Aurelia Butler

DUBAI (Reuters) -The International Monetary Fund said on Sunday Middle East economies were lagging below growth projections due to oil production cuts and the Israel-Gaza conflict, even as the global economic outlook remained resilient. Despite uncertainties, “the global economy has been surprisingly resilient,” IMF managing director Kristalina Georgieva told the Arab Fiscal Forum in Dubai, while warning of a potential wider impact on regional economies of continued conflict in Gaza. In a regional economic report last month, the IMF revised its GDP growth forecast for the Middle East and North Africa down to 2.9% this year, lagging below October projections, due in part to short term oil production cuts and the conflict in Gaza.The IMF last month edged its forecast for global economic growth higher, upgrading the outlook for both the United States and China and citing faster-than-expected easing of inflation.Georgieva said economies neighbouring Israel and the Palestinian territories saw the conflict weighing on tourism revenues, while Red Sea attacks weighed on freight costs globally. Those factors compounded “the challenges of economies that are still recovering from previous shocks,” she told the forum on the sidelines of the World Governments Summit in Dubai.The Iran-aligned Houthis in Yemen have been targeting commercial vessels with drones and missiles in the Red Sea since mid-November, and say their attacks are in solidarity with Palestinians as Israel strikes Hamas militants in Gaza. But the U.S. and its allies characterize them as indiscriminate and a menace to global trade.Several global shippers have been diverting traffic to the Cape of Good Hope, a longer route than through Egypt’s Suez Canal. Egypt’s Finance Minister Mohamed Maait told Reuters on the sidelines of the summit that part of the impact of the diversion on Suez Canal revenues could be absorbed due to good growth in “the period before the events.”AI TSUNAMI The IMF will publish on Monday a paper that shows phasing out energy subsidies could save $336 billion in the Middle East, equivalent to the economies of Iraq and Libya combined, Georgieva said. Georgieva said that eliminating regressive energy subsidies also “discourages pollution, and helps improve social spending.”In the Middle East and North Africa (MENA) region, fossil fuel subsidies made up 19% of GDP in 2022, the IMF has said. It has recommended the gradual unwinding of energy subsidies for the region’s economies, including oil exporters, and suggested targeted support as an alternative.Advanced technology, including Artificial Intelligence, is a key theme of focus at the World Governments Summit, with several top executives from major global tech firms due to speak, including Sam Altman, CEO of OpenAI.Georgieva said globally, 40% of jobs are exposed to AI, and countries that lack the infrastructure and a skilled workforce to invest could fall behind.Regional economies such as the UAE and Saudi Arabia have significantly increased investment in AI as part of strategies to diversify income sources. More

JERUSALEM (Reuters) -Bank of Israel Governor Amir Yaron said on Sunday the country’s economy was strong and would recover from the impact of the war, but called on the government to address issues raised by Moody’s (NYSE:MCO) after the agency downgraded Israel’s sovereign credit rating.To boost confidence of markets and ratings companies in Israel, it was key for “the government and the Knesset act to address the economic issues raised in the report,” Yaron said.”We knew how to recover from difficult times in the past and quickly return to prosperity, and the Israeli economy has the strength to ensure that this will be the case this time as well,” he said.Yaron, since the Palestinian Islamist group Hamas’ Oct. 7 massacre of mostly civilians in Israel, has urged the government to maintain fiscal discipline and trim spending on items not related to Israel’s reprisals against the group in Gaza. In the first-ever downgrade for Israel, Moody’s cut the country rating to “A2,” five notches above investment grade, from A1 on Friday, and kept its credit outlook at negative, meaning a further downgrade is possible.Moody’s cited material political and fiscal risks from the war, adding “Israel’s budget deficit will be significantly larger than expected before the conflict.”The downgrade, if prolonged or if it leads to further such moves, would raise borrowing costs for Israel and could lead to budget cuts and tax hikes to keep the budget deficit from spiraling out of control.Israel’s debt-to-GDP ratio, Moody’s noted, looked likely to peak at 67% by 2025, versus 62.1% in 2023. Still, that ratio has been much higher in the past during periods of economic crises for Israel, but “there was never any delay in the government’s debt repayments,” Yaron said.Last month, S&P Ratings told Reuters it could lower Israel’s credit rating if the war with Hamas expands to other fronts.Lawmakers last week gave initial approval to a revised 2024 state budget that added tens of billions of shekels to finance the war and compensate those affected, as well as a rise in the budget deficit this year to 6.6% of GDP from 2.25%. Prime Minister Benjamin Netanyahu on Friday reacted to Moody’s move on Friday, saying “the rating will go back up as soon as we win the war – and we will win.” More

A group representing drivers, Plataforma Nacional, and a newly created farmers’ group, Plataforma 6-F, on Saturday came together to jointly demand action from Spanish and European leaders. They claim rules to protect the environment make them less competitive compared to other regions. Members of both groups, waving Spanish flags, wearing yellow vests and shouting ‘Viva Espana’, gathered in a car park near the Atletico de Madrid stadium and voted in favour of joining forces. They will protest together from now on.”The government is forcing us to take measures that mean products will unfortunately not get to consumers in time. That is why we are calling on politicians to take responsibility and do something,” said Manuel Hernandez, head of the Plataforma Nacional, representing truck drivers. Since Tuesday, Spanish farmers have joined their counterparts from Germany, France, Italy, Portugal and Belgium in daily protests that include blocking several highways and ports. Shortly after the vote, hundreds of protesters walked around the Madrid stadium and then tried to access a main highway via a dirt road. Using force, dozens of police officers managed to stop them from doing so. Later a group of around 200 protesters tried to gather outside the headquarters of Spain’s ruling Socialist party, but a large police presence prevented them from getting too close. Both groups vowed to keep protesting, in Madrid and across the country, until their demands were met. More

“The Israeli economy is strong by all measures. It is capable of sustaining all war efforts, on the front line and home front, until, with God’s help, victory is achieved,” he said in a response to the decision published on Friday. Citing material political and fiscal risks for Israel from its war with the Palestinian militant group Hamas, raging since October, Moody’s cut the country’s rating to “A2”, which is fivenotches above investment grade, while its credit outlook waskept at negative, meaning a further downgrade is possible. The agency said it expects Israel’s debt burden to be “materially higher” than projected before the conflict and defence spending to be nearly double the level of 2022 by the end of this year in its baseline scenario. More

BRUSSELS (Reuters) – EU member states and MEPs struck a preliminary deal on Saturday to ease the bloc’s stringent fiscal rules, giving governments more time to reduce debt as well as incentives to boost public investments in climate, industrial policy and security.The latest revamp of two-decades-old rules known as the Stability and Growth Pact came after some EU countries racked up record high debt as they increased spending to help their economies recover from the pandemic, and as the bloc announced ambitious green, industrial and defence goals.The new rules set minimum deficit and debt reduction targets but these are less ambitious than previous figures.”At a time of significant economic and geopolitical challenge, the new rules will allow us to address today’s new realities and give EU member states clarity and predictability on their fiscal policies for the years ahead,” European Commission Vice-President Valdis Dombrovskis said in a statement.”These rules will improve the sustainability of public finances and promote sustainable growth by incentivising investment and reforms,” he said.Commenting on the deal, MEP Margarida Marques said: “With a case-by-case and medium-term approach, coupled with increased ownership, member states will be better equipped to prevent austerity policies.”The revised rules allow countries with excessive borrowing to reduce their debt on average by 1% per year if it is above 90% of gross domestic product (GDP), and by 0.5% per year on average if the debt pile is between 60% and 90% of GDP.Countries with a deficit above 3% of GDP are required to halve this to 1.5% during periods of growth, creating a safety buffer for tough times ahead.Defence spending will be taken into account when the Commission assesses a country’s high deficit, a consideration triggered by Russia’s invasion of Ukraine.The new rules give countries seven years, up from four previously, to cut debt and deficit starting from 2025.But a member state with excess debt would not be obliged to reduce this to under 60% by the end of the period of the seven years, as long as it is on a plausible downward path.EU countries and European Parliament will need to formally endorse the preliminary deal reached by the negotiators on Saturday before it can take effect next yearThe deal on Saturday was reached by negotiators from the EU Council of Ministers and the European Parliament. They need to formally endorse the preliminary deal before it can take effect next year. More

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GENOA, Italy (Reuters) -The moment is “fast approaching” for the European Central Bank (ECB) to cut interest rates, and timely and gradual steps could help to reduce ensuing volatility on financial markets and in the economy, a top policymaker said on Saturday.Addressing the Assiom Forex meeting in Genoa, ECB Governing Council member Fabio Panetta said the next monetary policy move had to reflect a situation in which disinflation is ongoing and a wage-price spiral unlikely, while rate hikes are proving to have a stronger effect on the economy than in the past.”The time for a reversal of the monetary policy stance is fast approaching,” said Panetta, who became Bank of Italy governor in November after a stint as an ECB executive board member.”We need to consider the pros and cons of cutting interest rates quickly and gradually, as opposed to later and more aggressively, which could increase volatility in financial markets and economic activity,” he added.The European Central Bank held interest rates at a record-high 4% last month and reaffirmed its commitment to fighting inflation even as the time to start easing borrowing costs approaches.The debate is now focussed on whether the ECB will start to cut rates as early as April or opt to delay.”Any speculation on the exact timing of monetary easing would be a sterile exercise and disrespectful to the ECB Governing Council as a collegiate body,” Panetta said.The ECB ended its fastest-ever cycle of rate hikes in September.INFLATION DEBATEIn recent weeks, key policymakers have argued that more evidence that inflation is heading back to target is needed before any rate cuts, despite growing confidence that price pressures are easing.”What should be discussed now are the conditions to start monetary easing, while avoiding risks to price stability and unnecessary damage to the real economy,” Panetta said.Addressing concerns raised by more hawkish policymakers, Panetta said downside risks to inflation expectations had emerged and fears about the ‘last mile problem’ of getting prices down appeared unwarranted, with inflation falling just as fast as it had risen. Also, strong nominal wage growth, which could pose risks, is being offset by the decline in other costs so that firms’ total production costs, the main inflation driver, have stopped increasing.With costs stable and demand weak, businesses are less likely to pass on wage increases to consumers.Panetta played down inflation risks stemming from the Red Sea crisis saying maritime transport accounts only for a small portion of total production costs.”Here too, low demand and high inventories reduce the likelihood of higher transport costs being passed on to prices to a significant extent,” Panetta said, adding an escalation of tensions could not be ruled out. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Italy’s new central bank chief has said the time for cutting interest rates is “fast approaching” and dismissed fears of a fresh inflationary spiral, in the latest sign that pressure is mounting to loosen eurozone monetary policy.Fabio Panetta, who became head of the Banca d’Italia in November, said inflation in the euro area was falling faster than expected, challenges were intensifying for Europe’s already stagnant economy and recent data “clearly point to ongoing disinflation”.“Fears that inflation would stop falling after the initial rapid decline — the ‘last mile problem’ — now appear unwarranted: inflation is falling at the same rate or faster than it has risen,” Panetta said in a speech on Saturday.He added that after the eurozone economy stagnated for five quarters, with the region’s industrial sector “in recession” and bank lending slowing, “disinflation is at an advanced stage and progress towards the 2 per cent target [for inflation] continues to be rapid”.“The time for a reversal of the monetary policy stance is fast approaching,” added Panetta, one of the most dovish voices on the European Central Bank’s rate-setting governing council.Eurozone inflation has declined rapidly from its record high of 10.6 per cent in October 2022, after a surge in energy and food prices faded. In January, annual price growth in the bloc was 2.8 per cent, close to the ECB’s target of 2 per cent.Investors are betting the ECB will start cutting borrowing costs as early as April. But the likelihood of that receded last week after other rate-setters warned there were still risks of fresh pressure on prices.Isabel Schnabel, an ECB executive board member, told the Financial Times: “We must be patient and cautious because we know, also from historical experience, that inflation can flare up again.”ECB chief economist Philip Lane said in a speech that recent data suggest disinflation “may run faster than previously expected”. But he also warned price pressures were expected to pick up as energy inflation stabilises, labour costs rise, demand recovers, and government support measures end.He said: “We need to be further along in the disinflation process before we can be sufficiently confident that inflation will hit the target.”Panetta dismissed fears that rapid wage growth — as workers try to recover the purchasing power they lost in the biggest surge of the cost of living for a generation — could cause a major rebound in inflation.He pointed out that labour accounts for less than 40 per cent of total costs for the average eurozone company and any increase was likely to be offset by falling prices of intermediate goods and energy. “A hypothetical increase in wage growth is currently highly unlikely to trigger a wage-price spiral,” he said. More