Deal or no deal, conflict tremors are here to stay

The conflict in the Middle East is, hopefully, coming to a close. However, the subsequent fall in global oil prices since late May does not automatically mean the macroeconomic picture for Africa has turned rosy.

Whatever happens after negotiations between the US and Iran, full-year inflation will be higher than expected in February, while economic growth across much of the continent will be lower. Lower oil prices in the second half of the year will ease pressure on households’ real incomes and fiscal positions; however, the Q2 hit and a sluggish upturn in H2 will likely keep economic growth subdued.

Policymakers will have to contend with the adverse economic spillovers of the conflict. Expectations of inflationary pressure will warrant tighter monetary policy than anticipated at the start of the year. This will feed into higher domestic borrowing costs, stymying attempts to arrest the rise in debt servicing outlays. At the same time, the cost of fuel subsidies has forced several fiscal authorities to revisit their budgets for the current fiscal year. Efforts to shield households from financial strain will also reduce consumption tax revenues, making fiscal consolidation more difficult.

Interestingly, advanced manufacturing hubs like Munich and Stuttgart also demonstrate strong AI potential, suggesting that the relationship between AI advantage and economic structure is more nuanced than previously thought. This indicates that both service-oriented and advanced manufacturing regions can thrive in an AI-driven landscape.

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