Energy markets: the most impacted
In the event of a significant conflict in the Middle East involving an actor such as Iran (responsible for about 4% of global oil production), black gold prices would be impacted, and it is through this channel that the global economy would be affected in turn. It is true that from 2011-2014, during the last sanctions against Iran, the price of the Brent barrel had turned 110 USD against 90 USD today. But it is also true that Russian production was present to compensate for the absence of Iranian production. Today, this is not the case.
We should, therefore, expect a shortage of oil in world markets, and, likely, this would first impact Europe. The United States is close to self-sufficiency in its energy supply. With the approach of a presidential election, it would not be surprising to see the imposition of export restrictions to ensure American consumer access to energy at still affordable prices.
As for China, it invests heavily in its production and will always have cheap oil from Russia. It is, therefore Europe, as well as others such as Japan or South Korea that would be the most affected, asked to go and get hydrocarbons elsewhere.
Inflation and migration
The problem with this expensive oil is that it inevitably leads to a rebound in inflation. And again, Europe would be the most affected. First of all, she would have the most difficulty to supply, which makes a guess a growth differential between Brent and the American WTI.
Secondly, it is lagging: inflation is higher in the European Union (4.9%) and the euro area (4.3%) than in the United States (3.7%) or in China on the verge of deflation (0.0%). The rebound in inflation means that central banks are forced to keep their key interest rates at higher levels longer, which hardly does the business of a weak European economy, which narrowly escaped the recession at the beginning of the year.
Another challenge must be added: the wave of refugees that would inevitably follow a conflict in the Middle East. As usual, it would be first in the other countries of the region (Jordan, Egypt, Lebanon, Syria, Turkey) that the victims of a conflict would seek refuge.
But in a Europe where the theme has become delicate, even the arrival of a small part of these refugees on our shores would be enough to revive many debates and radicalize opinions.
The one too many?
Taken in isolation, the conflict in the Middle East would not be likely to plunge the European economy into recession, let alone the global economy.
But both are in a real obstacle course. Barely recovered from a pandemic that strongly impacted production chains and weakened public finances, they faced a sharp rise in inflation that led to a sharp increase in credit. Let us add to this a war in Ukraine, one of the consequences of which has been the profound overhaul of the energy supply, especially in Europe.
Therefore, the European and global economies are pretty weakened, and 2024 was a delicate year in any case: Higher interest rates, longer, associated with the growing debt of recent years, will make investors, Businesses, households and governments face much higher debt burdens. This will weigh on new credits – which should force a slowdown in investment and spending – but also on existing credit financing (or refinancing).
The keys to resilience threatened
If credit inflation is a problem, it is because it affects two of the three pillars that have kept the global economy afloat in recent years.
First is the surge in public spending, which helped support consumers and businesses during the height of the pandemic and the following period. This boosted our economies, keeping them afloat when the economic activity downturn seemed the most likely outcome.
Public aid has also helped to keep the labour market in good shape by assisting businesses. Despite an economy that has struggled to grow for a year, the unemployment rate in the eurozone was only 6.4% in August, a historic minimum. In the United States, it is only 3.8%. And since the job market is doing well and labour is scarce, companies are forced to adjust wages. This limits the loss of purchasing power caused by high inflation.
Finally, household savings accumulated during the pandemic are the last pillar of the global economy's resilience. Restrictions imposed in 2020 and 2021 have enabled households to push savings to exceptionally high levels. If the wool is rapidly draining in the United States (the savings rate is only 5.2%), it remains high in the eurozone (which has even risen to 14.8%). Enough to offer households the margin necessary to continue consuming.
The conflict in the Middle East represents a new challenge for an economy that has been fighting for several years and is, therefore, quite weakened. Surprisingly, it managed to stay ahead in 2023, driven by public spending, an excellent job market and significant savings in the aftermath of the pandemic, which enabled households to cushion the inflationary shock and limit the loss of purchasing power.
The year 2024 promises to be just as delicate, marked by expensive credit that should force the postponement of many investment projects and increased debt charges. With these realities, growth was expected to be at least disappointing, close to 1% on both sides of the Atlantic.
A conflict that would escalate in the Middle East – which no one wants – could wipe it out in the US and precipitate a European recession.