Amid the relief of policymakers as the economy gradually emerges from high inflation without triggering a recession, the increasingly tense situation in the Middle East is adding new uncertainties to the global economy.
The conflict sparked by the Ha War nearly a year ago on October 7th has not only failed to simmer down but has escalated. Armed groups supported by Israel and Iran have been engaged in multi-front battles. Recent intensive airstrikes by Israel on Hezbollah in Lebanon resulted in the killing of Hezbollah leader Hassan Nasrallah and several Hezbollah commanders. In retaliation, Iran launched around 200 missiles at Israel on Tuesday, October 1st, leading to a significant escalation of tensions in the Middle East. Israeli Prime Minister Netanyahu vowed strong retaliation against Iran.
US President Biden stated on Thursday that the US is discussing a potential Israeli attack on Iranian oil facilities. This statement caused oil prices to briefly surge by 5%.
Following intensive airstrikes in Lebanon in the past two weeks, Israel has deployed troops to southern Lebanon and engaged in fierce battles.
Based on Reuters’ summary, here are the possible impacts of the Middle East conflict on the global economy:
The conflict’s influence is primarily limited to financial markets, with investors hedging their portfolios with safe assets. Since Iran’s ballistic missile attack on Israel, the dollar has been in favor: the “dollar index” measuring the dollar against the euro, yen, and four other major currencies is trading near a three-week high.
Oil prices rose on Thursday as concerns grew that broader conflicts could disrupt oil flows from the region. For example, if Israel chooses to attack Iran’s oil infrastructure, this could trigger Iranian retaliation.
Iran is the world’s seventh-largest oil producer, with about half of its output exported overseas, mainly to China.
It is currently unclear if this conflict will lead to sustained and substantial increases in oil prices for consumers. Analysts point out that US crude inventories are high, and OPEC oil-producing countries have sufficient spare capacity to alleviate the impact of any disruptions in oil supply in the short term.
Central bank governors emphasize the need to focus on deeper underlying trends beyond unpredictable one-off economic shocks. However, they cannot completely overlook geopolitical events.
Andrew Bailey, Governor of the Bank of England, told The Guardian that if inflation pressures continue to ease, the central bank may take more aggressive rate-cutting measures. This indicates that central bank governors currently do not see the Middle East conflict as a significant threat to their efforts to tame inflation.
Per Jansson, Deputy Governor of the Swedish central bank, also sent a similar message that the impact of the Middle East conflict is not sufficient to adjust economic forecasts.
Bailey stated that if the situation escalates further, the conflict could push oil prices higher.
The International Monetary Fund (IMF) stated on Thursday that an escalation of the Middle East conflict could have significant impacts on the region and global economy, but commodity prices remain lower than last year’s highs. IMF spokesperson Julie Kozack stated that it is too early to predict the specific impact on the global economy.
Brent crude futures are currently around $75 per barrel, significantly lower than the $84 level when Hamas attacked Israel almost a year ago on October 7 and far below the peak of $130 reached after Russia’s invasion of Ukraine in February 2022.
Europe faces the risk of rising oil prices since, unlike the US, Europe does not have major oil production within its borders. However, policymakers estimate that prices need to increase by 10% continuously to push inflation up by 0.1 percentage point.
If a full-scale war leads to wider attacks on energy infrastructure across the entire Middle East and Gulf region, along with further disruptions in trade routes through the Red Sea, the economic impact will be more pronounced.
Oxford Economics estimates that such a scenario would skyrocket oil prices to $130 and reduce next year’s global output growth rate by 0.4 percentage points. IMF currently projects next year’s global output growth rate to be around 3.3%.