The Iranian war has entered its fourth week, exacerbating the energy supply crisis and its impact on the global economy. Countries vary in their ability to cope with these repercussions, necessitating close monitoring of the most affected economies.
In Europe, any new shock to the energy sector brings to mind the aftermath of the Russian invasion of Ukraine, which revealed the continent's heavy reliance on energy imports. Inflation is expected to rise again, potentially forcing the European Central Bank and the Bank of England to increase interest rates this year. Recent data has shown that business activity has already been affected by the conflict, signaling a slowdown in economic growth.
Details of the Situation
Germany is among the most vulnerable countries to rising energy costs, as its economy heavily relies on the industrial sector. Although the contraction of the German manufacturing sector has halted for the first time since 2022, its reliance on exports makes it susceptible to any slowdown in the global economy. The massive stimulus program launched by the government has helped absorb part of the shock, but its capacity to provide additional support is limited due to the expected budget deficit.
Italy also heavily depends on the manufacturing sector, with oil and gas accounting for a significant portion of its total primary energy consumption compared to other European countries. Meanwhile, the UK relies on gas-fired plants for electricity generation, making it vulnerable to fluctuations in gas prices, which have risen faster than oil prices since the conflict began. Despite a price cap on energy, this may lead to higher interest rates, keeping borrowing costs elevated for a longer period.
Japan is also facing significant challenges, as it imports about 95% of its oil needs from the Middle East, with approximately 90% of these supplies passing through the Strait of Hormuz. Additionally, inflationary pressures from a weak yen are affecting food and essential goods prices.
Background & Context
The Gulf countries are experiencing a direct economic blow due to the Iranian war, with analysts predicting a contraction in their economies this year after previous forecasts of strong growth. Despite rising oil and gas prices, the near-total closure of the Strait of Hormuz could hinder the flow of oil and gas exports to international markets, impacting remittances from expatriate workers.
India, which imports about 90% of its crude oil needs, is also facing significant risks. Economists have begun to lower their growth forecasts, while the rupee has fallen to a record low. In restaurants, some hot foods and beverages have disappeared due to rising gas prices.
Impact & Consequences
Turkey faces economic challenges related to a potential influx of refugees and geopolitical instability due to its borders with Iran. The Turkish central bank has had to halt its rate-cutting cycle and inject up to $23 billion from its reserves to support the lira amid ongoing inflation crises.
Egypt is experiencing rising fuel and food prices, along with a significant potential decline in revenues from the Suez Canal and the tourism sector. The burden of debt repayment, most of which is in dollars, is increasing after the value of the pound has dropped by about 9% since the war began.
Sri Lanka and Pakistan are also suffering from the war's repercussions, with Sri Lanka declaring a public holiday to reduce energy consumption, while Pakistan has had to raise gasoline prices and close schools for two weeks.
Regional Significance
Concerns are growing that these crises will exacerbate economic conditions in the Arab region, where many countries are already suffering from prior economic crises. The war's impact on energy supplies could lead to rising prices and declining growth, placing additional pressures on Arab governments.
In conclusion, the economic repercussions of the war in the Middle East appear set to continue affecting many countries, necessitating a coordinated response to address these challenges.