What Middle East Conflict Means For Global Economy

In recent times, tensions have been escalating in the Middle East, bringing a fresh wave of uncertainty to the global economy. This comes even as policymakers celebrate having tackled high inflation without pitching the world into a recession.

For nearly a year now, Israel has found itself at loggerheads with Hamas in Gaza. The situation took a turn for the worse when Israel decided to push its troops into southern Lebanon following weeks of intense airstrikes. This move heightens the stakes in a conflict that might potentially pull in the United States and Iran.

Current Economic Implications

The instant effects of these tensions haven’t trickled far beyond the immediate vicinity. Investors, keen on safeguarding their assets, have turned to safe-haven options. Consequently, the US dollar has seen a notable boost, especially since Iran’s missile strike on Israel. The dollar index, which pits the US currency against the euro, yen, and four others, is trading quite high.

Meanwhile, oil prices spiked by approximately 2% last Thursday. Understandably, there’s a looming concern about a potential broader conflict disrupting oil supplies from the Middle East. The scenario where Israel targets Iranian oil infrastructures sounds plausible, albeit with the possibility of Iranian retaliation.

Policymakers’ Reactions

Central bankers often profess a focus on the more foundational economic trends, steering clear of erratic disturbances. Yet, ignoring geopolitical events entirely isn’t a luxury they can afford.

Andrew Bailey of the Bank of England remarked that interest rates could be slashed more aggressively if inflation pressures weaken further. His stance suggests the Middle East conflict, for now, isn’t a damper on their objective to manage inflation.

Similarly, Sweden’s Riksbank’s Per Jansson relayed that the ongoing conflict hasn’t skewed their economic projections so far.

Indicators to Watch For

Brent crude presently hovers around $75 per barrel. This is significantly lower than the $84 it reached post the Hamas strike on Israel nearly a year ago. Comparatively, post the Russian incursion into Ukraine in February 2023, prices once surged to $130.

Europe, unlike the US, lacks major domestic oil production. Rising oil prices would affect Europe more. Yet, experts believe a sustained 10% price hike would only nudge inflation by a meagre 0.1 percentage point.

Potential Global Effects

An all-out conflict threatening broader energy infrastructures across the Gulf and Middle East would bring palpable economic impacts. Possible disruptions in trade routes through the Red Sea amplify concerns.

According to estimates by Oxford Economics, a severe scenario might elevate oil prices to about $130. This could potentially reduce global output growth by 0.4 percentage points next year, even though the International Monetary Fund currently anticipates a growth rate of 3.3%.

For the moment, though, it’s challenging to predict any specific ripple effects on the global economy. As advised by the IMF’s Julie Kozack, any predictions remain too premature to be considered concrete.

(This piece remains untouched by NDTV and is curated from a syndicated feed.)