The EU will be the fire starter behind the IMF’s global recession
The conflict in the Middle East remains a central focus for the global markets, and while the turbulence continues to manifest in consumer price indexes worldwide, it’s the IMF’s latest economic forecast that should be the greatest cause for concern – being that a global recession is on the cards. Indeed, should the uneasy, extended ceasefire between the US and Iran not hold, where and when this predicted global economic downturn will originate is up for question.
For me, however, I’d argue it’s most likely to spiral from the EU.
Historic tensions in the oil-rich region were fiery long before the conflict began in February – but the scale of the disruption now is incredibly concerning. The blockades in the Strait of Hormuz, especially, the waterway responsible for over 20% of the world’s oil and liquified natural gas (LNG) consumption, continue to cause major blockers and pose real threats to economies globally.
Perhaps nowhere has this been felt more keenly than in the European Union. The bloc, less insulated against oil-market volatility, is already facing domestic macroeconomic headwinds, and as this conflict drags on, the danger of a recession spawning within its borders becomes increasingly likely.
The fact is, Europe – as a market – is overexposed to geopolitical instability. Last year’s tariff war already sent shockwaves rippling through its economy, with its GDP facing a notable 0.3% reduction. While these disruptions are relatively minor compared to those now forecasted from this conflict, they are just another economic pressure the bloc faces.
Naturally, the IMF’s forecast of a global recession – albeit only in the most severe scenario – is a worry to all central banks. The ECB will be especially concerned, though, as it has only just brought Eurozone inflation back under control – a result of the steepest monetary policy tightening cycle in the ECB’s history. Indeed, ECB president, Christine Lagarde, has fought tooth and nail to nurse the EU’s economy back to relative health.
What Lagarde has not been able to shake, however, is the weak productivity that continues to restrict European economic growth. Despite EU labour productivity per hour rising 1.4% last year, the bloc continues to lag behind its international counterparts, with the US’s labour productivity growth increasing by nearly double year-over-year by comparison.
All of this to say, the EU already has all the makings of a recession. With weak productivity and rising stagflationary pressures – especially from major Union members such as Germany – its economy is on a precipice. With news of another ceasefire extension and a prolonged conflict becoming a reality, Europe’s economy may just tip over the edge.
Of course, this is also all before considering the EU’s critical oil vulnerability. Domestically, the Russia-Ukraine war is entering its fourth year, and 90% of EU imports of Russian oil remain under embargo. Yet, with EU ambassadors recently agreeing on its 20th package of sanctions for Russia, it is unlikely we’ll see those restrictions lifted any time soon.
In turn, Europe is heavily reliant on the Middle Eastern oil supply chain. We saw this manifest in energy inflation within the Eurozone surging to 4.9% in March, and I doubt we’ve seen its peak yet.
International disruption will continue to drive consumer prices upwards, especially in Europe, as the Strait of Hormuz remains the epicentre of global tensions. And with a US-Iranian resolution still unagreed, the IMF’s worst-case scenario is becoming all the more realistic. As it stands, it is only a matter of time before the bloc’s inflation spirals out of control.
Now, of course, Europe is not the only economy with rising inflation and over-weighted oil dependence. Indeed, the UK is in a particularly unfavourable position. The fifth-largest global economy has the harshest growth forecast among its G7 peers, its inflation is already materially rising, and its pay growth is at the lowest in five years. Yet, while the UK is set to suffer, it will not have the same influence on global markets as the EU.
The EU is a far-reaching economic giant – the third-largest economy globally by GDP. Nevertheless, its weak productivity, oil vulnerability, and climbing stagflationary pressures leave it teetering on the edge of an economic slump – one which will spark a dangerous, global economic domino effect.
Make no mistake, should the latest uneasy ceasefire crumble and conflict continue, then the IMF’s global recession will become reality. Only, it will start from Europe.
Yerbol Orynbayev is an economist and former Governor of the World Bank on behalf of Kazakhstan. He served as the Deputy Prime Minister of Kazakhstan from 2007-2013 and Aide to the President on economic policy from 2013-2015.
