The latest update of the Brookings-FT Tiger indexes, which are based on pre-Iran war data, shows how the world economy appeared resilient and set for a year of decent growth despite structural headwinds resulting from trade policy volatility, rising public debt levels, and geopolitical fragmentation. Financial markets were booming in many countries and private sector confidence was turning around. The U.S. Supreme Court’s reversal of Liberation Day tariffs was a positive omen for world trade even if it did not ensure a predictable path forward.
The Iran war has thrown the world economy off track and will almost certainly lead to a spike in inflation. Whether that spike proves temporary and whether growth will be dented substantially depends on how prolonged the war is. The lack of a resolution to the conflict in the next few weeks and the possibility that the war could engulf broader swaths of the Middle East pose a substantial danger to the global economic outlook.
Select a country below the Composite Index to view charts for the main TIGER indexes by country and charts for the indicators that make up the indexes, which are broken down by real activity, financial, and confidence indicators for advanced economies and emerging markets.
There are two key questions that matter in gauging the effects of the war. First, will the war end relatively soon and without further substantial damage to the energy-producing infrastructure in the region? Second, will the war end in a way that provides durable peace in the region or will it leave the underlying regional tensions festering? As this column is being written, both issues are grounds for considerable concern.
This column will largely focus on the underlying growth momentum in the major economies before the Iran war broke out, as this provides a baseline for evaluating how seriously the war could affect growth prospects.
The U.S. economy seemed to be on track for another year of healthy growth, despite some indications of slowing labor market momentum. Inflation had stabilized (although at a level above the Fed’s target), giving the Fed some room to reduce policy interest rates. Strong consumer spending, continued investment in AI, and rising productivity were powering the economy and stock markets. The Iran war presages further increases in deficit spending and federal debt, with Treasury bond yields rising significantly as a result. The dollar, which had weakened somewhat earlier in the year, has strengthened as investors search for safety.
Economic performance in the eurozone remained uneven as this year got underway. France continued to struggle with a budget overhang, turbulent politics, and weak consumer spending, while Germany was set for a modest recovery in growth but with private sector confidence still fragile. The Netherlands, Italy, and Spain had stronger growth momentum. Eurozone countries’ dependence on imported energy and robust demand for their own exports leaves them vulnerable to price hikes that could stunt growth or perpetuate a broader global downturn, especially since many of these economies were already facing significant fiscal pressures.
Japan, also a major energy importer, faces a similar set of challenges and could face a resurgence of inflation, especially if the yen continues weakening. The United Kingdom remains beset by falling private sector investment as well as weak consumer spending and productivity growth. In both these economies, there is little room to use fiscal policy to soften the blow of higher energy prices on growth.
China’s economy showed signs of stabilizing earlier this year, with exports still leading the way but growth in domestic consumption, investment, and industrial production beginning to pick up. China’s energy reserves, and its gradual transition to a greener economy, are likely to save it temporarily from the direst effects of energy price hikes. China does have room with both monetary and fiscal policy to deal with this shock in the short run. A greater concern is that the government still shows no urgency to deal with deep-rooted problems in real estate, financial markets, and the structure of public finances that continue to impede growth as well as an unbalanced growth model characterized by weak household consumption.
India appeared poised for another year of banner growth with low inflation, disciplined fiscal policy, and a resurgent manufacturing sector, but all of that now looks doubtful. India’s dependence on imported energy leaves its consumers and manufacturing firms highly vulnerable to price spikes. These worries are reflected in a sharp depreciation of the Indian rupee and falling equity prices. Rising oil prices could provide a boost to the Russian economy, which might have the side effect of prolonging the war in Ukraine, adding to geopolitical instability.
The Iran war is a particularly severe blow for low-income economies, many of which had seemed poised for a breakout year of growth. These economies depend heavily on imported fertilizer, oil, and gas, and roughly half of their household expenditures is accounted for by food and energy. The spike in energy and food prices will severely damage growth in these economies, particularly since most of them lack monetary and fiscal policy space.
This is an extraordinarily challenging time for policymakers in all countries, as they seek to buffer their economies and citizens from the economic impact of the Iran war. Central bankers, in particular, are caught in a difficult bind as they weigh the twin risks of a prolonged spike in inflation and weakening growth. The public finances of many of the major advanced economies are already strapped, with high public deficit and debt levels leaving little room for maneuver, and rising interest rates in some countries raising interest expenditures and further squeezing that room. The Iran war highlights the importance of maintaining policy buffers and improving the flexibility of economic structures to navigate a world in which economic and geopolitical instability have become the norm.