US strikes on Iran come at fragile moment for the global economy
'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.
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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.'
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Rather, it is the non-trade stuff, chiefly the way Trump handled the aftermath of this year's India-Pakistan conflict, that came as a shock—an intrusion that Saran calls 'the superimposition of the political aspect". This was marked by Trump's repeated claims to have helped end the conflict, denied by New Delhi, which views Kashmir mediation as a red line, and his hosting the Pakistan army chief, Gen. Asim Munir, at the White House. The man later issued outrageous nuclear threats from American soil. 'There's no doubt that Pakistan has come up in the political relationship (with America)," said Saran in comments made before Munir's nuclear threats. 'Trump probably found the India-Pakistan conflict to be a geo-political surprise, and he is convinced about the American role in ending it. The difference between the Indian and Pakistani approach to this was sharp. The disagreements began with trade, and political aspects were superimposed on it." White House spokeswoman Anna Kelly said Trump hosted Munir after he called for the president to be nominated for the Nobel Peace Prize. According to Roy-Chaudhuri of IISS, New Delhi may have 'mismanaged massaging his (Trump's) ego". How to heal With India seen by much of the world as key to addressing the negative impact of a fragmented world described by some experts as a fallout of 'deglobalization," its relationship with the US will be keenly watched. For ties to heal, some suggest looking at some of the domestic economic areas that have emerged as irritants. 'Politicians, like markets, tend to be forward-looking," said Mishra, asked if tariffs could spur domestic reforms. 'Consensus needs an external pressure to allow the government to go through meaningful reforms, in agriculture and GM crops for instance. We've been reluctant to change. Why not change now? In manufacturing, we should be looking at domestic demand. The assumption everyone makes is that manufacturing is chiefly for exports—that is wrong. Export competitiveness is important for better productivity, but exports as a source of end-demand are unlikely to be large enough." To be sure, introducing such reforms in India won't be easy. New Delhi, after all, chose to walk out of the Doha Round of trade talks in 2008 rather than give in to American pressure on agriculture. China supported the Indian position against the US then, and something similar may be happening this time around too, with four of the Brics Plus grouping founders— Brazil, Russia, India and China—reportedly eyeing a response to tariffs. Trump is deeply suspicious of Brics, viewing it as anti-American, and this has emerged as another sticking point in India-US ties. But the Russian ambassador to India told a recent meeting on Brics, organised by the India Foundation, more than once that 'de-dollarization (finding an alternative to the global currency of trade) was never a Brics proposal". Pai recommends keeping the temperature down. 'India and the US are joined at the hips when it comes to technology. As many as 25 major US tech companies have Indian-origin CEOs," said Pai, whose Aarin Capital is an investor in technology-intensive businesses. 'It's a temporary set-back. In India, there's a lot of pride; we are not deal-driven." A test ahead 'Trump's Presidency is a work in progress," said Saran. 'You have to play with the cards you are dealt. We have to find our own equilibrium with President Trump, and be careful not to make matters worse. Indian diplomacy will be strongly tested in the coming years, with flashes from the Cold War years, now fuelled by terrorism, threatening to cloud what promised to be a new era of growth-fuelled development. Equally, with a mercurial US president, things could swing right back to a more predictable and respectful relationship. But even amid the current uncertainty, Indian diplomats can draw satisfaction from the fact that an increasingly multipolar world sees India as a shining example of economic progress. And that's something even Trump cannot ignore.
