re seeing labour hoarding behaviour and perhaps the re-emergence of insider-outsider dynamics in wage setting.

“We certainly see a big discrepancy between what surveys tell us about new hires, what they’re being paid, versus incumbents and what they’re being paid. And that type of discrepancy might suggest the labour market may be behaving in a different way.”