What the Middle East Conflict Means for the Global Economy – Reuters

By Mark John

Rising tensions in the Middle East are introducing new uncertainties for the global economy, even as policymakers begin to acknowledge their success in navigating a period of high inflation without triggering a recession.

Israel has been engaged in conflict with Hamas in Gaza for nearly a year and has recently escalated the situation by deploying troops into southern Lebanon following two weeks of intense airstrikes. This escalation raises concerns about the broader implications for the Middle East.

Here’s a look at the potential impacts on the global economy in the upcoming weeks.

What Impact Has Been Noted So Far?

So far, the main consequences have been felt primarily in financial markets, with investors moving towards safe-haven assets. The U.S. dollar has appreciated, especially following Iran’s missile attack on Israel, as the currency index, which compares the dollar against the euro, yen, and other major currencies, reached three-week highs.

Oil prices saw a rise of around 2% as concerns grew that a broader conflict could disrupt oil flows from the region, particularly if Israel targets Iranian oil infrastructure, which could provoke Iranian retaliation. However, analysts argue that this spike may not lead to sustained increases in fuel prices for consumers. The United States holds significant crude oil inventories, and OPEC nations have enough spare production capacity to mitigate short-term disruptions.

How Are Economic Policymakers Responding?

Central bankers typically emphasize the importance of focusing on long-term economic trends rather than reacting to unpredictable shocks. However, they cannot completely disregard geopolitical events.

Bank of England Governor Andrew Bailey indicated that the bank might consider cutting interest rates more aggressively if inflation pressures continue to subside, suggesting that the ongoing conflict in the Middle East is not currently perceived as a major risk to efforts to manage inflation. He noted a commitment to maintaining stability in oil markets, although he cautioned that escalating tensions could still drive oil prices higher.

Similar sentiments were echoed by Sweden’s Riksbank Deputy Governor Per Jansson, who stated that the current effects of the Middle East conflict are insufficient to warrant changes in economic forecasts.

The International Monetary Fund acknowledged that an escalation in the conflict could have substantial economic consequences for both the region and the global economy. However, commodity prices are still below levels seen during the previous year, making it premature to predict specific effects on the global economy, according to IMF spokesperson Julie Kozack.

When Will Any Impact Become More Apparent?

At present, oil futures are around $75 a barrel, significantly lower than the $84 mark following Hamas’ attacks on Israel back in October and well below the $130 highs observed after Russia’s invasion of Ukraine in February 2022.

Europe is particularly vulnerable to rising oil prices due to its lack of significant domestic oil production. However, policymakers believe that a sustained 10% increase in prices would only result in a minor inflation increase of 0.1 percentage points. The potential economic impacts of an outright war that disrupts energy infrastructure across the Middle East and trade routes could be far more pronounced.

Oxford Economics estimates that such a scenario could push oil prices up to $130 and reduce global output growth by 0.4 percentage points next year, which the International Monetary Fund currently projects to be around 3.3%.

This overview highlights the need to monitor developments closely, as the situation continues to evolve.