Economists Warn Of “Bigger” Middle East War, But Yellen Downplays Its Economic Impact

Authored by Andrew Moran via The EPoch Times,

The war between Hamas and Israel is unlikely to spill over into the global economy, Treasury Secretary Janet Yellen told delegates at the annual meetings of the International Monetary Fund (IMF) and World Bank, in Morocco.

Despite the initial volatility in global financial markets on Oct. 9, investors have largely dismissed concerns that the latest conflict in the Middle East will impact the international economy, pricing in various scenarios.

Ms. Yellen does not think the events will result in anything “very significant” for the global economic outlook.

“While we are monitoring potential economic impacts from the crisis [in Israel], I’m not really thinking of that as a major driver of the global economic outlook,” she said. “Thus far, I don’t think we’ve seen anything suggesting it will be very significant.”

In her prepared remarks to the IMF roundtable, Ms. Yellen championed America’s commitment to strengthen the fund and advocated more support for the organization as economic shocks “often hit low-income countries the hardest.”

“The IMF’s continued relevance depends on its ability to adapt its policy advice and provide lending that will support countries’ efforts to restore macroeconomic stability,” she said.

Gita Gopinath, the IMF’s first deputy managing director, told Bloomberg TV on Oct. 11 that it is still too early to determine if the war between Israel and Hamas will exacerbate inflation pressures and hamper global growth.

“If it turns into a wider conflict, and that causes oil prices to go up, that does have an effect on the economies,” Ms. Gopinath said in an interview with the business news network.

“That’s usually one of the channels through which we see that affecting global numbers.”

Also appearing in Morocco this week, IMF chief economist Pierre-Olivier Gourinchas noted that the global economy is “limping along, not sprinting.”

The IMF forecasts that the global economy will expand 3 percent this year and 2.9 percent in 2024.

Concern Over War’s Length

Other economists warn that the longer the war goes on, there will be worries that it will threaten the worldwide economic outlook.

“All eyes clearly remain on the tragic scenes out of Israel, and there is deep concern over what’s to come. Likely this story goes quiet for a while, but it’s clearly far from over. More likely the beginning in fact, given the voices out of Israel,” wrote ING strategists in a research note.

“Even if it remains localized, there will be concern that it becomes much bigger and more dangerous.”

Ultimately, it will depend on how far the conflict intensifies and extends, says Heritage Foundation economist Peter St Onge.

“For the real economy, everything depends on how far the conflict spreads. If it is contained, we will get drama and markets but little on the real economy,” Mr. St. Onge explained in his daily commentary posted to X.

“If, on the other hand, regional powers and the United States are drawn into a deeper war, we could be looking at oil dealing a catastrophic hit to inflation, which would drive the Fed to pull out all the stops and hike interest rates to economy-crushing levels we have not seen since [former Fed Chair] Paul Volcker,” he wrote.

On the market front, the leading U.S. benchmark indexes have risen around 2 percent in the last week. The fear trade quickly dissipated after sending traders into safe assets like the greenback and U.S. Treasurys.

The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, fell below 106.00. Treasury yields also slipped to their lowest levels in about two weeks. Gold, a conventional haven asset during volatile times, has held steady in recent sessions, inching back toward the $1,900 mark.

An oil facility on Khark Island off Iran’s coast, on March 12, 2017. (Atta Kenare/AFP via Getty Images)

Iran and Oil

The U.S. government has not linked Tehran to the events of this past week. However, Ms. Yellen warned that nothing is “off the table” if Iran is found to have supported the assault on Israel.

Still, Washington has not made any decisions on renewed economic sanctions on the Iranian regime.

“I wouldn’t take anything off the table in terms of future possible actions, but I certainly don’t want to get ahead of where we are on that,” she said.

Last month, the White House released $6 billion in frozen Iranian crude oil assets, transferring the funds from South Korea to an account in Qatar as part of broader efforts to ease tensions with Iran.

Sen. Tim Scott (R-S.C.) has called for a Senate Banking Committee hearing with Ms. Yellen and a federal investigation into the release of the $6 billion.

“In the face of evil, we must use every tool, weapon, and economic sanction available to provide for our nation’s security and the security of Israel,” said Mr. Scott in a statement.

“We should be signaling strength—not leniency—when it comes to Iran. That’s why now is the time to pass my Solidify Iran Sanctions Act and send the message that Iran should not expect U.S. sanctions to lapse.” (Since then, the United States and Qatar, where the money was held, re-froze the assets.)

Energy markets mostly shrugged off the geopolitical strife following a 4 percent rally to start the trading week, despite the potential consequences for oil prices if Iran is found to have played a role in Hamas’ attacks on Israel.

West Texas Intermediate (WTI) crude oil futures plunged about 2 percent on Oct. 11, to about $84 per barrel.

Brent, the international benchmark for oil prices, also slumped around 2 percent, to $86 a barrel, on London’s ICE Futures exchange.

At the Pump

Gasoline prices also have not felt the effects of the war 5,600 miles away. According to the American Automobile Association (AAA), the national average for a gallon of gas is $3.66, down 3 percent from a week ago.

The problem is that investors are largely ignoring the supply risk, says Phil Flynn, senior market analyst at The PRICE Futures Group.

“It is clear the impact on oil and the risk to supplies is still incredibly high,” he wrote in a note. “The market is going to have to get more comfortable that the imminent risk to supply is not going to go away in an already tight global oil market.”

This year, Iran’s crude exports and production have returned to their highest levels since 2018. But as many as 500,000 barrels per day of Iranian crude could be removed from the economy, according to S&P Global Commodity Insights analysts.

While the White House wants more oil traveling through the global energy market, the situation in the Middle East could “override” this desire, they added.

“Before the war, U.S.-Iranian tensions had eased, which facilitated higher Iranian oil exports. Iranian crude oil production increased 500,000 b/d from March to September 2023—to 3.1 million b/d from 2.6 million,” the analysts wrote.

“[President] Biden will be under pressure to enforce sanctions and curtail Iranian export revenue. This is a challenging situation for the Biden administration, which wants more oil on the market, not less. The attacks on Israel could override the oil issue,” they added.

In the United States, market observers have been paying close attention to the Strategic Petroleum Preserve (SPR).

As a chorus of Wall Street experts sounds the alarm about oil prices surpassing $100 per barrel again due to geopolitical uncertainty, some are wondering if the current administration could tap into the nation’s emergency stockpiles.

Following a six-week build in the SPR in August and September, replenishing efforts have stagnated in the last three weeks. The SPR stands at 351.28 million barrels, equal to approximately 17 days of supply.


Source link