Source: Finance Association
Author: Bian Chun

At a time when central banks are still struggling to cope with the economic impact of the COVID-19 pandemic and the Russia-Ukraine conflict, the Middle East conflict may bring new risks to the global economic outlook. Central banks may have to contend with new inflationary pressures.

A new round of military clashes broke out between Israel and Palestine on the 7th. Hamas launched military operations against Israel on the same day, while the Israeli army launched multiple rounds of air raids on the Gaza Strip. The conflict is still ongoing. Up to now, more than 1,100 people have died in a new round of conflict between Palestine and Israel.

Nearly 20 months ago, the Russia-Ukraine conflict triggered global instability, and the prospects for the Middle East conflict to expand could exacerbate this instability, disrupt supply chains, and drag down confidence in the global economy.

The economic impact of the conflict will depend on its duration and intensity, and whether it will spread to the rest of the Middle East — home to major oil producers such as Iran and Saudi Arabia and major international shipping lanes such as the Strait of Hormuz.

Agustin Carstens, general manager of the Bank for International Settlements (BIS), said in a speech to the National Association of Business Economics (NABE)It's “too early” to say what impact the Middle East conflict might have on the economy, although oil and stock markets could be affected immediately.

Carl Tannenbaum, chief economist at Northern Trust (Northern Trust), an established US private bank, pointed out that any source of economic uncertainty would delay decisions and increase risk premiums, especially given the importance of oil in the Middle East. He added that the market will focus on “future conditions” and whether this conflict will end in a different way after decades of instability in the Middle East.

The Federal Reserve is in trouble

As the conflict in the Middle East, an important oil-producing region, intensifies, the reactions of major oil producers such as Iran and Saudi Arabia will be closely watched to determine whether oil prices will continue to soar. International oil prices soared in early Asian trading on Monday, and at one point WTI crude oil rose more than 4%.

Analysts said that since Iran's oil exports may experience a chain reaction, crude oil prices may rise in the short term, but the overall impact of this geopolitical event on the oil market should be limited.

These risks could put the Fed in trouble and complicate future interest rate hike decisions.Currently, the Federal Reserve is considering whether to raise interest rates again this year and weighing how long it will keep interest rates high.

Federal Reserve officials have said that the recent high energy prices may pose a risk to the prospects for a gradual slowdown in inflation, and said that if there is no unexpected external shock of some kind, they think the US economy may avoid recession.

Higher oil prices may increase inflationary pressure and weaken consumer confidence in the economy, thereby threatening the prospects for an economic “soft landing” expected by the Federal Reserve.

Karim Basta, chief economist at Ill Capital Management, said that this conflict poses a risk of rising oil prices, as well as risks to inflation and economic growth prospects.This makes it necessary for the Fed to figure out whether rising prices or slowing economic growth is a more worrying question.

editor/tolk