Just as the world economy was stabilizing after its worst performance in a decade, a U.S. airstrike in Iraq that killed one of Iran’s most powerful generals is a jolting reminder of how fragile the outlook remains.
A tentative trade agreement between the U.S. and China had buoyed expectations that global growth would start to rebound this year. Business confidence has slowly been improving as key manufacturing gauges show signs of bottoming out.
Now, the U.S.-Iran flare-up could nip any positive sentiment in the bud. A sustained rise in oil prices -- futures in London and New York surged by more than 4% on the news -- would hurt economies that rely on energy imports, and suppress consumer demand.
“The situation reminds me of the game of Whack-A-Mole,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “Just when the market started to be relieved that trade war escalation risk has subsided, another risk-off event pops up seemingly from nowhere.”
Much will hinge on whether any spike in oil prices is sustained. A sharp rise in oil would have a significant negative impact on economies beyond the Middle East.
Higher energy costs impact economies in different ways. Countries that are net energy importers would see household income and spending hurt, and inflation could accelerate. As the world’s biggest importer of oil, China is vulnerable; many European countries also rely on imported energy.
Emerging markets that dominate the list of oil-producing nations could earn greater revenues, helping to plug current-account deficits.
Still, Charlie Robertson, London-based chief economist for Renaissance Capital Ltd., said worries about higher energy costs linked to geopolitical turbulence have come and gone many times over the past decade.
While there’s always a risk that disrupted supplies will threaten economic growth, there are key buffers in place to withstand it, he said.
“Strategic petroleum reserves are probably large enough in the U.S., China and the EU to cope with disruption to Saudi oil facilities or to the Straits of Hormuz,” he said.
In the aftermath of Friday’s assassination, London’s Brent crude rose as high as $69.16 a barrel, the highest price since the attacks on Saudi Arabian oil infrastructure in September. However, the price had stabilized by the close of business in Asia, suggesting it might take a more concrete hit to supply for crude costs to remain elevated.
Still, economists remain wary.
“This is the last thing the world needs,” said Howie Lee, a Singapore-based economist at OCBC. “If oil prices spike, the resulting high inflation is likely to derail economic recovery. For all the attention that the U.S.-China trade war has garnered, it is a reminder that tail risks still exist in other pockets.”
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