Middle East conflict adds new risks to global economic outlook

DALLAS, Oct 8 (Reuters) – The outbreak of military conflict in the Middle East not only means central bankers will continue to grapple with new inflationary trends; This could deal a blow to economic confidence at a time when expectations were growing for containment. The pandemic and Russia’s invasion of Ukraine in 2022.

The stunning violence in Israel, where fighters from the Hamas movement invaded from the Gaza enclave and left hundreds of people dead, added to the global instability sparked by Russian military action nearly 20 months ago. Added the possibility of a broader Middle East conflict. .

The effects may take time to become apparent and will depend on how long the conflict lasts, how intense it becomes, and whether it spreads to other parts of the region.

Agustín Carstens, general manager of the Bank for International Settlements, said in a presentation to the National Association for Corporate Economics that while there could be an immediate impact on oil and stock markets, it was “hard to say” what the impact would be. It’s too early.”

But the war has at least predicted an impact on the U.S. market, which continues to adjust to an already slowing global economy and the possibility that the Federal Reserve will keep interest rates high for longer than many investors expected. It has the potential to apply an impossible set of forces.

“Any factor of economic uncertainty slows decision-making and increases risk premiums, and especially given that region… there are concerns about where oil will open up,” said Karl Tannenbaum, chief economist at Northern Trust. There is,” he said.

“Markets will be watching to see how the scenario plays out and whether this outbreak of violence will play out differently after decades of instability in the Middle East,” he said. Stated.

“The question is whether this repetition will upset the long-term equilibrium.”

generate confidence

This and related issues are likely to be high on the agenda of world financial leaders attending a meeting of the International Monetary Fund and World Bank in Morocco this week, continuing to rise amid severe volatility caused by the pandemic. The state of the world economy will be considered. trade friction.

For central banks, this poses a dilemma as to whether this could lead to new inflationary pressures – the region is not only home to major oil producers such as Iran and Saudi Arabia, but also has major oil reserves passing through the Gulf of Suez. There is also a sea route — or poses a dilemma as to whether to make such a deal. It is a blow to confidence that the economy will stagnate.

Federal Reserve officials have cited recent spikes in energy prices as a potential risk to the outlook for inflation to gradually ease, and they also say that barring some unforeseen external shock, the U.S. economy is unlikely to slip into recession. He also said he felt there was a high possibility of evasion.

With conflicts escalating in major oil-producing regions, the reaction of traders and major countries such as Iran and Saudi Arabia will be closely watched for further price increases, while bond and stock market trends in the coming days will be closely watched. It will show how trading will change. Markets are anticipating the possible impact.

“This conflict poses risks to both higher oil prices and to the inflation and growth outlook,” said Karim Basta, chief economist at III Capital Management, adding that he is unsure whether higher prices or slower growth are the bigger concern. He said the Fed needs to determine whether this is the case.

Fed officials are already looking at the recent rise in U.S. Treasury yields for signs that investors may be pushing financial conditions further than necessary to cool inflation, increasing the risk of a too pronounced economic slowdown. was.

To the extent that the war between Israel and Hamas raises concerns about the global economy, that trend could be reversed if capital floods into the relative safety of U.S. debt, as often happens during potential crises. be.

In other circumstances, a decline in market interest rates might be seen as a potential source of new inflation, encouraging consumers and businesses to borrow and spend; The perception of risks to the economy will be emphasized and different conclusions may be drawn. .

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