The global economy is in turmoil two weeks into the US-Israeli war on Iran, with oil prices surging past $100 per barrel as supplies from the Middle East are disrupted and inflation fears rise.
The International Monetary Fund this week said that if a 10 per cent increase in energy prices persisted for a year, it would push global inflation up by 40 basis points and slow economic growth by 0.1 to 0.2 percentage points.
Meanwhile, Emirates NBD, Dubai's biggest bank by assets, expects two rate cuts that would be delayed well into second half of this year.
“If the new conflict proves prolonged, it has clear and obvious potential to affect market sentiment, growth and inflation, placing new demands on policymakers,” IMF managing director Kristalina Georgieva said at an event in Tokyo on Monday.
It came as oil prices traded higher as a result of the effective closure of the Strait of Hormuz, through which about 20 million barrels of oil are shipped on a daily basis.
On Monday, Brent shot past $119.50, its highest since mid-2022 and is currently trading above $100 per barrel as Iran attacks vessels near the strait.
Brent has gained more than 37 per cent since the Iran war broke out on February 28. The International Energy Agency on Wednesday agreed to release 400 million barrels of oil to address the supply disruption, the largest such action in the organisation’s history.
Oil reserves released by the G7 states will represent 70 per cent of the amount announced by the IEA, French President Emmanuel Macron said.
“If the strait remains blocked for a prolonged period – a month or longer – then the oil and gas markets’ buffers will erode quickly and allow prices to be sustained at high prices for longer,” said Edward Bell, acting chief economist and group head of research at Emirates NBD.
The Fed is scheduled to meet next week with virtually no chance of a rate cut.
Oil markets entered this year with substantial buffers in place, as demand growth had been modest last year and was expected to remain at a similar pace. As of the end of last year, commercial inventories in Organisation for Economic Co-operation and Development stocks represented about 62 days of demand, close to long-run averages.
The release of oil from strategic oil reserves “isn’t a lasting solution to the effective blockage of one fifth of global flows of oil and gas inside the Gulf", Mr Bell added.
Insurance risks
Other sectors, including shipping and aviation, continue to be hit as the war rages on. Insurance, in particular, is also expected to record losses owing to a prolonged conflict.
“Specialty insurers and reinsurers, which provide tailored coverage of complex risks such as marine, aviation and political violence, face an increased likelihood of severe events leading to outsized claims as a result of the Iran conflict,” Moody’s Ratings said.
But it expected losses to be manageable for “large, diversified insurers” if the conflict ends in a matter of weeks. A longer war, however, increases the likelihood of larger and more complex loss scenarios, it added.
Vessel tracking indicates a complete halt in tanker movement through the strait, with about 500 ships anchored in the Gulf. Insurers have withdrawn war risk coverage for vessels attempting to pass through the waterway.
US President Donald Trump said previously that the American navy would escort vessels as they sail through the channel, though other officials in his administration have played down that suggestion. The risk of being hit by Iran has deterred ships from undertaking the journey.
"The Iranian threat has to be reduced for warships to provide naval escorting. It is currently too dangerous," Jakob Larsen, chief safety and security officer at the Bimco shipping association, told The National.
Gulf economies
Several airlines have suspended operations in the Middle East amid Iran's attacks. Abu Dhabi's Etihad Airways and Dubai's Emirates airline have operated a limited number of flights, having initially halted operations after the war broke out.
"Initial economic damage is staggering, with regional airspace closures halting Ramadan tourism and resulting in expected losses of $40 billion across the Gulf countries," said Samer Hasn, senior market analyst at XS.com, quoting the Middle East Council on Global Affairs. "Immediate market panic also forced the UAE stock exchanges to pause trading for two days. If strikes persist for another week or more, losses will compound exponentially."
For the Middle East, Oxford Economics downgraded the forecast for Gulf nations' real gross domestic product growth by 1.8 percentage points to 2.6 per cent. "The worst-case scenario for GCC countries might involve substantial damage to the very infrastructure of oil and gas extraction," Mr Hasn said.
"That would result in structural damage that could take months to repair and could push crude prices possibly beyond $200 per barrel for a significant period, triggering global stagflation," he added. The prolonged closure of Hormuz could also drive prices up to $200 per barrel.
Foreign direct investment is also expected to drop, threatening the region's key diversification plans. However, the UAE's investment environment is highly favourable and Mr Hasn said he expected that "authorities will further enhance the market’s attractiveness, boosting its reputation for resilience", after the conflict ends.
War among 'three major fears' for investors
Stock markets have also felt the effects of the war. The Abu Dhabi Stock Exchange and Dubai Financial Market closed lower on Friday, with bourses in Saudi Arabia and Qatar also falling. US stocks closed sharply lower on Thursday.
The conflict is now one of three "major fears" facing investors, who also have to deal with the disruption driven by artificial intelligence and concerns about private debt, said Yves Bonzon, group chief investment officer of Zurich-based Julius Baer. This is "requiring investors to distinguish endogenous from exogenous factors, as well as fundamentals from positioning-driven moves", he said.
Gold, which in theory should have benefitted from the increase in geopolitical risk, has instead been influenced by profit-taking after its recent successful run. "While the market has not given rise to an exceptional buying opportunity so far, the unwinding of excessive positioning triggered by the war could allow investors to rebalance their portfolios in line with prevailing trends," Mr Bonzon said.
Those trends include "the global diversification away from the US, technology stocks and public balance sheets and towards tangible-based business models, precious metals and emerging markets", he added. "After all, from a fundamental perspective, these trends remain firmly in place and, we would argue, have only been strengthened."
