Inflation could rise and economic growth slow around the world if the conflict in the Middle East drags on, economists have warned.
Oil and natural gas prices jumped and stock markets tumbled Tuesday, as investors fretted over the economic consequences of the fast-moving situation.
“That the current war may be ‘inflationary’ is what’s panicking traders today,” Thierry Wizman, a strategist at Macquarie Group, wrote in a note.
“The view of a short war has been upended,” he added, citing comments from the Trump administration that the conflict could last more than a few weeks.
The Middle East is a major producer of both oil and natural gas, but its energy exports have now been largely cut off from the rest of the world by an effective closure of the Strait of Hormuz.
Iran has vowed to attack ships that attempt transit through the narrow waterway, which is usually a conduit for around a fifth of global oil and liquefied natural gas production each day. The Islamic Republic has also attacked energy infrastructure across the region, prompting several producers to halt output and increasing the risk that global supplies could be throttled.
Berenberg chief economist Holger Schmieding told CNN Tuesday that a prolonged closure of the Strait of Hormuz would hurt economic growth and raise inflation globally. However, he does not currently expect the conflict to last more than a few weeks.
Brent crude, the global oil benchmark, jumped almost 8% to around $84 a barrel Tuesday, up from $72.90 on Friday, before the United States and Israel attacked Iran.
Meanwhile, European natural gas futures spiked 22%, following a decision Monday by Qatar’s biggest gas producer to stop production due to Iranian attacks.
“For the energy market, this is going as badly as it could have done,” said David Oxley, chief commodities economist at consultancy Capital Economics. Iran’s attacks on energy infrastructure signaled that the conflict was entering “uncharted territory,” Oxley cautioned.
The European Union’s executive arm said Monday that it was “closely tracking” developments in energy prices and supply and would convene an “energy task force” with EU countries this week.
A lot depends on how high prices go and how long those rises are sustained, as that will determine the extent to which consumer prices for energy and goods are also affected.
According to Capital Economics, a prolonged conflict that pushed oil into the $90-100 per barrel range for a sustained period could intensify inflation pressures globally and cause growth to slow in major economies. But the United States, as a net exporter of oil, is less exposed than Europe or Asia, the consultancy said.
John Towfighi contributed reporting.