Geopolitical Tensions Threaten to Drag Global Economy Back to Pre-Pandemic Stagnation Levels

Multilateral development institutions periodically revise their global economic growth projections in response to external shocks. Recently, scenarios involving escalation of conflicts in the Middle East have prompted analysts to recalibrate their expectations for upcoming periods, pointing toward worldwide economic expansion limited to 2.5%. This threshold represents a significant decline compared to performance observed in recent years and approaches contraction levels recorded during the acute phase of the COVID-19 pandemic, signaling a substantially more restrictive macroeconomic environment.

The driver of this revision lies in the behavior of energy markets. When geopolitical tensions affect oil and natural gas producing regions, the immediate result manifests through widespread inflationary pressures. Rising energy costs transmit rapidly through production and consumption chains, impacting sectors ranging from transportation to manufacturing and services. Simultaneously, central banks face increasingly complex dilemmas: maintaining elevated interest rates to contain inflation raises capital costs for businesses and consumers, contracting aggregate demand; loosening monetary policy, conversely, risks reigniting inflationary pressures. This configuration produces a scenario of "relative stagflation," where weak growth coexists with persistent inflation.

The differentiated impact across economies warrants special attention. Countries that are net petroleum and gas importers face deterioration in their external accounts and greater exchange rate pressure, while energy producers experience the opposite dynamic. Nations with energy-intensive industrial structures suffer more acute profit margin compression. Emerging markets, frequently more vulnerable to capital flow reversals and with reduced buffering capacity, experience amplified volatility. Advanced economies, equipped with more diversified structures and greater capital market access, manage to partially absorb these shocks, yet still see their growth potential affected.

Given this outlook, governments and financial institutions are expected to intensify monitoring of inflation indicators, currency fluctuations, and credit risk spreads. Post-pandemic economic recovery, which already faced challenges related to supply bottlenecks and demand recomposition, now confronts additional pressures that reduce space for stimulus policies. Investors adjust portfolio allocations favoring defensive assets, while firms revise investment and employment plans.

The scenario described does not represent a deterministic forecast, but rather a probability band calculated from observable economic and geopolitical parameters. The actual trajectory of the global economy will depend on both economic policy decisions and the evolution of external factors. However, the alert transmitted by economic analysts is clear: the margin for expansionary policies is reduced, and building institutional and sectoral resilience becomes imperative to mitigate vulnerabilities.

Source: Al Jazeera Business