The escalating conflict in the Middle East is testing the resilience of the global economy, already strained by tariffs and trade disruptions over the past year. Within a week of the latest turmoil, signs of strain have emerged along global trade arteries, including rice exports stuck at Indian ports and spikes in fertilizer prices critical for food production.
A prolonged war keeping energy prices high could drive up inflation and interest rates, increasing borrowing costs. Threats to cargo ships may snag supply chains, raising prices for businesses and consumers. The International Monetary Fund's deputy managing director, Dan Katz, warned the widening conflict could be 'very impactful on the global economy across a range of metrics,' such as inflation and economic growth.
The severity of economic consequences depends on the conflict's duration. Before the US and Israel attacked Iran, the IMF expected global growth of 3.3% this year. The fund has not yet changed its outlook, citing it's 'too early' to assess the impact, but is monitoring risks including trade disruptions, surges in energy prices, and financial market volatility.
Energy prices have soared, with Brent crude trading at levels not seen in over 18 months. A prolonged closure of the Strait of Hormuz, through which about a fifth of daily global oil and liquefied natural gas passes, poses a major risk. European natural gas futures have skyrocketed and could more than double if shipments are halted for over two months, according to Goldman Sachs.
Consumer price inflation in the European Union, at 2% in January, could rise by over a percentage point if the conflict drags on for months, potentially shaving up to half a percentage point off economic growth, said Holger Schmieding, chief economist at Berenberg bank. In the US, gasoline prices are at their highest in 11 months, and Goldman Sachs predicts inflation could rise from 2.4% in January to 3% by year-end if oil prices stay high.
Asia is particularly vulnerable, as 80-90% of crude oil and LNG shipped through the Strait of Hormuz goes to the region, with China a major buyer. The war comes as China set its lowest economic growth target in decades. India faces disruptions with over 400,000 metric tons of basmati rice stuck at ports. Capital Economics warned that most Asian economies face higher inflation, with a half percentage point rise in many countries if Brent crude remains at current levels.
