Market Update: Surging energy prices and threats to shipping. How the Middle East war could hurt the global economy – Full Analysis

London/Hong Kong
 — 

The conflict raging in the Middle East will test the resilience of a global economy buffeted by tariffs and other trade disruptions over the past year.

Barely a week into the latest turmoil in the region, there are already signs of strain along the carefully orchestrated arteries of global trade: from rice exports stuck at ports in India to spikes in the price of fertilizer critical to food production.

A prolonged war that keeps energy prices high could drive up inflation and, with it, interest rates, piling pain on borrowers. Meanwhile, threats to cargo ships could snag supply chains, further raising prices for businesses and consumers.

The widening conflict in the Middle East could be “very impactful on the global economy across a range of metrics,” such as inflation and economic growth, according to Dan Katz, deputy managing director at the International Monetary Fund.

The severity of the economic consequences will depend on how long it lasts.

Before the United States and Israel attacked Iran over the weekend, the IMF expected the global economy to grow by a healthy 3.3% this year.

The fund has not yet changed its outlook, saying it’s “too early” to assess the economic impact. But it also said it was “closely monitoring developments” and listed a number of risks to the global economy, including more trade disruptions, “surges in energy prices” and “volatility in financial markets.”

The conflict’s effect on the global economy largely hinges on energy prices, which soared this week on worries about supply. Brent crude, the global oil benchmark, is trading at levels not seen in more than 18 months.

The major risk here is a prolonged closure of the crucial Strait of Hormuz, which is virtually the only way to ship the Middle East’s copious oil and natural gas to the rest of the world. The narrow waterway, flanked by Iran on one side and Oman on the other, is ordinarily a conduit for around a fifth of daily global oil and liquefied natural gas production, according to the US Energy Information Administration.

With the strait virtually impassable, European benchmark natural gas futures have also skyrocketed and could more than double from levels seen before the war if shipments through the strait are halted for longer than two months, according to Goldman Sachs.

European prices are still well below the peaks hit in 2022, following Russia’s full-scale invasion of Ukraine, but the region’s stockpiles are much lower than in recent years and will need to be refilled before next winter at potentially much greater cost.

Consumer price inflation in the European Union — which stood at 2% in January — could rise by more than a percentage point if the conflict drags on for several months, according to Holger Schmieding, chief economist at Berenberg bank. And up to half a percentage point could be shaved off economic growth in that scenario, he told CNN.

Motorists are already paying higher prices at the pump. On Wednesday, Europe’s largest automobile association, ADAC, said gasoline and diesel prices had jumped by double digits in Germany over the past week.

Gasoline prices have also climbed in the United Kingdom. In the United States, they are now at their highest level in 11 months — and small businesses are feeling the squeeze.

If oil prices stay at their current levels for several months, US consumer price inflation could rise from 2.4% in January to 3% by the end of the year, Goldman Sachs said. That could make it even more difficult for the Federal Reserve to deliver interest rate cuts this year.

Asia, meanwhile, is even more vulnerable to a sustained energy price shock. About 80-90% of crude oil and liquefied natural gas shipped through the Strait of Hormuz is destined for the region, with China a major buyer, according to consultancy Capital Economics.

The war comes at a particularly difficult moment for China, which on Thursday set its lowest economic growth target in decades.

“Most economies in Asia are worse off and facing higher inflation as a result of the attacks on Iran,” Capital Economics’ Asia economists wrote in a note Tuesday, adding that inflation would rise by half a percentage point in most countries if Brent crude prices remain at current levels.

Alongside energy prices, Asian economies could be hit through another channel: exports.

India is already feeling the pain. More than 400,000 metric tons of basmati rice grown in the country for export are stuck at Indian ports or in transit, as the war disrupts shipping lanes across the Middle East, according to Satish Goel, president of the All India Rice Exporters’ Association. Roughly 75% of India’s annual basmati rice exports, or some 6 million tons, go to the Middle East, he told CNN.

The Middle East has become an important destination for Asian exporters hit by rising US tariffs, according to Deepali Bhargava, head of Asia-Pacific research at ING, a bank. If the conflict persists, India and China stand to lose the most, she wrote in a note Monday.

India’s immobilized rice exports point to a bigger worry: the potential for wider disruptions to global trade and food manufacturing.

“The Strait of Hormuz is essential for global food production,” CEO of Norwegian chemical company Yara International, Svein Tore Holsether, told CNN on Thursday.

About one-third of the world’s exports of urea, a widely used fertilizer, move through the strait, as do large supplies of other raw materials needed to make fertilizer, he noted. “Fertilizers are not just another commodity – nearly half of global food production depends on them.”

Egyptian urea prices, an industry benchmark, have shot up 35% so far this week, according to CRU Group, a data provider. Prices for sulphur, used in fertilizer, have also jumped. Nearly half of global sulphur trade stems from countries in the Middle East, CRU Group said.

As well as pushing up input costs, the Middle East war could lead to congestion at ports many miles away from the fighting and delay shipments of goods around the world as vessels are rerouted.

For example, containers bound for the Middle East are starting to bunch up at ports in India after several major carriers suspended shipping to the region, according to Judah Levine, head of research at logistics company Freightos. The longer the disruption lasts, the higher the odds that shortages of containers and reduced shipping capacity could be felt elsewhere, he said in a note Thursday.

Air cargo could be even more adversely affected, with many planes grounded in the Middle East and airspace in the region severely restricted. For example, Adidas warned this week that some shipments sent by airfreight could face delays.

Middle Eastern airlines, including Emirates, Qatar Airways and Etihad, account for around 13% of global air cargo capacity, Levine said. According to the International Air Transport Association, air cargo accounts for about a third of world trade by value — often transporting high-value items like smartphones, microchips and other electronics.

In a note this week, shipping analytics company Xeneta painted a troubling picture: “Escalating conflict in the Middle East is creating immediate uncertainty for supply chains, with vessel movements changing by the hour and shippers left managing cargo that may no longer reach its intended ports.”