Just as economists began to fret over a third wave of inflation following the Covid-19 pandemic and the outbreak of the Ukraine war, the conflict in Israel-Gaza has thrown an oil shock into the mix, according to a leading ratings agency.
Talk in trading rooms has turned to the potentially damaging effect the Israel-Gaza conflict could have on global markets and economies, even if the 11-day war has not yet had a serious effect on the world economy, according to the ratings agency, Standard and Poors.
“We've got inflation under control. It looks like it's heading downwards, and we get a shock to global oil prices,” S&P's global chief economist, Paul Gruenwald told The National on Tuesday.
“Is that going to feed through to another round of inflation? Is that going to cause central banks to pause for longer? Are they actually going to have to raise rates another round? Which would be a bad scenario.”
Having recently returned from the IMF and World Bank meetings in Morocco, when proceedings were largely overshadowed by the Hamas attack just days before, he said “we haven't seen the macro [economic] needle move yet”.
“Obviously we've had some de-risk in the markets and Treasuries and other safe assets have gone up,” he told The National.
“What we're watching is whether the conflict will spread and start to impact what we call real variables in the region – we haven't seen that so far.”
“Oil is another important variable, but I would say it's very early days, so even though the macro needle hasn't moved yet, it doesn't mean it won't.
“But, at this point, we're just trying to identify the risks and the channels and we'll continue to do our macro surveillance.”
Nonetheless, there has been no shortage of politicians, ministers and officials voicing fears of what could befall the global economy should the conflict escalate and broaden, particularly if it sucks in others.
Economists at Bloomberg predicted that if Iran were to be brought directly into conflict with Israel, the price of oil would rise to $150 a barrel and world economic output would take a $1 trillion hit.
The chief executive of JP Morgan, Jamie Dimon, called it the “most dangerous time in decades”.
Even before the outbreak of the Israel-Gaza conflict, the outlook for the global economy was subdued at best. Interest rate rises were seen as finally having the effect they were designed for and, as such, demand was deemed to have peaked.
In its fourth quarter global economic outlook, S&P forecasted “a period of subpar growth fuelled by higher-for-longer rates ahead, with a relatively slower and softer adjustment back to steady states; this is conditional on strong labour markets”.
But even though economies seem to be on a better footing in the battle against inflation, geopolitical shocks still have the ability to throw much off course.
Kathleen Brooks, founder of Minerva Analysis, said if the conflict continued to put pressure on the price of oil, it could feed through to “consumer inflation expectations in the West in the coming month”.
“This could then impact interest rate expectations and investor sentiment.”
Speaking in Marrakesh, Gita Gopinath, the deputy head of the IMF, noted that the world was potentially facing a “large number of shocks”.
Because debt is at record levels at the same time as economies are having to keep interest rates higher for longer, there is “a lot that could go wrong”, she said.