Andrew Hammond
Most of the world has welcomed the easing of tensions between the US, Israel and Iran. However, geopolitical and economic shock waves will continue to ripple from the crisis, even in the optimistic scenario that the currently fragile ceasefire is translated into a sustainable peace deal in spite of the collapse of the Islamabad talks.
On the eve of the US and Israeli military campaign at the end of February, the outlook for the global economy was relatively benign. However, fast forward to today and the challenges from what the head of the International Energy Agency has called the “greatest global energy security challenge in history” are still unfolding.
The global economy is still far from being out of the woods, not least because the price of oil seems unlikely to fall back to pre-war levels anytime soon. Such issues will be discussed extensively by international policymakers at the International Monetary Fund-World Bank Spring Meetings this week.
A look back at other energy crises over the last two decades shows how much these economic shocks have fueled inflation and undermined growth. The typical increase in the consumer price index in the US economy, which remains key to global growth, has been between 1.5 percent and 2.1 percent.
For instance, between March 2007 and June 2008, during the economic boom preceding the subprime lending crash, oil prices rose from $66 per barrel to $140. This helped fuel a jump in the US consumer price index from 2.8 percent to 4.9 percent. This oil price spike brought about the start of the US recession in the summer of 2008, a couple of months before the downfall of Lehman Brothers and the great financial crash of 2008-09.
During the robust economic boom in China from May 2010 to April 2011, oil prices rose from $74 per barrel to $113, with a jump in the index from 2 percent to 3.5 percent. More recently, from November 2021 to May 2022, the period immediately before and after Russia’s invasion of Ukraine, oil rose from $66 per barrel to $114. This helped fuel an increase in the index from 6.9 percent to 8.5 percent.
In the last month and a half, oil prices have again risen significantly, from $62 at the start of February to around the $100 mark. This has increased concerns about stagflation in much of the world: a combination of weak economic activity combined with accelerating inflation.
The likelihood of a global recession, of course, depends much on whether there will be sustainable peace in the Middle East. This includes how long the Strait of Hormuz remains partially or fully blocked.
While many uncertainties remain, several forecasters have already sounded alarm bells. Oxford Economics, for instance, has warned that if global oil prices average about $140 per barrel for some two months, this would be enough to push parts of the global economy into a mild recession. Blackrock predicts that a slightly higher mark — $150 per barrel — would be the tipping point.
Although these levels have not yet been reached on a sustained basis during this crisis, Iran seems to have determined that it faces an existential threat and that its best course of action is to inflict as much pain as possible on global financial markets. It vowed to try to cause the price of oil to soar to $200 a barrel if the war with the US and Israel continued.
Worryingly, the oil price rises in the last month and a half have come despite announcements by the International Energy Agency of a historically large release of 400 million barrels of oil from emergency reserves, coordinated by 32 major economies. The unusualness of such a release is shown by the fact that the agency’s member nations have released emergency oil stocks on only five previous occasions: the 1990-91 Gulf War, Hurricane Katrina in 2005, the Libyan war in 2011 and twice following Russia’s invasion of Ukraine.
One signal of how the Middle East crisis is rapidly changing the global economic outlook is the series of recent monetary policy decisions. Key central banks, including the US Federal Reserve, the European Central Bank and the Bank of England, held interest rates steady last month despite significant prior expectations of cuts.
Moreover, a growing number of market participants are so concerned about inflation risks that they no longer expect the US Fed and key European central banks to cut rates at all this year. Traders are even currently pricing in European Central Bank rate hikes in 2026.
The economic fallout from the crisis is likely to make many upcoming elections even more challenging for incumbent parties. This includes the US’ November midterms, in which Republicans face a growing possibility of losing their majority in the House of Representatives and possibly the Senate too.
US President Donald Trump has asserted that the economic impacts of the continued tensions in the Middle East are “a very small price to pay” for trying to oust the Iranian regime. However, that view is not shared by a growing number of countries that have been hit by the crisis — and it may ultimately be rejected by the US electorate in the upcoming midterms.
• Andrew Hammond is an associate at LSE Ideas at the London School of Economics.
