Why the Israel-Iran conflict could sink the global economy | DW News

Key Concepts

• Energy Prices: Impact of the conflict on oil and liquified natural gas (LNG) prices.
• Strait of Hormuz: Its strategic importance as a key oil supply route and the potential consequences of its blockage.
• Inflation: The role of energy prices in driving inflation and the dilemma faced by central banks.
• Supply Chain Disruption: Potential impact on global trade and markets.
• Economic Resilience: Comparing the economic strengths and vulnerabilities of Israel and Iran.
• Cyber Warfare: The potential for attacks on critical infrastructure.
• International Sanctions: The impact of sanctions on Iran's economy.
• Geopolitical Uncertainty: The broader context of global economic instability.

Energy Bills and Oil Production

The conflict between Israel and Iran poses a significant threat to the global economy, primarily through its potential impact on energy prices. Iran is a major oil producer, with approximately 90% of its exports going to China. Any disruption to Iranian oil production could lead to a surge in global oil prices.

The Strait of Hormuz

A critical factor is the Strait of Hormuz, a narrow waterway between Iran and Oman. This strait is a vital passageway for oil tankers, handling about 20% of the world's oil consumption. Asia is particularly reliant on energy imports through this route. Iran has threatened to block the Strait of Hormuz as a "last resort," specifically if the U.S. attacks Iranian ports and prevents Iran from exporting oil. "If we can't export oil, uh nobody else will too," indicating a potential for significant disruption. Even without a complete closure, attacks on shipping and navigation systems in the area have increased insurance premiums and shipping costs, ultimately affecting consumer energy bills. Since the conflict escalated, oil prices initially rose sharply before slightly decreasing due to hopes of de-escalation.

Liquified Natural Gas (LNG) and Europe's Dependence

The Gulf region is also a major producer of liquified natural gas (LNG). Europe's dependence on LNG from this region has become "very critical" due to the situation in Ukraine. Disruptions to LNG supplies could disproportionately affect Europe.

Inflation and Central Bank Dilemma

Rising energy prices are a major driver of inflation, which countries worldwide have been struggling to control since the pandemic and the war in Ukraine. An escalation of the conflict presents central banks with a dilemma. Raising interest rates can help curb inflation, but high borrowing costs can also trigger a recession. Central banks are caught "in between these two blades of the scissor," trying to determine whether the situation is primarily a supply shock or an inflationary shock. During the Ukrainian crisis, the ECB and other central banks prioritized controlling inflation over preventing a recession by maintaining higher interest rates for a longer period.

Global Trade and Supply Chain Disruption

A wider conflict could lead to significant reductions in global trade due to supply chain disruptions, potentially causing turmoil in global markets.

Economic Resilience: Israel vs. Iran

The economic impact on Israel and Iran differs significantly. Israel's economy has remained relatively "unscathed" despite the ongoing war in Gaza, largely due to the resilience of its high-tech sector. The high-tech sector accounts for nearly a fifth of Israel's GDP and is capable of maintaining work through remote operations. In contrast, Iran's economy is far more vulnerable, heavily reliant on energy exports and its relationship with China.

Israel's Economic Vulnerability

Israel's main economic vulnerability is the massive increase in defense spending since the war in Gaza began, leading to heavy borrowing. The conflict with Iran is exacerbating this situation, potentially pushing Israel's debt-to-GDP ratio to around 75%, which is a "significant burden" for a small country, with substantial interest payments.

Iran's Economic Reliance on China and Russia

Iran's economy relies heavily on China, its most important trading partner. China could provide diplomatic support and essential supplies to Iran. Russia can also supply Iran with food. Iran's reliance on Russia and China, particularly within the BRICS framework, may prove beneficial.

Cyber Warfare and Critical Infrastructure

Early last year, Israel's energy ministry warned of potential attacks on electricity supplies. While initial fears of widespread disruption did not materialize, Iran has demonstrated the capability to strike refineries. Although Israel has strong cyber defense systems, other regions like the U.S. and Europe could be more vulnerable to cyber warfare. U.S. agencies are reportedly preparing for potential attacks.

The Failure of Sanctions and Iran's Economic Growth

Despite years of international sanctions, Iran's economy has not collapsed. Instead, it has experienced slow growth of 2-3%, indicating the "failure of sanctions" to cripple the country.

Diversion of Attention in Israel

The war in Gaza and the conflict with Iran are diverting attention from other critical areas in Israel, such as healthcare and education. The constant threat of attacks disrupts daily life and limits focus on long-term issues.

A Vision for the Middle East

The speaker references Israeli leaders describing Israel as a "coffee shop in the middle of a rubble," but argues that this is not a desirable situation for the region. The world needs a Middle East that resembles East Asia, where countries invest in their future and cooperate with the rest of the world.

Conclusion

The conflict between Israel and Iran presents significant risks to the global economy, primarily through its potential impact on energy prices, supply chains, and inflation. While Israel's economy has shown resilience, it faces increasing debt burdens. Iran's economy, though weakened by sanctions, has not collapsed and relies heavily on its relationships with China and Russia. The potential for cyber warfare and broader geopolitical instability further complicates the situation, leaving young people concerned about the future.