Global Economic Impact of US Strikes on Iran
The recent US strikes on Iran’s main nuclear facilities have come at a time when the global economy is already fragile. 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.
Potential Escalation and Its Consequences
The attack on Iran’s nuclear facilities is likely to put the conflict on an escalatory path. According to Bloomberg Economics analysts, this could lead to higher oil prices and an upward impulse to inflation. The biggest economic impact from a prolonged conflict in the Middle East would likely be felt via surging oil prices. A derivative product that allows investors to speculate on price swings in crude oil surged 8.8% after the US strike, indicating a potential increase in oil prices.
Iran’s Response and Its Implications
Iran’s Foreign Minister Abbas Araghchi has stated that the US attacks are "outrageous and will have everlasting consequences." 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
- Closing the Strait of Hormuz maritime chokepoint using underwater mines or harassing ships passing through
Impact on Oil Prices and the Global Economy
In the extreme scenario where the Strait of Hormuz is shut, crude could soar past $130 per barrel. This 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.
Economic Implications for the US and China
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 has updated economic projections, marking down its forecast for US growth this year to 1.4% from 1.7%. China, as the largest buyer of Iranian oil exports, would face the most obvious consequences from any disruption to the flow of petroleum. However, its current stockpiles may offer some respite.
Impact on the Global Liquefied Natural Gas Market
Any disruptions to shipping through the Strait of Hormuz would have a significant impact on the global liquefied natural gas market. Qatar, which makes up around 20% of the global LNG trade, uses this route for exports and has no alternative passage. This would leave the global LNG market extremely tight, pushing European gas prices significantly higher.
Conclusion
The US strikes on Iran’s nuclear facilities have added another layer of uncertainty to the already fragile global economy. The potential escalation of the conflict and its implications for oil prices and the global economy are a major concern. While OPEC+ members and the International Energy Agency may take steps to calm prices, the Middle East tensions represent another adverse shock to an already weak global economy. Higher oil prices and the associated rise in CPI inflation would provide central banks with a major headache, making it challenging to navigate the current economic landscape.
