Charts of the Week: Geopolitics, Oil, the IMF and China

The IMF’s global economic outlook One of the most notable themes that emerged from the IMF’s latest economic outlook this week is the resilience of the world economy in recent months. This resilience has led to significant upward revisions to its GDP outlook for several large economies compared to the projections made last October (see chart 1). The most notable upgrades were made to the US and to several large emerging market economies, including India and China. These were partially offset, however, by some small downgrades to the outlook for Europe and Japan. The factors driving this global outperformance were diverse but mostly revolve around loose fiscal policy, big drawdowns in household savings, and lower inflation, fostered, in turn, by supply-side improvements.

Geopolitical risk and oil The extent to which these forecasts are now at risk will hinge on several factors but increasing geopolitical instability in the Middle East is clearly one of them. As chart 2 below indicates, a generic indicator of global geopolitical risk has spiked sharply higher over the past few days, largely thanks to the escalation of tensions between Israel and Iran. The most important channel through which this could generate economic instability is higher oil prices. But heightened risk aversion in the Middle East, and more broadly among global investors, could also hamper economic activity.

Global oil supply Global oil prices have, so far, remained well-behaved against this backdrop. However, there is no assurance that this stability will continue if geopolitical risks escalate. Iran plays a crucial role in the global oil market due to its significant oil reserves and production capacity. More broadly, the Middle East holds nearly half of the world's proven oil reserves (see chart 3) and accounted for 33 percent of global oil production in 2022. Therefore, any disruptions or changes in the region's oil production or exports could significantly affect the global oil market, influencing both supply and prices worldwide.

Oil prices, inflation and monetary policy While oil prices have remained relatively stable in recent days, they have generally been on the rise since the beginning of the year. This increase has been a major factor in slowing down or even reversing disinflationary trends in many countries. Additionally, it has led to reduced expectations for looser monetary policies, especially in the US. It is certainly no coincidence, against that backdrop, that oil prices appear to have enjoyed a close lead relationship with US Treasury yields over the past few months as well (see chart 4).

US financial conditions A major challenge for central banks in adjusting monetary policy is the feedback loops between economic activity, financial conditions, and monetary policy itself. For instance, earlier expectations of a more lenient monetary policy contributed to looser financial conditions in the US. This, in turn, may have provided greater support to the US economy than the Federal Reserve had anticipated (see chart 5). This indicates that while many metrics suggest that US monetary policy is stringent, indicators of financial conditions present a more nuanced view.

China’s economy Finally, and on a more positive note, this week’s dataflow for China has offered a more upbeat take on recent economic developments. For instance, GDP in Q1 2024 grew by 5.3% y/y, up from 5.2% in the Q4 2023, and significantly above expectations which were centered on a growth rate of 4.8%. A closer examination shows that net trade significantly boosted economic growth over the past three months, thanks to robust growth in export volumes during January and February. Whether this strength will be sustained, however, remains to be seen not least against the more risky global economic backdrop discussed above.