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OECD Outlook: Significant Risks to Global Economy if Hamas-Israel Conflict Expands

OECD expects inflation to gradually decline to 5.3 percent next year in its member countries (dpa)
OECD expects inflation to gradually decline to 5.3 percent next year in its member countries (dpa)
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OECD Outlook: Significant Risks to Global Economy if Hamas-Israel Conflict Expands

OECD expects inflation to gradually decline to 5.3 percent next year in its member countries (dpa)
OECD expects inflation to gradually decline to 5.3 percent next year in its member countries (dpa)

The Organization for Economic Cooperation and Development (OECD) reduced its forecast for global GDP growth to 2.9 percent in 2023 while keeping next year's forecast unchanged.
It warned that the worsening conflict between Israel and Hamas in the Gaza Strip could undermine the economy.
According to the estimates of the Paris-based institution, "If the conflict escalates and spreads to the entire region, the risks of growth slowdown and increased inflation will be much greater than they are now."
The Organization noted that the war has had a relatively limited impact on the global economy, noting that international growth would slow to 2.7 percent in 2024 from an expected 2.9 percent pace this year.
OECD Chief Economist Clare Lombardelli explained in the report that the obstacles holding back the economy are not coming from the Middle East and that tight financial conditions, weak trade, and low confidence all have grave consequences.
"Global growth is set to remain modest, with the impact of the necessary monetary policy tightening, weak trade, and lower business and consumer confidence being increasingly felt."
Consumer price inflation is expected to gradually ease towards central bank targets in most economies to 5.3 percent next year, compared to 7.4 percent this year.
GDP growth in the US is projected at 2.4 percent in 2023 before slowing to 1.5 percent in 2024. In the euro area, GDP growth is projected to be 0.6 percent in 2023 before rising to 0.9 percent in 2024 and 1.5 percent in 2025.
Lombardelli stated that the "pace of growth is uneven."
China is expected to grow at a 5.2 percent rate this year before growth drops to 4.7 percent in 2024 and 4.2 percent in 2025 due to ongoing stresses in the real estate sector and continued high household saving rates.
The Organization pointed out that if the war in the Middle East intensifies and expands, the impact of its transition on the global economy may be mainly through oil and gas prices.
It indicated that a ten percent rise in the price of a gas barrel may lead to an increase in global inflation by 0.2 points in the first year and a decrease in growth by 0.1 points.
Trade may be significantly affected, especially since two international trade routes, the Strait of Hormuz and the Suez Canal, are within the conflict zone.

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Firm Dollar Keeps Pound, Euro and Yen Under Pressure

US Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/ File Photo
US Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/ File Photo
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Firm Dollar Keeps Pound, Euro and Yen Under Pressure

US Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/ File Photo
US Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/ File Photo

The US dollar charged ahead on Thursday, underpinned by rising Treasury yields, putting the yen, sterling and euro under pressure near multi-month lows amid the shifting threat of tariffs.

The focus for markets in 2025 has been on US President-elect Donald Trump's agenda as he steps back into the White House on Jan. 20, with analysts expecting his policies to both bolster growth and add to price pressures, according to Reuters.

CNN on Wednesday reported that Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries. On Monday, the Washington Post said Trump was looking at more nuanced tariffs, which he later denied.

Concerns that policies introduced by the Trump administration could reignite inflation has led bond yields higher, with the yield on the benchmark 10-year US Treasury note hitting 4.73% on Wednesday, its highest since April 25. It was at 4.6709% on Thursday.

"Trump's shifting narrative on tariffs has undoubtedly had an effect on USD. It seems this capriciousness is something markets will have to adapt to over the coming four years," said Kieran Williams, head of Asia FX at InTouch Capital Markets.

The bond market selloff has left the dollar standing tall and casting a shadow on the currency market.

Among the most affected was the pound, which was headed for its biggest three-day drop in nearly two years.

Sterling slid to $1.2239 on Thursday, its weakest since November 2023, even as British government bond yields hit multi-year highs.

Ordinarily, higher gilt yields would support the pound, but not in this case.

The sell-off in UK government bond markets resumed on Thursday, with 10-year and 30-year gilt yields jumping again in early trading, as confidence in Britain's fiscal outlook deteriorates.

"Such a simultaneous sell-off in currency and bonds is rather unusual for a G10 country," said Michael Pfister, FX analyst at Commerzbank.

"It seems to be the culmination of a development that began several months ago. The new Labour government's approval ratings are at record lows just a few months after the election, and business and consumer sentiment is severely depressed."

Sterling was last down about 0.69% at $1.2282.

The euro also eased, albeit less than the pound, to $1.0302, lurking close to the two-year low it hit last week as investors remain worried the single currency may fall to the key $1 mark this year due to tariff uncertainties.

The yen hovered near the key 160 per dollar mark that led to Tokyo intervening in the market last July, after it touched a near six-month low of 158.55 on Wednesday.

Though it strengthened a bit on the day and was last at 158.15 per dollar. That all left the dollar index, which measures the US currency against six other units, up 0.15% and at 109.18, just shy of the two-year high it touched last week.

Also in the mix were the Federal Reserve minutes of its December meeting, released on Wednesday, which showed the central bank flagged new inflation concerns and officials saw a rising risk the incoming administration's plans may slow economic growth and raise unemployment.

With US markets closed on Thursday, the spotlight will be on Friday's payrolls report as investors parse through data to gauge when the Fed will next cut rates.