00:00The World Bank is the latest global financial institution to warn of a global economic slowdown due to the conflict
00:06in the Middle East.
00:07On Thursday, the World Bank trimmed its global growth forecast for this year by a tenth of a percentage point
00:14to 2.5%.
00:15But that's the best case scenario is warned the growth could slow sharply to just 1.3% if the
00:22Iran crisis drags on and the broader stress across financial markets is triggered.
00:27While developing economies are also slowing with the bank expecting growth of 3.6% for those countries this year,
00:35it's the weakest pace since the pandemic and down from 4.4% in 2025.
00:42While the growth forecast in the Middle East has been cut from 4.3% to just 1.6%
00:48in January, the United Arab Emirates was poised to grow 5% this year.
00:53But the World Bank now expects the oil-rich nation to grow just 2.4%.
00:59Well, Pushmin Singh is the managing economist at the Centre for Economics and Business Research.
01:05Pushmin, great to have you on the show.
01:07So first of all, is this only the start of a more serious global economic downturn?
01:13Well, the evidence rightly points to that, actually.
01:18I mean, you're starting to see a lot of data coming in.
01:21For example, the U.S. with quarter one, which includes the first full month of the conflict, it slowed down
01:26relative to quarter four.
01:27The Eurozone correspondingly contracted.
01:30You've got high-frequency data as well with the PMI showing a huge downtick since the onset of the conflict.
01:35Even within Asia-Pacific, with China, you know, the April data came out really wasn't the greatest of all.
01:43So the data supports the idea that, you know, we are starting to see a serious slowdown moving forward.
01:49Well, the picture is rather gloomy, isn't it?
01:52And the World Bank report said the global growth could slow to just 1.3% if the financial markets
01:59are impacted.
02:00You probably wouldn't like these questions, but how likely is that?
02:04It's very hard to say.
02:05I mean, with the financial markets, I mean, there are two key spheres that we'll have to look at.
02:10One is the idea of public finances, right?
02:12You're seeing all across, especially in Asia, which is the worst-hit region due to the Middle East conflict.
02:19There are a lot of kind of fuel handouts, a lot of temporary cuts in taxes, which are going to
02:24add to each of the economy's relative debt levels,
02:27which has already been strained due to the pandemic, due to the Russia-Ukraine crisis.
02:31And that's going to put a lot of pressure on their sovereign bonds.
02:34The second aspect is the more general financial market aspect.
02:38And you're going to see the idea of capital being drawn away from secondary markets into primary markets due to
02:45a lot of these tech IPOs that are coming up with Anthropic, OpenAI, and SpaceX.
02:50So that's going to lead to a liquidity crunch, which has the huge potential of causing a huge financial turmoil.
02:56So it's not ideal, but it's very uncertain in terms of how the dynamics are going to play out.
03:01Yeah, exactly.
03:01It's very hard to tell at this point.
03:03And because the situation is rather fluid, isn't it?
03:06So what does this mean for central banks all around the world already struggling with inflation and weak growth?
03:13You're right to point that out.
03:14That's basically the stagnationary environment which central banks really don't like to care.
03:20You know, on one side, you want to promote GDP growth, so you'd want to cut interest rates.
03:24But on the side, you've got high inflation, which means that you've got to raise interest rates in terms of
03:28the economic mechanism.
03:29It really depends from central bank to central bank.
03:31You know, if their mandate is for price stability, it probably means that rates are going to be higher for
03:36longer.
03:36And that has kind of implications for both the consumers, the businesses, and more widely for the economy in terms
03:43of slower real activity.
03:46OK, thank you very much, Pushpin.
03:48And please stay with us and later we'll go back to you to talk about the European Central Bank's interest
03:53rate decision.
03:54Well, the World Bank also cut growth expectations for the eurozone from 1.4% to 0.8% this
04:02year.
04:02Here in Europe, the central bank has raised interest rates for the first time in three years.
04:07Policymakers voted to raise the ECB's key interest rates by a quarter of a percentage point, bringing it to 2
04:14.25%.
04:15Well, inflation across the eurozone reached 3.2% in May.
04:20Before the Iran conflict began in February, inflation has been below 2% to the ECB's targets level.
04:26Well, several central banks around the world, including those in South Africa, Australia, and Norway, have also raised interest rates
04:34since the conflict began.
04:36And next week, the U.S. Federal Reserve and the Bank of Japan are expected to announce their interest rate
04:41decisions.
04:42And the ECB's move comes after the United States on Wednesday reported its highest inflation rate in three years.
04:51You know what I really love? I love the inflation. You know why?
04:54Because as soon as this war is over, you know, I can say it now, something you didn't know.
05:00Do you know we've been taking out millions of barrels of oil?
05:05Nobody knows it. You know who doesn't know about it? Iran, until right now.
05:10And now let's go back to Pushping Singh, Managing Economist at the Centre for Economics and Business Research.
05:15Good to have you again. So was this the right call? I'm just wondering, is the ECB prioritising inflation over
05:22economic growth?
05:23Well, to say, to even contextualise whether it's the right call, we have to look at the ECB's primary objective,
05:29which is for price stability.
05:30So if you take that into account, the ECB clearly thought that the surge in inflation in May to 3
05:36.2% was outside of its tolerance limits.
05:40And as such, they wanted to hike rates to kind of mitigate any kind of price pressures happening.
05:45So clearly they were prioritising their mandate to enforce price stability right now.
05:51And what is the biggest risk for Europe's economy right now?
05:54The question is, because what is tricky here is, it is a balancing act, isn't it?
05:59It is between fighting inflation and also growing the economy.
06:03The central bank risked the inflation forecast in the eurozone.
06:07This number is averaged 3% in 2026 before coming down to 2% in 2028.
06:13So what is the biggest challenge now for Europe's economy?
06:16I mean, the biggest challenge which has been prevalent for the last 12 to 18 months, essentially, is uncertainty,
06:22which is so hard to plan against.
06:24First, last year you had the whole kind of trade war and the tariffs being imposed on the eurozone.
06:28And now you have, you know, the Middle East conflict, which is something outside of the control of the eurozone
06:33as well.
06:33So the biggest challenge for them is trying to kind of mitigate the impact of these kind of uncertain events
06:40on the economy,
06:41on the consumers, on businesses, which is very much easier said than done.
06:45So Europe is going to, ECB including them, are going to try to best in terms of using policies to
06:52ensure that, you know,
06:53the effects are kind of mitigated.
06:55But it's going to be a very hard road ahead for at least the next 12 months.
06:59But I think for viewers watching from Europe right now, how will this affect households?
07:05For households specifically, I mean, I think the effects are starting to be seen, right?
07:08If the inflation is surging up to 3.2% in May, it means that clearly the price levels increasing
07:14are starting to hit the household finances.
07:17The direct impact will be by energy, which you can see why the fuel prices are increasing massively around, I
07:22think, about 10%.
07:23But there are going to be wider spillover impacts down the line,
07:27simply because of energy's role as an input into key production processes.
07:31What that means is the fact that the average kind of bundle of consumer goods, be it the food at
07:37the shops
07:37or your kind of services that you do over the weekend, are going to increase in cost as well as
07:43businesses try to kind of put some relief on their margins.
07:46So the overall bundle of consumer goods is going to increase in terms of cost, and that's going to weigh
07:51on household budgets.
07:52So that will mean quite a lot of kind of lower consumer spending in the meantime,
07:57as well as households look to save and try to find cost savings everywhere.
08:01I think just one more question.
08:03The head of the ECB said we're not committing to a particular path, and she said that before, actually.
08:09What can we expect?
08:11I mean, at least in terms of CBR's view, we're expecting another rate hike at some point this year.
08:17In terms of what the ECB chief said, they have kind of gone on a data-driven approach in terms
08:23of what's best based on the data that they have at that point.
08:26And it is, in our view, a right approach simply because of the uncertainty surrounding the conflict.
08:31You know, in one week you can have the conflict that's about to be resolved soon, and in another week
08:35you can have a fresh wave of strikes again.
08:37So the situation is inherently fluid and dynamic, and it's very hard to even try to find a way to
08:44plan for it,
08:45which is why ECB is adopting a data-driven approach in terms of assessing the data at the point of
08:50the governing council meeting,
08:51and then from there making a decision.
08:53What this means is the fact that there's not going to be a lot of forward guidance,
08:57but clearly with today's rate hike, it is clear that the ECB have found that the inflation surge is intolerable
09:03for them to not raise rates,
09:05and we're expecting further rate hikes down the line.
09:08All right, thank you very much for your insight.
09:10That is Pushpin Singh, Managing Economist at the Centre for Economics and Business Research.
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