Iran tension tests world economy’s prospects

JUST as the world economy was stabilising after its worst performance in a decade, a US airstrike in Iraq that killed one of Iran’s most powerful generals is a jolting reminder of how fragile the outlook remains.
A tentative trade agreement between the Donald Trump-led US and China had buoyed expectations that global growth would start to rebound this year.
Business confidence has slowly been improving as key manufacturing gauges show signs of bottoming out.
Now, the US-Iran flare-up could nip any positive sentiment in the bud. A sustained rise in oil prices — futures in London and New York surged by more than four percent on the news — would hurt economies that rely on energy imports, and suppress consumer demand.
“Just when the market started to be relieved that trade war escalation risk has subsided, another risk-off event pops up seemingly from nowhere,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corporation in Singapore
A sharp rise in oil would have a significant negative impact on economies beyond the Middle East, as energy-dependent countries would see household income and spending hurt, and inflation could accelerate. As China is vulnerable; many European countries also rely on imported energy.
Emerging markets that dominate the list of oil-producing nations could earn greater revenues, helping to plug current-account deficits.
Still, Renaissance Capital chief economist Charlie Robertson said worries about higher energy costs linked to geopolitical turbulence have come and gone many times over the past decade.
“Strategic petroleum reserves are probably large enough in the US, China and the EU to cope with disruption to Saudi oil facilities or to the Straits of Hormuz,” he said.
In the aftermath of Friday’s assassination, London’s Brent crude rose as high as $69.16 a barrel, the highest price since the attacks on Saudi Arabian oil infrastructure in September.
However, the price has stabilised and it might take a more concrete hit for crude costs to remain elevated.
“If oil prices spike, the resulting high inflation is likely to derail economic recovery. For all the attention that the US-China trade war has garnered, it is a reminder that tail risks still exist in other pockets.”
— Bloomberg