The war in the Middle East that has caused an oil and gas shock will have far-reaching effects on the global economy, dragging inflation and interest rates higher, the chief executive of JP Morgan said in his annual letter to shareholders.
The war continues with no end to hostilities in sight, after the U.S. president threatened Iran with “hell” if it did not reopen the Strait of Hormuz and Iran rejected a ceasefire plan presented to the two sides by Pakistan, insisting instead on a permanent peace deal. This kept oil prices high, suggesting the oil shock this time will be quite different from the 2022 shock, when prices spiked suddenly but relatively briefly, with markets calming when it became clear global supply would not be too severely affected by Western sanctions on Russia.
This time, however, the economic context is much worse than it was four years ago. “Global deficits are significantly elevated, particularly during what has been a relatively healthy global economy and, until recently, a time of peace — the deficit globally is at an extremely high 5%, while global sovereign debt is at all-time highs,” Dimon wrote in his letter.
Hungary Set to Agree to Buy U.S. Oil During JD Vance Visit
Noting that consumer debt now was lower than it was in 2007, which was a positive development, as was corporate debt, at a healthy 45%, Dimon warned that “High and increasing government debt will eventually have to be dealt with — the right way would be to deal with it now before it becomes a problem; the wrong way would be to let it become a crisis, which, in my opinion, is probably the likely outcome.”
In addition to problematic levels of sovereign debt, Dimon pointed out the increased risks of “stickier inflation” as a result of the energy flow disruption from the U.S. and Israeli war against Iran and “ultimately higher interest rates than markets currently expect.” This is not an economic context conducive to growth and indeed, JP Morgan’s CEO admitted that the present situation is fraught with challenges, citing deficit spending by the U.S. federal government and stimulus programs.
Despite that, Dimon said, the U.S. economy was resilient, “with consumers still earning and spending (though with some recent weakening) and businesses still healthy. It is important to note that our economy has been fueled by large amounts of government deficit spending and past stimulus and that increased expenditure on infrastructure remains a growing need,” he also said.
To address the biggest challenges, Dimon announced the launch of a Security and Resiliency Initiative, which will involve spending $1.5 trillion over ten years on industries that are critical to “national economic security and resiliency”. The areas of focus include critical minerals, advanced manufacturing, robotics, defense and aerospace to maintain the United States’ lead in military capabilities, according to Dimon, and energy independence. The latter is envisioned to be effected through “battery storage, grid resilience and distributed energy, helping build energy systems to meet the increased demand of technologies like AI and data centers.”
The points that Dimon made in his annual letter suggest the head of JP Morgan is dedicated to an energy transition to “distributed energy” quite unlike the current federal government of the country, which has bet on baseload generation capacity instead, and energy dominance through maintaining high production rates in oil and gas.
Dimon warned about the possibility of more oil and gas shocks from the war in the Middle East and the “reshaping of global supply chains” as a result of the hostilities. He also suggested a recession scenario is not impossible, citing similar economic and geopolitical conditions in 1974 and 1982. However, Dimon also noted some “tailwinds” this year, including fiscal stimulus from the One Big Beautiful Bill and the benefits of deregulation, which should cushion any blows from the foreign policy developments.
By Irina Slav for Oilprice.com