Rising tensions in the Middle East have created new uncertainties for the global economy, while policymakers are beginning to congratulate themselves for pulling it out of hyperinflation without triggering a recession.
Israel, which has been fighting with Hamas in Gaza for almost a year, has dispatched its troops to southern Lebanon after two weeks of intense air strikes, raising tensions in the conflict that has drawn criticism from the United States and Iran. There is a danger of increasing tension.
The following graphs what we know about what impact this could have on the world economy in the coming weeks.
What impact, if any, has been felt so far?
Far less than the immediate area, the main impact is limited to financial markets as investors hedge their portfolios with safe-haven assets. The US dollar has gained since Iran’s ballistic missile attack on Israel: The dollar index, which measures the US currency against the euro, yen and four other top currencies, is trading near three-week peaks.
Oil prices rose about 2% on Thursday on concerns that the wider conflict could disrupt the flow of crude from the region – for example if Israel decided to target Iranian oil infrastructure, which This in turn could trigger retaliation from Iran.
But it’s unclear how this will translate into the kind of sustained, sharp increase that motorists will begin to notice at the fuel pump. Analysts say the United States has high levels of crude oil reserves, while OPEC-producing countries have enough spare capacity to cushion the impact of the disruptions, at least in the short term.
How are economic policy makers responding?
As always, central bankers stress that their job is to look beyond unexpected, one-off shocks to the economy and instead focus on deeper, underlying trends. But they also cannot afford to ignore geopolitical events completely.
Bank of England Governor Andrew Bailey told The Guardian newspaper that the bank could move more aggressively to cut interest rates if inflationary pressures continue to weaken – suggesting that central bankers may not be able to do so for the time being in the Middle East. The conflict is not seen as a major threat to its efforts to reduce inflation. , Bailey said there seemed to be a commitment to keeping the oil market stable, but he also said that if things continued to escalate, oil prices could rise due to the conflict.
Per Jansson, deputy governor of Sweden’s Riksbank, sent a similar message, saying the effects of the Middle East conflict were not yet enough to derail economic forecasts.
An escalating conflict in the Middle East could have significant economic impacts on the region and the global economy, but commodity prices remain below last year’s highs, the International Monetary Fund said Thursday. IMF spokeswoman Julie Kozak said it was too early to predict specific impacts on the global economy.
When will any effects be more pronounced?
For context, Brent crude futures are currently around $75 a barrel, well below the $84 level reached nearly a year ago when Hamas attacked Israel on October 7 and Russia’s invasion of Ukraine in February 2023. Far from the high of $130 reached after.
Europe will face rising oil prices because, unlike the United States, it has no large domestic oil production. But even there, policymakers estimate that a sustainable 10% increase in prices would be needed to lift inflation by just 0.1 percentage point.
The economic effects of an all-out war, which led to widespread attacks on energy infrastructure throughout the Middle East and Gulf regions as well as further disruption of trade routes through the Red Sea, will be more pronounced.
Oxford Economics estimates that such a scenario would see oil prices rise to $130 and global output growth next year fall by 0.4 percentage points, which the International Monetary Fund currently sees at about 3.3%.
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