World faces 'difficult' six months as economic risks mount, Saudi finance minister says

Nations need to come together to find solutions, Mohammed Al Jadaan tells FII conference

Saudi Minister of Finance Mohammed Al Jadaan speaks during a panel discussion at the Future Investment Initiative conference in Riyadh. AFP

The world is facing a very difficult six months as mounting geopolitical risks exacerbate economic hardship, with the situation expected to deteriorate before improving, panellists told the Future Investment Initiative.

Nations need to come together to find solutions to the economic predicaments they are facing as they have no other option, Saudi Minister of Finance Mohammed Al Jadaan told FII delegates in Riyadh on Wednesday.

“I can tell you worldwide it is going to be a very difficult six months.”

However, the wider Middle East is largely split into two parts — GCC nations and other countries outside the bloc.

“I think the next six months and possibly the next six years are going to be actually very good,” Mr Al Jadaan said referring to the GCC. “For the wider region, it is going to be very difficult.”

Globally, nations should ensure “there is more collaboration and co-operation to bring about stability”, he said.

Sheikh Salman Al-Khalifa, Bahrain’s Minister of Finance and National Economy, who participated in the panel discussion along with Steven Mnuchin, former US treasury secretary and managing partner at Liberty Strategic Capital, said a “multitude of challenges” had weakened the economic outlook.

“Inflation is certainly one of them, driven by the disruption in supply chains coming out of Covid and compounded by the conflict in Europe,” he said.

“Now it is a period where there is food price inflation [and] energy price inflation and that is a big issue.”

Economic dynamics are further compounded by the fact that many countries have “limited fiscal space, coming out of Covid-19 [which] battered the ships and battered their sails, and then we are sailing into another storm”, Sheikh Salman said.

The global economic momentum has slowed amid strengthening geopolitical headwinds, including Russia's war in Ukraine and China's relations with the West.

Inflation, in particular, has also dented economic activity. Earlier this month, International Monetary Fund managing director Kristalina Georgieva said the world was facing a recession in 2023.

In its latest economic outlook, the IMF cut its growth forecast for 2023 and warned of a cost-of-living crisis.

The fund maintained its global economic estimate for this year at 3.2 per cent but downgraded next year's forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast.

The IMF expects global inflation to peak in late 2022 at 8.8 per cent and to remain elevated for longer than previously expected, before falling to 4.1 per cent by 2024. Inflation is forecast at 6.5 per cent in 2023.

“I don't want to underestimate the next six to 12 months as things are gonna get worse before they get better. But I believe there is an end in sight, so long as we can deal with some of these geopolitical risks,” Mr Mnuchin said.

A global response is needed to address geopolitical risks, similar to what was put in place during the fight against the pandemic.

“We need the same type of response … because the economic risks and the geopolitical risks are tied together…. this can't be solved by just the US [alone],” he said.

China and US, the world's two largest economies, also need to resolve their issues and learn to coexist.

“I hope President [Joe] Biden and President Xi [Jinping] will get together because, again, we need global leadership to deal with these global political issues,” Mr Mnuchin said.

The US, the world’s largest economy, was already in recession and would continue to be, with 10-year Treasury rates peaking at 4.5 per cent, Mr Mnuchin added.

On Tuesday, JP Morgan Chase chief executive Jamie Dimon and his counterpart at Goldman Sachs, David Solomon, said that the likelihood of a recession in the US was increasing as the Federal Reserve continues to increase its policy rate aggressively.

The Fed is meeting next week and is expected to raise interest rates by 75 basis points for a fourth consecutive time as it vies to tame inflation, which is at a four-decade high.

Annual headline inflation in the US was up 8.2 per cent in September, down from its peak of about 9 per cent in June, but still near the highest levels recorded in the early 1980s, the latest economic data indicates.

Core inflation for September was up 6.6 per cent from a year ago, the biggest 12-month gain since August 1982.

“A combination of higher US rates, higher oil prices [and] higher mortgage rates, I think you are going to see inflation in the US begin to come under control,” said Mr Mnuchin. “Now, it will probably be a two-year period.”

In terms of challenges faced by Middle Eastern economies, he said these issues should be resolved at a regional level.

It is “our role to help the region” and ensure availability of microfinance to keep economic momentum going, Mr Jaddan added.

“A lot of countries [globally] are going through a very difficult time when it comes to debt … these are pretty difficult situations,” he said.

“I can tell you, within the region, what Saudi Arabia did is that we mobilised regional multilateral development institutions to make sure that we provide support to countries in the region.”