Weekly Economic Commentary

The extremely valid question regarding the impact of war in the Middle East on the global economy simply cannot be well-answered at this time. Several immediate areas of concern are clear — oil and gas supplies and prices, transportation flows and costs in the Red Sea (headed to the Suez Canal) and the Persian Gulf (Straits of Hormuz), and the involvement of additional countries — yet the magnitude of the concern will depend upon, among other things, the still-uncertain duration of the conflict. Given the current abundance of oil supplies, a spike in oil prices may be quite short-lived, especially if OPEC raises oil production by an additional amount. And it is notable that until March 2, three days into the war, combatants had not attacked oil and gas production, storage and shipping facilities in the Persian Gulf; whoever or whatever comes next will need that oil revenue. At the same time, Iran’s Houthi proxies have menaced Red Sea shipping before and are expected to do so again, yet ship traffic is still moving through the Suez Canal, as a limited amount is also going through the Straits of Hormuz. Iran has somewhat amusingly declined to declare the Straits of Hormuz “closed,” though ship owners might do that for them once they look at skyrocketing insurance costs. The fog of war element in this conflagration and in the global economy itself very well be the role of drones. A leaderless Iran assigns greater significance to a multitude of militias and other factions free to pursue their own tactics, occasionally using missiles and rockets, but increasingly using drones that are maddeningly difficult to defend, especially as missile batteries are effectively knocked out by US and Israeli airpower. Economic activity brought to a halt by explosive drones is not an unlikely possibility. 

Given all this uncertainty and the reality that monetary policy can’t do much about short-term spikes in inflation due to war, the US Federal Reserve and other central banks are likely to take a wait-and-see attitude regarding any potential implications for price levels. Possibly of greater interest to the Fed is the eventual need for the US Government to rebuild military stockpiles seriously depleted by any war that goes on longer than a week. Upward pressure on the federal budget deficit and the costs of servicing a larger national debt seem inescapable, though the consequences for economic growth are unclear. Broadly speaking, it would be tempting to conclude that this is not a world where interest rates should be expected to decline, except for the reality that something could break under this kind of stress and if it does, lower interest rates will be the remedy.  

Data to Watch 

• S&PGlobal and ISM (Institute for Supply Management) Purchasing Managers Surveys for the US Manufacturing Sector in February, released Monday, March 2 

• Challenger Job Cuts for February, released Thursday, March 5 

• US Nonfarm Payrolls and Unemployment for February, released Friday, March 6 

Suggested Readings 

1. OPEC+ to raise oil output slightly even as U.S.-Israel strikes on Iran disrupt shipments 

2. The Week the Dreaded AI Jobs Wipeout Got Real 

3. The Looming Taiwan Chip Disaster That Silicon Valley Has Long Ignored