Global Economy Feels Ripple Effects of US-Israel-Iran War as Conflict Persists
The ongoing US-Israel-Iran war has now lasted for more than 10 days, with no signs of either side relenting. This prolonged conflict is sending significant ripple effects across the global economy, impacting nearly every region with disruptions in energy supplies and financial instability.
Economic Scenarios: Quick Recovery vs. Prolonged Disruption
Economists are currently evaluating two primary possibilities for how the global economy might respond to the Middle East tensions. In the first scenario, the conflict subsides quickly, allowing oil and natural gas prices to stabilize by summer. This would limit broader impacts on global growth and inflation.
However, the second scenario assumes persistent disruptions in energy supplies, pushing up everyday expenses such as food and travel during the summer months, as reported by the Wall Street Journal. A more pessimistic outlook from Goldman Sachs suggests crude prices could climb to around $100 per barrel and remain elevated, potentially reducing global economic growth by half a percentage point and increasing inflation by nearly one percentage point over the next year.
Regional Impacts: Winners, Losers, and the Insulated
The effects of this situation vary widely across countries, with some economies facing greater strain while others see limited gains or even benefits.
United States: Insulated but Not Immune
Over the past decade, the shale revolution has transformed the US into a net energy exporter, reducing its exposure to external oil-related shocks. Despite this, the world's largest economy is not completely insulated from the war's consequences.
Since tensions escalated, the cost of regular unleaded gasoline has risen by about 20%, hitting household budgets and reducing spending on other goods and services. Higher fuel prices may also weigh on industries like airlines, cruise companies, and manufacturing. On the flip side, American energy producers could benefit from stronger price environments.
According to Oxford Economics, if Brent crude averages around $80 per barrel in coming months, US inflation could increase by roughly 0.2 percentage points, while economic growth may decline by about 0.1 percentage point.
Middle East at a Precipice
While Gulf countries typically benefit from higher oil prices, disruptions around the Strait of Hormuz have curbed exports and forced output reductions. Capital Economics warns that even a short-lived conflict could cause Gulf economies to shrink by up to 2% this year, with potential declines of up to 15% if hostilities persist.
Kuwait and Qatar are expected to face severe impacts due to heavy energy dependence, while Saudi Arabia and the UAE may offset losses via pipeline networks. Beyond energy, the unrest threatens the Gulf's reputation as a stable destination, risking foreign investment for projects like Saudi Arabia's Vision 2030. Tourism could decline by 27%, with revenue losses up to $56 billion.
Neighboring economies are also affected. Egypt's pound hit a record low amid fears of higher energy import costs, and Iran's economic difficulties are expected to worsen.
Europe's Energy Shock Reloads
If energy prices remain high, Europe's fragile economic recovery could slow. The EU depends on imported fossil fuels for about 58% of its energy consumption, making it vulnerable to global price surges. Gas prices in Europe have climbed over 50% this month.
Oxford Economics estimates the inflationary effect in the eurozone could be three times greater than in the US, with Italy facing sharp increases due to reliance on Qatari LNG. However, economists do not anticipate a crisis like the 2022 Ukraine invasion, as natural gas prices are currently much lower.
China's Resilience
China holds advantages against energy disruptions, with strategic petroleum reserves over one billion barrels, renewable energy investments, electric vehicle subsidies, and a robust domestic coal industry. These factors provide significant resilience amid global turmoil.
India Faces Energy Supply Shock
India depends heavily on the Middle East for crude oil, LNG, and LPG imports. The government has prioritized domestic LPG use, while industries face potential shortages. Crude imports from Russia have helped, and refineries have increased LPG production to avoid household shortages. India currently has petroleum reserves for a few weeks, with no immediate plans to raise petrol and diesel prices.
However, crude prices above $100 could impact India's Current Account Deficit and inflation. DSP Netra reports every $10 increase in crude adds $12–15 billion to India's annual import bill, with higher prices exacerbating deficits. If crude exceeds $120, the oil trade deficit could rise to $220 billion, pushing the current account deficit beyond 3.1% of GDP, risking currency depreciation and inflation.
Asian Economies Exposed
Japan and South Korea rely heavily on Middle East crude, though both have sizable reserves. Many Asian economies depend on LNG from the region, which is harder to store, making shortages more likely if supplies are disrupted. Countries like Pakistan and Taiwan are particularly exposed to LNG supply squeezes.
Some governments have taken conservation steps: South Korea and Thailand capped domestic fuel prices, Myanmar rationed petrol, Pakistan shifted to remote work and closed schools, and the Philippines implemented energy-saving measures in public offices.
Russia's Crude Oil Trade Wins
The war has given Russia an economic boost. Disruptions in Gulf supplies are driving demand for Russian crude, strengthening Moscow's position with buyers like China and India. The US has relaxed some sanctions, allowing purchases of Russian oil to resume. Higher global prices have also improved Russia's finances, with crude trading above the $59 per barrel needed to balance its budget.
Latin America and Canada Could Gain
High energy prices may support growth in oil-producing nations like Canada, Brazil, and Venezuela, where production is ramping up post-Maduro. However, these countries could face modest inflation increases from higher costs in gasoline and air travel.
