US Strikes On Iran Come At Fragile Moment For The Global Economy
The World Bank, the Organization for Economic Cooperation and Development and the International Monetary Fund have all downgraded their global growth forecasts in recent months.
US strikes on Iran’s three main nuclear facilities come at a fragile moment for the global economy, and the outlook now hinges on how forcefully the Islamic Republic retaliates.
The World Bank, the Organization for Economic Cooperation
and Development and the International Monetary Fund have all
downgraded their global growth forecasts in recent months. Any
significant increases in oil or natural gas prices, or
disturbances in trade caused by a further escalation of the
conflict, would act as yet another brake on the world economy.
“We’ll see how Tehran responds, but the attack likely puts
the conflict on a escalatory path,” Bloomberg Economics analysts
including Ziad Daoud wrote in a report. “For the global economy,
an expanding conflict adds to the risk of higher oil prices and
an upward impulse to inflation.”
The rising geopolitical risks intersect with a potential
escalation in tariffs in the coming weeks as President Donald
Trump’s pauses of his hefty so-called “reciprocal” levies are
due to expire. The biggest economic impact from a prolonged
conflict in the Middle East would likely be felt via surging oil
prices.
Post the US strike, a derivative product that allows
investors to speculate on price swings in crude oil surged 8.8%
on IG Weekend Markets. If that move were to hold when trading
resumes, IG strategist Tony Sycamore said he projects WTI crude
oil futures will open at around $80 per barrel.
Much will hinge on near-term events. Iran’s Foreign
Minister Abbas Araghchi said the US attacks are “outrageous and
will have everlasting consequences.” He cited the United Nations
Charter on provisions for self-defense and said Iran reserves
all options to defend its sovereignty, interest and people.
Bloomberg Economics sees three options for Iran to respond:
Attacks on US personnel and assets in the region
Targeting regional energy infrastructure
Close the Strait of Hormuz maritime chokepoint using
underwater mines or harassing ships passing through
In the extreme scenario in which the Strait of Hormuz is
shut, crude could soar past $130 per barrel, according to Daoud,
Tom Orlik and Jennifer Welch. That could take US CPI near 4% in
the summer, prompting the US Federal Reserve and other central
banks to push back the timing of future rate cuts. About a fifth of the world’s daily oil supply goes through the Strait of Hormuz, which lies between Iran and its Gulf Arab neighbors such as Saudi Arabia.
The US is a net exporter of oil. But higher crude prices
would only add to the challenges the US economy is already
facing. The Fed updated economic projections last week, marking
down its forecast for US growth this year to 1.4% from 1.7% as
policymakers digested the impact on prices and growth of Trump’s
tariffs.
As the largest buyer of Iranian oil exports, China would
face the most obvious consequences from any disruption to the
flow of petroleum, though its current stockpiles may offer some
respite.
Any disruptions to shipping through the Strait of Hormuz
would have a significant impact on the global liquefied natural
gas market too.
Qatar, which makes up around 20% of the global LNG trade,
uses this route for exports and has no alternative passage. That
would leave the global LNG market extremely tight, pushing
European gas prices significantly higher, Bloomberg Economics
has noted.
While investors may be concerned that supplies could be
interrupted if hostilities escalate, OPEC+ members, including de
facto group leader Saudi Arabia, still have abundant spare
capacity that could be activated. In addition, the International
Energy Agency may choose to coordinate the release of emergency
stockpiles to try and calm prices.
“The Middle East tensions represent another adverse shock
to an already weak global economy,” Ben May, director of global
macro research at Oxford Economics, said in a report ahead of
the latest escalation. “Higher oil prices and the associated
rise in CPI inflation would provide central banks with a major
headache.”
