“My advice to policymakers around the world in this new global environment: think of the unthinkable and prepare for it.” The words this past Monday of Kristalina Georgievamanaging director of the International Monetary Fund (IMF), pronounced in the context of the new crisis that hits the world economy after the attacks by the United States and Israel on Iran, sound like something more than a mere warning: they exude uncertaintythe worst thing that can happen to the global economy.
All analysts agree in pointing out that the economic scenario that is drawn with the new conflict unleashed in the Middle East is “complex”. Some even call it “grave”. In statements to the EFE agency, Gonzalo Escribanoprincipal researcher for Energy and Climate at the Elcano Royal Institute, maintains that the conflict has caused “a supply shock that is going to cost us a lot of inflation”.
“From an economic point of view, the crisis in the Middle East introduces a relevant and multidimensional inflationary risk. The most immediate channel is energy: any prolonged tension in a key region for the production and transit of oil and gas usually translates into an increase in the price of crude oil and fuels, with knock-on effects on electricity, transportation and a good part of the consumer basket”warns Jose Manuel Corralesprofessor of Applied Economics and International Relations at the European University of Madrid.
“Added to this is the increase in the cost of maritime freight and commercial insuranceespecially if strategic routes are affected, which increases import costs and puts pressure on prices finals,” insists the professor at the European University of Madrid.
In fact, the first visible impact of the conflict is a sharp rise in energy prices. Citizens are already noticing it in their pockets, especially in the price of fuel. Gasoline and diesel have risen 12% in a week: Gasoline has become more expensive by 15 cents per liter and diesel by 28 cents. The light also goes up: Kilowatt hour (kWh) electricity prices are up to 57.6% higher than the previous week.
The rise in prices will also be noticeable in food, as Corrales points out.. Spanish agricultural organizations warned this Monday that the increase in prices of fertilizers and diesel, in addition to the speculative movements that are already occurring in the markets, are going to be transferred to the cost of food, which has already been sufficiently stressed in recent years. The means of agricultural production have become between 20% and 40% more expensive and farmers are beginning to notice difficulties in the supply of fertilizers for the fields.
José Manuel Corrales: “The key element is how the social costs of this shock are distributed”
Nerves have also spread to international markets. this monday the price of oil exceeded 100 dollars per barrelreaching its highest price since July 2022. The price of gas It also shot up 15.5% this Monday and is already accumulating an increase of 92% in just nine days of conflict. With skyrocketing oil and gas prices, European and Asian stock markets—those in the United States have taken the hit more firmly—are suffering and falling sharply, unable to react to “the unthinkable,” to use Grigorieva’s expression. As the economist points out Juan Torres In an article published this past weekend on his blog, “the real risk may not lie in the conflict itself, but in something deeper: the silent accumulation of very dangerous fragilities in the global financial system.”
Regarding the economic impact at a global level, the IMF recalls that every 10% increase in oil pricesif maintained for most of the year, would result in a 40 basis point increase in global headline inflation and one drop of two tenths in growth of world GDP. On February 27, the day before the attack on Iran, the price of a barrel of oil was $70. In nine days, oil has become more expensive by more than 40%. Do your math.
Even the Government itself assumes the economic impact of the conflict. Carlos BodyMinister of Economy, Commerce and Business, declared this Monday that the war in Iran is already having “tangible effects” in the pockets of citizens. “We are noticing the beginning of the effect of this war in our pockets, in the Spanish economy, beyond the energy raw materials markets. From here, as the President of the Government has pointed out, what the Spanish Government is going to do is protect citizens, companies and workers, as we already did in the case of the war in Ukraine.”
Body’s words refer to what happened in 2022. In February of that year, Russia invaded Ukraine and an inflationary crisis was unleashed that had already been brewing for months. In July 2022, inflation reached 10.8%, its highest since the mid-1980s. The European Central Bank intervened by raising interest rates to cool prices. The Government then activated a social shield to limit the impact of rising prices in various sectors with subsidies in food, transport or fuel.
Los fears of the same story repeating itself are back on the table, although this time the markets’ reaction has been less virulent than with the Russian invasion of Ukraine. At that time, oil reached prices above 180 dollars and gas in Spain rose to 200 euros, four times more than what it is worth today. Despite this more moderate reaction, Analysts predict that in summer inflation in Spain will exceed 3% from the 2.3% it is now.
That is the forecast of the Savings Bank Foundation (Funcas) in the event that the war lasts three months, although he recognizes that the scenario would be “significantly more negative” if the war were to continue. and applied to Spainestimate que a 10% increase in the price of oil adds one tenth of the CPIand a 10% increase in the price of gas results in an increase in the price index of the same magnitude. Funcas also predicts that the growth of the Spanish Gross Domestic Product will grow in 2026 two tenths less than anticipated due to the war.
Manuel Hidalgoprofessor of Applied Economics at the Pablo de Olavide University of Seville, He also does not believe that inflation will reach the level it did in 2022although he recognizes Public that, indeed, there is a lot of uncertainty: “The situation is complicated and could get worse, but it all depends on how long the war lasts. It is true that there are factors that we do not know how long it will take to return to normal, even after the weapons stop. The longer the conflict lasts, the more intense the consequences will be. In any case, I believe that we are in a different situation than in 2022. Except for scenarios that I don’t even want to imagine right now, I don’t think we will reach those levels.”
Manuel Hidalgo: “The longer the conflict lasts, the more intense the consequences will be”
The Sevillian economist maintains that in the last four years “many economies have advanced in energy resilience and they have used less oil”, but it also assumes as almost inevitable that “there will be a rebound in inflation and therefore in interest rates.” “If the conflict lasts a long time and the damage is greater, obviously we will have a much greater impact on the economy,” Hidalgo reiterates.
“We are not facing a shock punctual and easily reversible, but in a scenario of high uncertainty, in which expectations play a central role. If companies and markets anticipate a long conflict or a regional escalation, they tend to adjust prices and margins upwards, which may prolong inflationary tensions even if demand is contained. In that sense, the IMF director’s warning about preparing for the unthinkable is significant: it is not about managing only the central scenario, but about being prepared for tail scenarios, with energy, financial or logistical disruptions more severe than usual,” José Manuel Corrales abounds when asked about what may happen in the coming weeks.
The keys to what may happen are not only the duration and severity of the conflict, but also the resistance of the world economy. Western countries have some cushion to withstand the closure of the Strait of Hormuz and the disruption of supply chains for a time. That time, however, is limited: the countries of the European Union (EU) have Sufficient oil and gas reserves for 90 days. Despite everything, Brussels sends a message of calm: “We are much less concerned about security of supply than high energy prices,” a European Commission spokeswoman told reporters. That same spokesperson pointed out that right now there is no indication that an emergency situation is occurring. In any case, most countries do not foresee an immediate supply shortage.
There are still several steps to climb to find ourselves facing a truly worrying situation, say economists and institutions. That being true, it is no less true than No one can make a completely accurate prediction of what will happen.except that inflation will pick up and it will have an impact. In this sense, the director of the IMF, the same one who poses an unthinkable scenario, urges countries to focus “on what they can control” and, above all, be agile in responding to what may come.
Corrales, however, poses a slightly different key: “The key element is How are the social costs of this distributed? shock. Recent experience shows that transferring the adjustment to households (via loss of purchasing power) or to employment (via salary containment or cuts) is not only socially unjust, but also economically inefficient, because depresses demand and slows growth. There is room for a different response: selective fiscal policies, well-targeted temporary aid, margin control or supervision mechanisms in strategic sectors and coordinated public action in energy matters, both at national and European level, to avoid a new spiral of extraordinary prices and profits. If the response is limited to austerity recipes or to relying exclusively on monetary policy, the most likely result will be more inequality, greater social unrest and weaker growth,” he warns in conclusion.
