The assassination of Qassem Soleimani, a major figure in the Iranian regime, in a US airstrike last night has significantly raised the chances of an outright conflict between the US and Iran. We’ve previously estimated that a US-Iran war could shave 0.5%-pts or more off global GDP, mainly due to a collapse in Iran’s economy but also due to the impact from a surge in oil prices.
- The assassination of Qassem Soleimani, a major figure in the Iranian regime, in a US airstrike last night has significantly raised the chances of an outright conflict between the US and Iran. We’ve previously estimated that a US-Iran war could shave 0.5%-pts or more off global GDP, mainly due to a collapse in Iran’s economy but also due to the impact from a surge in oil prices.
- It’s extremely difficult to know how events will play out from here. But Iran’s Supreme Leader has promised “tough revenge” for the death of Mr. Soleimani. This could come via numerous channels, including attacks on US embassies in the region, assaults on neighbouring US allies (such as Saudi Arabia) or even strikes on US military facilities in the Gulf.
- Clearly, the major concern for the world economy is that events spiral out of control and the US launches a full-blown military assault on Iran. We would direct clients to a Focus published last year for a discussion of the possible geopolitical and economic implications of a direct conflict between the US and Iran. We won’t go into all the details here, but there are few key points worth reiterating.
- First, the resulting collapse in Iran’s economy could knock as much as 0.3%-pts off global GDP – equal to our estimate of the damage from the US-China trade war. The impact on the other MENA countries would ultimately depend on whether they get directly caught up in the conflict. Past experience suggests that they could actually come through relatively unscathed – many of the Gulf countries recorded rapid growth during the First Gulf War.
- Second, and more importantly for the rest of the world, oil prices would surge. In response to last night’s events, oil prices have risen by more than 3% today to $68pb. But if Iran tried to close off the Strait of Hormuz, we’ve previously estimated that Brent crude would jump to $150pb. (See here.) This would push up inflation across the world – by as much as 3.5-4.0%-pts in the OECD countries.
- Central banks in the developed world would probably look through this. But in EMs, those countries where higher oil prices exacerbate balance of payments strains or an inflation problem would probably hike interest rates. Turkey would be a prime candidate, but India would face strains too. (See here.)
- Third, there would also be indirect effects via a hit to sentiment and possible disruption to shipping routes. Our central scenario is that the global economy will bottom out in the early part of this year and recover thereafter. But the outbreak of war between the US and Iran would put the recovery on ice.
- In terms of financial markets, equity and bond markets across the Middle East would probably come under pressure. But we suspect that dollar pegs in the Gulf would remain intact. At a global level, a dent to risk appetite would cause risky assets to suffer – equities would fall and EM currencies would weaken – and safe haven assets to rally.
Jason Tuvey, Senior Emerging Markets Economist, +44 20 7808 4065, firstname.lastname@example.org