The global economy is at a critical juncture as war with Iran threatens to trigger another energy shock with domino effects on growth, inflation and markets, writes Matt Gertken, chief geopolitical strategist at BCA Research, in a MarketWatch article
The coming days of the conflict could determine the course of the global economy, he argues, adding that if the Persian Gulf crisis escalates and leads to a prolonged disruption of energy flows, then the fundamental dilemma for the global economy will be clear: stagflation or global recession.
He estimates that the likelihood of further escalation and prolonged oil market disruption is around 70%.
The Strait of Hormuz constitutes the most important energy “bottleneck” of the global economy, as approximately one-fifth of all maritime cargoes of oil and LNG pass through it.
Oil and the “spectre” of oil crises
Experience shows that major oil price shocks often coincide with economic downturns.
Historically, doubling the price of oil has often been associated with a global recession. At current prices, this translates to levels around $120 – $140 per barrel, levels that the market has already approached this week.
If the shock turns out to be temporary, savings could absorb the hit. But if it is prolonged, then the increase in energy costs will be transmitted throughout the economic system: from transport and industry to food and fertilizers.
Stiglitz's warning of an 'economic storm'
Even more worried is Nobel Prize-winning economist Joseph Stiglitz, who warns that this conflict could trigger a dangerous sequence of developments in the global economy.
In an interview with the Monetary Matters podcast, Stiglitz pointed out that war could bring “the four horsemen of the economic apocalypse”: higher oil prices, more expensive food, an economic slowdown and geopolitical chaos.
As he notes, oil has already crossed $100 a barrel and gasoline has risen significantly in the US in a week. At the same time, transport and fertilizer disruptions are driving up food costs, while economic activity is already showing signs of fatigue.
According to Stiglitz, the result could be a new episode of stagflation, that is, a combination of high inflation and low economic growth, reminiscent of the oil crises of the 1970s.
Scenarios for the global economy
Economists at Capital Economics believe that the extent of economic damage will depend mainly on the duration and intensity of the energy shock.
In the base case, if the crisis de-escalates relatively quickly, oil could remain above $100 for a limited period. In that case, the global economy would suffer but probably avoid recession.
In a more negative scenario, if the conflict drags on and prices head towards $130 a barrel, the Eurozone could enter recession while the US economy slows significantly.
The result would be a particularly difficult environment for central banks:
higher inflation due to energy lower growth pressure on bond and stock markets.
Who wins and who loses?
The energy crisis does not affect all economies in the same way.
Large energy exporters such as Norway, Canada or Russia can benefit from higher prices. In contrast, large economies that depend on energy imports – especially those in Europe and Asia – face the greatest risk of an inflationary shock.
The United States is in an intermediate position. Thanks to shale oil production, they have become a net exporter of energy, making them less vulnerable than in the past, although consumers are still affected by higher fuel prices.
A new era of energy insecurity
Even if the crisis will deescalate, many analysts believe that the world is entering a new period of energy instability. Attacks on ships, sea mines and low-cost drones show that the global energy market can now be much more easily disrupted by geopolitical tensions.
The question now is not just how the war will end, but how deeply it will affect the global economy. If the energy disruption turns out to be temporary, economies will likely absorb the shock. But if the Gulf crisis drags on, rising energy costs, inflationary pressures and slowing growth could create a much more difficult economic environment for governments, markets and central banks.
