Wider Middle East conflict threatens the global economy — when the US and China already face headwinds, experts say

The widening Middle East conflict, Hurricane Helene, and China’s woes all pose economic headwinds.

Experts say the escalating war in the Middle East could choke global economic growth and reignite inflation, just as the US is dealing with the aftermath of Hurricane Helene, and China is trying to stabilize its beleaguered economy.

Shockwaves of war

The regional conflict has expanded, with Israel threatening retaliation against Iran for attacking it with missiles in response to the killing of Hamas and Hezbollah leaders.

The escalation comes as the global economy is already under pressure from the delayed impact of interest-rate hikes, reduced trade, uncertainty around the upcoming US election, and China’s economic slowdown, said Ahmet Kaya, a principal economist at the UK’s National Institute of Economic and Social Research.

“War in the Middle East could exacerbate the instabilities in the global economy, further increase the uncertainties, harm disinflationary efforts, and eventually reduce the global GDP growth,” he told B-17.

Kaya warned the conflict could accelerate inflation by disrupting international supply chains and causing the cost of energy and shipping to rise. He estimated an increase in oil prices of $10 a barrel could raise inflation in advanced economies by about 0.4 to 0.6 percentage points, and a 10% rise in shipping costs could lift it by about 0.3 percentage points.

US crude has already climbed by 10% in just over a week to over $74 a barrel on Friday, its highest level since August, while Brent crude is up almost 9% to above $78.

Kaya said resurgent inflation could lead central banks to delay cuts to interest rates, dampening growth at a time when recession fears are rife in many countries.

In Israel, the war and its lack of an obvious endpoint have knocked confidence and curbed investing and growth, making it harder for authorities to temper rising inflation without crushing the economy, said Assaf Razin, a professor emeritus at the Eitan Berglas School of Economics at Tel Aviv University.

He told B-17 the government must urgently improve its policies and close social and economic gaps, or “Israel’s negative economic spiral could deepen, putting its status as a stable nation at risk.”

Weathering the storm

The conflict is less of a worry for the US, according to Oliver Allen, a senior economist at Pantheon Macroeconomics. Rising oil prices could drive inflation but they’ve dropped since the spring, and the US is a net energy exporter, so the effect on incomes and economic activity would “probably be trivial,” he told B-17.

Confidence is unlikely to take a meaningful knock unless there’s material escalation, Allen added.

However, Hurricane Helene could trigger a “fairly sharp rise” in next week’s initial jobless claims data, and reduce nonfarm payroll employment by about 20,000 in October’s report, Allen said. But he emphasized that hurricanes have historically had limited and short-lived impacts on growth and inflation.

“The most likely outcome looks like a small but passing impact on some of the lower-level activity data and a slight, but also temporary, lift to inflation from some of these supply-side shocks,” he said.

An Oxford Economics report said that Hurricane Helene could affect several parts of the US economy — including consumer spending, the job market, housing, business profits, and industrial production — but it would likely have only a minimal impact on fourth-quarter GDP.

Oxford Economics researchers said state and local economies might suffer but there would probably be limited fallout at the national level. Output is poised to recover during the rest of this quarter, boosted by cleanup and rebuilding after the storm, they said.

One piece of good news arrived on Thursday night as tens of thousands of striking port workers agreed to suspend strike action and return to work while contract negotiations continue.

Trouble in China

China is facing a cocktail of economic challenges. Its GDP grew by a disappointing 4.7% year-on-year in the second quarter, down from an annual average of nearly 8% for the decade before the pandemic.

However, “that’s not all bad given high inflation last year,” Duncan Wrigley, the chief China economist at macroeconomic researchers Pantheon, told B-17, adding inflation would have been higher had the economy grown faster.

He predicted that China’s recently unveiled economic stimulus package would buttress short-term growth but would not address its root problems such as high youth unemployment and a beleaguered property market. Wrigley suggested those and other issues could rear their heads again next year, spurring Beijing to offer further support.