A war in the Middle East has drastically reduced oil flow through the Strait of Hormuz, acting as a major supply-side shock to the global economy. The IMF has downgraded its global growth forecast to 3.1% and warns that a prolonged conflict could push the world toward recession.
Governments are entering this crisis with high public debt and limited fiscal space after massive spending during the pandemic. Simultaneously, central banks are constrained by persistent inflation, preventing them from lowering interest rates to stimulate growth, creating a difficult stagflationary environment.
The United States, the largest shareholder in the IMF and World Bank, is retreating from global cooperation. This has weakened the credibility of these institutions and makes a coordinated, US-led G20 response to the brewing economic crisis highly improbable.
The US is in a stronger position to weather the energy crisis than other nations, benefiting from its status as a net energy exporter and low domestic natural gas prices. However, this relative insulation is a source of concern for other countries, who fear the US will not feel enough economic pain to act decisively to end the conflict.
Rising interest rates have dramatically increased the cost of servicing the massive public debts accumulated since 2008. According to the UN, 3.5 billion people live in countries where debt service payments now exceed spending on education and healthcare, signaling a looming developing world debt crisis.
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