As the conflict in the Middle East enters its third week, economists are warning of a potential stagflation scenario, where prices rise across the board and growth stalls. The war, which started with US and Israeli strikes on Iran, has disrupted oil trade, causing prices to spike from around $60 to $100 per barrel. This has led to concerns about the impact on the global economy, with International Monetary Fund officials closely monitoring the situation.
Stagflation Risks
According to Helene Baudchon, deputy chief economist for BNP Paribas, the hostilities have flipped the expected benign scenario of steady growth and low inflation to concerns about stagflation. “The longer this conflict drags on, the more it begins to look like a classic energy shock feeding directly into inflation,” said Stephen Innes, managing partner for SPI Asset Management. Baudchon notes that the length and scope of the conflict will determine the extent of the stagflationary effects.
Potential Outcomes
There are two possible stagflationary paths, according to Baudchon. In the first scenario, the intensity of the conflict drops off, and hydrocarbon prices gradually decline while remaining above pre-conflict levels. This would appear manageable for the global economy. However, a surge in oil prices lasting several weeks or months would be more negative and could force central banks to raise interest rates to curb rising consumer prices. The following are some potential effects of the conflict on the global economy:
- Reduced global GDP by 0.4% after four quarters if oil prices hold at $100 per barrel
- Add between 1.2 and 1.5 percentage points to inflation in Europe and the United States
- Disruption to supply chains, affecting not just oil and gas prices but also other products and raw materials
The Fitch Ratings agency has warned that the conflict could have far-reaching consequences for the global economy. As several key central banks, including the US Federal Reserve, European Central Bank, and Bank of England, meet this week, they will be closely watching the situation and considering their next moves.
