\n<\/p>\n
In the days after the US and Israel first bombed Iran, financial markets bet the economic fallout from Donald Trump\u2019s \u201clittle excursion\u201d in the Middle East would be short-lived.<\/p>\n
\u201cThere are risks from higher oil prices longer term. But this is a tail risk,\u201d one US-based fund manager said after the airstrike killing Iran\u2019s supreme leader, Ayatollah Ali Khamenei. \u201cHistory has shown time and time again that geopolitical flare-ups like this tend to be short-lived. This one should prove to be no exception.\u2019\u2019<\/p>\n
Goldman Sachs told clients it expected temporary disruption. \u201cOil prices to decline throughout the year. But risks are skewed to the upside,\u201d its analysts wrote. UniCredit suggested crude would be capped at about $80 a barrel. \u201cGiven its struggle for survival, the Iranian regime has an incentive to keep its response measured\u201d.<\/p>\n
Three weeks later, the prospect of a drawn-out war is causing mounting economic problems. Oil prices have soared above $100 a barrel, European gas prices have doubled, volatility stalks financial markets, and consumers worldwide are bracing for a surge in living costs. Central banks, including the US Federal Reserve, Bank of England and European Central Bank, warn the war could have a material impact on inflation and dent global growth.<\/p>\n
\u201cMarket wisdom still holds that the war will end quickly, with the strait of Hormuz soon to reopen,\u201d said Albert Edwards, a senior analyst at Soci\u00e9t\u00e9 G\u00e9n\u00e9rale. \u201cMaybe the market is right, but in my opinion the risks are asymmetric that stagflation bursts the complacency bubble.\u201d<\/p>\n
With each day, more problems are emerging. From the soaring price of petrol and diesel for motorists, to cancelled flights and the worst travel disruption since the Covid pandemic.<\/p>\n
<\/span>The cost of fertiliser is rising sharply, hurting farmers worldwide.<\/span> Photograph: Aly Song\/Reuters<\/p>\n European heavy industry \u2013 still reeling from the 2022 energy price shock after the Russian invasion of Ukraine \u2013 is feeling the pinch in particular. Huntsman told the Guardian its Teesside plant in the north-east of England is at risk, Germany\u2019s BASF, the world\u2019s largest chemicals firm, is putting up prices. The cost of fertiliser \u2013 an important byproduct of the petroleum industry \u2013 is rising sharply, hurting farmers worldwide and laying the groundwork for a sharp rise in food prices.<\/p>\n Iran has threatened to send oil to $200 a barrel through its fightback, targeting shipping through the narrow seaborne passage between its southern shore and Oman, as well as refineries and pipelines across the Middle East. Iranian missiles hit Ras Laffan, an important Qatari liquefied natural gas (LNG) processing facility, leading analysts to warn that energy markets are now on the road to a \u201cdoomsday\u201d scenario.<\/p>\n In Washington DC, the message has been mixed. Trump has declared the war \u201cwon\u201d, while also saying it could end \u201csoon\u201d, or might need to go \u201cfurther\u201d \u2013 adding a layer of uncertainty for global markets and the world economy that contrasts with the situation on the ground.<\/p>\n Oil price chart<\/p>\n Against this backdrop, businesses and investors are increasingly at a loss how to respond. Barclays compared the president\u2019s comments to a 19th century-style \u201cfog of war\u201d, fuelling violent market swings. \u201cA dense fog has been induced by the communication about the war: its objectives, its duration, its potential expansion and\/or its off-ramps,\u201d its analysts wrote.<\/p>\n Forecasters say a prolonged conflict could resemble past global economic crises. \u201cSurging oil and gas prices are harbingers of economic trouble,\u201d said Ian Stewart, the chief economist in the UK at the accountancy firm Deloitte. \u201cHigher energy prices, triggered by war or revolution in the Middle East, were important factors in western recessions in 1973, 1979 and 1990.<\/p>\n \u201cThe surge in energy prices in the wake of Russia\u2019s invasion of Ukraine collapsed Europe\u2019s growth rate in 2023.\u201d<\/p>\n The clearest parallels, however, are with the 1980s. Back then, Ronald Reagan sent US warships to Hormuz to protect merchant shipping during the Iran-Iraq war. In an episode that became known as the \u201ctanker war\u201d, Washington dispatched the largest naval convoy since the second world war to keep oil and gas exports flowing.<\/p>\n Four decades ago Tehran and Baghdad knew that targeting Hormuz would draw US involvement. By threatening western economic interests, they sought to gain leverage. In a case of history repeating itself, naval escorts are being mooted, after an apparent miscalculation by the Trump White House that this time would be different.<\/p>\n <\/span>About a fifth of global oil supplies normally pass through the strait of Hormuz.<\/span> Photograph: Reuters<\/p>\n About a fifth of global oil supplies pass through the 126km-long waterway, which provides the only seaborne route for vessels leaving the Gulf to the open seas beyond. Saudi Arabia, an important US ally, exports the most through the tiny passage, followed by the United Arab Emirates.<\/p>\n The record release of 400m barrels of oil stockpiled by International Energy Agency member states\u2019 has helped calm fears over shortages. But experts say supply constraints will soon bubble up, hitting crude refineries and downstream fossil fuel products worldwide.<\/p>\n \u201cThere is an increasing shortage in refined products,\u201d said Mark Dowding, a fund manager at RBC BlueBay. \u201cChina has issued an export ban on refined products as it seeks to protect domestic consumption. Other countries, including South Korea, are considering similar steps and we would not be surprised if the US follows suit.\u201d<\/p>\n In a lengthy conflict, energy supply constraints are expected to hit fossil fuel byproducts such as fertiliser. The Gulf is home to some of the world\u2019s biggest plants, as a linchpin region for farming worldwide. About half of all global exports of urea, a commonly used fertiliser, and sulphur, a critical fertiliser ingredient, are sourced from the Middle East.<\/p>\n <\/span>Rising fertiliser costs will hit crop yields and drive up food prices.<\/span> Photograph: David Pearson\/Alamy<\/p>\n Before the critical spring planting season in the northern hemisphere, analysts warn rising fertiliser costs will hit crop yields and drive up food prices \u2013 hurting low-income countries and poor households globally.<\/p>\n Plastics, chemicals and pharmaceuticals are also being hit. Supplies of helium \u2013 critical to microchip production and MRI machines \u2013 have been hit by Qatar shutting down production. The Gulf state accounts for a third of global supply, as an important byproduct of LNG. Analysts say global manufacturing supply chains could be hit as a consequence \u2013 from the production of cars to electronics.<\/p>\n \u201cFossil fuels and petrochemical feedstocks run through the deep plumbing of the modern economy,\u201d analysts at Soci\u00e9t\u00e9 G\u00e9n\u00e9rale wrote in a note to clients. \u201cThe stakes of this conflict are enormous for the global economy.<\/p>\n \u201cIf the strait of Hormuz remains effectively blocked for months, disruptions to supply chains beyond energy \u2013 from food to semiconductors \u2013 will become so critical that the risk of a scenario akin to the Covid plus Russia-Ukraine shock would be hard to rule out.\u201d<\/p>\n Gulf gas field map<\/p>\n Alongside higher inflation, economic growth is expected to be dragged down worldwide. Households have little room to stomach higher prices, while businesses were already laying-off workers in several countries before the Iran war began.<\/p>\n Barclays estimates in a scenario of oil prices averaging $100 in 2026 \u2013 as was the case in 2022 \u2013 global growth would be 0.2 percentage points lower, at 2.8% this year, while headline inflation would be 0.7 percentage points higher, at 3.8%, than would otherwise have been the case.<\/p>\n Some economists warn a prolonged war could drive oil prices above $170 a barrel, triggering a global recession. The UK, the eurozone and Japan are on watch. Experts warn a sharper sell-off in global markets could amplify the worsening outlook \u2013 exposing fractures in the financial system. Fears are growing over opaque private credit markets, while the bursting of an AI-fuelled bubble in tech valuations could spell disaster.<\/p>\n Governments are exploring emergency energy support for consumers already battered by a cost of living crisis. But amid expectations for central banks to drive up interest rates in response to the inflation shock, borrowing costs are rising \u2013 potentially hitting their capacity to respond.<\/p>\n <\/span>Trump\u2019s tariff threats in April last year had a much bigger impact on global financial markets.<\/span> Photograph: Patrick T Fallon\/AFP\/Getty Images<\/p>\n There are hopes the fallout can still be contained. Despite being rattled, the fall in global financial markets remains relatively muted. Trump\u2019s tariff threats in April last year had a much bigger impact.<\/p>\n Part of the reason is the context of the latest energy price shock. Conditions are different to 2022. Back then, the oil and gas price spikes amid Russia\u2019s war in Ukraine added to the inflationary effects of the post-Covid economic restart. Pent-up consumers had a voracious appetite for goods and services. Governments and central banks were pushing to stimulate activity, and labour markets were tight.<\/p>\n \u201cThe result today in the case of a protracted war would be an intense supply shock that runs up against much weaker demand growth,\u201d said Kallum Pickering, the chief economist at Peel Hunt.<\/p>\n After the shale gas boom, the US is largely energy-independent. Less than a tenth of its oil supplies travel through Hormuz. China has amassed vast oil stockpiles. European countries \u2013 most are net energy importers \u2013 are likely to be hit hardest by the fallout, but have pushed to diversify supplies since 2022. Renewable energy capacity has also increased.<\/p>\n While there are clear parallels to the 1970s energy shocks, the world economy in 2026 has reduced its reliance on fossil fuels. Some estimates suggest energy intensity \u2013 consumption of energy per unit of economic output \u2013 has fallen by about 70% since the mid-1970s.<\/p>\n <\/span>The world economy has reduced its reliance on fossil fuels since the 1970s.<\/span> Photograph: Julian Stratenschulte\/AP<\/p>\n Unlike after the Kremlin\u2019s invasion of Ukraine, when western nations pushed to permanently cut Russian energy out of their supply chains, analysts see an end to the war in Iran allowing for a recovery.<\/p>\n \u201cThe key difference is that current supply disruptions are temporary. Yes, there is plenty of uncertainty about the duration of the disruption, but ultimately, supply will return,\u201d said Warren Patterson, the head of commodities energy strategy at the Dutch bank ING.<\/p>\n However, long-term consequences are still likely.<\/p>\n The world economy is more interconnected than in the 1970s. With the march of globalisation and just-in-time supply chains, global trade in goods and services has swelled from 42% of world GDP in 1980 to more than 60% by the mid-2000s. But an interdependent world, in an age of rising conflict and geopolitical tensions is a riskier one; and no basis for a sustainable economic model.<\/p>\n In response, \u201cnearshoring\u201d and \u201cfriendshoring\u201d have become buzzwords for multinational companies, as companies direct supply chains towards politically aligned and neighbouring countries to bolster their resilience.<\/p>\n Running up to the Iran conflict, this imperative had been underscored by the bottlenecks in supply after the easing of Covid lockdowns; disruption from the Ever Given blocking the Suez canal, and Houthi rebel attacks on Red Sea shipping after the Israeli invasion of Gaza. Rising geopolitical tensions and Trump\u2019s tariff wars have accelerated things further.<\/p>\n Economists say the fragmentation of the global economy could add permanent additional costs, with potential to stoke inflation in the short term, while weighing on growth in the long term.<\/p>\n Wei Yao, an economist at Soci\u00e9t\u00e9 G\u00e9n\u00e9rale, said the conflict had put the world\u2019s central banks \u201cat the mercy of war\u201d. \u201cThere are moments when one must come near the edge to remember why one must not go over it. We may be at one of those moments.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" In the days after the US and Israel first bombed Iran, financial markets bet the economic fallout from Donald Trump\u2019s \u201clittle excursion\u201d in the Middle East would be short-lived. \u201cThere are risks from higher oil prices longer term. But this is a tail risk,\u201d one US-based fund manager said after the airstrike killing Iran\u2019s supreme<\/p>\n","protected":false},"author":1,"featured_media":47312,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49],"tags":[1404,14573,1123,84,23947,2328,5216,261],"class_list":{"0":"post-47311","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-economy","9":"tag-enormous","10":"tag-global","11":"tag-iran","12":"tag-prolonged","13":"tag-shock","14":"tag-stakes","15":"tag-war"},"_links":{"self":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/47311","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=47311"}],"version-history":[{"count":0,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/47311\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/media\/47312"}],"wp:attachment":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=47311"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=47311"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=47311"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}