With war in Iran threatening to disrupt the flow of energy for an extended period, Europe is facing a big supply shock, one that could send inflation spiralling back to crisis levels.
Already airlines are warning they face a five-week cliff edge before fuel shortages force them to start grounding flights.
Manufacturers are warning of widespread supply chain disruptions. In Ireland, white van man, the backbone of so many small businesses, is bleeding cash on higher diesel prices.
EU energy commissioner Dan Jorgensen has warned we’re on the brink of a “long-lasting” energy price shock. And US president Donald Trump’s response is to mock European leaders and European countries suffering on the back of his actions.
“You’ll have to start learning how to fight for yourself,” he wrote on Truth Social. “The hard part is done. Go get your own oil!”
[ Irish inflation jumps to 3.6% as energy prices surgeOpens in new window ]
These really are unprecedented times.
How is this likely to play out?
Oil and gas are fundamental to transport and heating. Motorists are already feeling the hit at the fuel pumps. Home energy bills come later as providers are hedged to a point. Everything depends on the duration of the conflict, which Washington says will be another “two or three weeks”.
But the US is continually drawing out the timeline as it gets more embroiled. Iran’s effective closure of the Strait of Hormuz and attacks on neighbouring Gulf states have given it an unexpected potency. Keeping oil above $100 (€87) a barrel gives Tehran leverage.
Iran’s cyber-attacks on Irish-based companies and the ongoing impact of conflict in the Middle East
Trump’s movement of ground troops to the region could be a bluff or a prelude to an invasion of Kharg Island, Iran’s oil export hub. The latter could escalate the conflict in an entirely unpredictable way.
How will the Irish economy be affected?
Last week we had forecasts from the Central Bank of Ireland and the Economic & Social Research Institute (ESRI) which both warned of an impending price shock with headline inflation expected to rise to above 4 per cent in the coming months.
Both institutions caveated their forecasts by saying that a more prolonged conflict would make things worse, a whole lot worse, potentially lifting inflation higher while dampening growth.
A massive hike in household energy bills would throttle consumer spending, the main source of demand in any economy. That’s how recessions start. We’re not at that stage yet.
What is the European Central Bank saying?
The other negative flowing from a big price hike is a countering move on interest rates. This would hit everyone from small businesses looking to borrow to hard-pressed householders with big mortgages.
Criticised for failing to take action quick enough in the face of the 2022 gas price crisis, the European Central Bank (ECB) is sounding more hawkish in the face of the current shock. While it left rates unchanged last month, ECB president Christine Lagarde has warned that financial markets were underestimating the severity of the economic fallout and that investors were in a state of denial.
Speaking to The Economist magazine last week, Lagarde said the conflict represented “a real shock” that was “probably beyond what we can imagine at the moment”. Markets are already pricing in possibly two ECB rate hikes this year.
[ ECB won’t be ‘paralysed by hesitation’ on Iran, Lagarde saysOpens in new window ]
Is there anything to be optimistic about?
The Irish economy began the current crisis in relatively good shape with healthy growth, full employment and a budget surplus. This provides a certain amount of insulation.
The Irish Government has been quicker than most in moving to cut excise duty on fuel, a reflection of the strength of the public finances. The economy here has proved itself extraordinarily resilient in the face of recent crises, hopefully it can do so again.