Fears for the US economy as fight in the Middle East threatens oil prices and shipping through the Suez Canal and Strait of Hormuz – as experts warn it could cause MORE inflation
- Analysts warn that the Israel-Hamas war could cause turmoil in the world’s economy
- The conflict could impact oil prices, global trade, inflation and confidence in the markets
- Economists say it is too soon to tell what the effect will be but they are watching developments closely
America’s economy could be thrown into turmoil by the war between Israel and Hamas, analysts have said – warning that the dollar could be impacted and oil prices swiftly affected.
The conflict may lead to higher inflation in the United States, which would be a significant problem for President Joe Biden going in to the election year.
On Tuesday, economists at Goldman Sachs reported that the consumer price index looked set to continue its downward trajectory, dropping to 3.98 percent in September, down from 4.3 percent in August.
The news will be welcomed by the White House, but their work in reducing inflation could be undone by the rapidly evolving events in the Middle East.
The turmoil could impact the Suez Canal – the fastest shipping route between Europe and Asia, which carries seven percent of all global trade and is responsible for the passage of $10 billion worth of goods every day.
Smoke billows after a strike by Israel on the port of Gaza City on Tuesday. Economists are watching the conflict closely to see how it affects global trade and commodities
A trader is seen at work on the floor of the New York Stock Exchange. The war is causing great uncertainty in the markets
Amphibious dock landing ship USS Carter Hall is seen in August transiting the Suez Canal – a vital route connecting Europe and Asia
It could also affect the Strait of Hormuz, widely regarded as the world’s most strategically important passage for international trade. Twenty percent of the global oil supply flows through the Strait, which links the Persian Gulf with the Gulf of Oman and the Arabian Sea.
‘The conflict poses a risk of higher oil prices, and risks to both inflation and the growth outlook,’ said Karim Basta, chief economist at Ill Capital Management, according to Fox Business.
Another analyst, Carl Tannenbaum, chief economist with Northern Trust, said that the uncertainty that the conflict caused could create swings in oil prices.
‘Any source of economic uncertainty delays decision-making, increases risk premium, and especially given that region… there is an apprehension about where oil is going to open,’ he said.
Tannenbaum added that markets will be following ‘what the scenarios are looking like’ and whether, after decades of instability in the Middle East, this outbreak of violence plays out differently.
‘The question will be: is this iteration something that will throw the long-term equilibrium out of balance?’
Twenty percent of the global oil supply flows through the Strait of Hormuz, which links the Persian Gulf with the Gulf of Oman and the Arabian Sea
The Suez Canal is pictured in 1973, as Egyptian soldiers transport supplies. The canal is of vital strategic importance and now carries seven percent of all global trade
Agustin Carstens, general manager of the Bank of International Settlements, cautioned that it was too early to tell how the conflict would impact the economy.
Carstens told the National Association for Business Economics that it’s ‘too early to say’ what the economic implications of a Middle East conflict may be, although oil and equity markets may see immediate fallout.
Federal Reserve officials have been monitoring a recent rise in U.S. Treasury bond yields for indications that investors may have pushed financial conditions beyond what’s needed to cool inflation and raised the risk of cooling the economy too dramatically – potentially derailing the Fed’s desired ‘soft landing’ for this inflationary cycle.
U.S. Treasuries are generally considered a safe haven in times of economic uncertainty and crises, so the conflict could spur a flight by investors in search of relative security.
Bond prices and interest rates are inversely correlated, so greater demand for Treasurys would help bring down interest rates.
While falling interest rates can serve as a warning sign for a rise in inflation by encouraging consumers and businesses to borrow and spend more, the context of a new regional war in the Middle East could cause markets to draw a different conclusion in this case.