Middle East: Economic effects could worsen

The escalation of the conflict in the Middle East is causing shockwaves in global markets, with repercussions that go far beyond the region's borders. The increase in the price of oil seems to be the most immediate economic consequence, but there are others, such as inflation. Nascer do SOL spoke to three experts to try to understand what the main consequences are and what to expect from now on, although uncertainty is the key word.

Paulo Monteiro Rosa, an economist at Banco Carregosa, begins by recalling that since Israel's attack on Iranian nuclear bases on June 13, the price of Brent oil "has risen significantly".

At that time, the economist recalls that the price was at 67 dollars per barrel, having reached 78 dollars last week, driven by the conflict. «There was fear of a further worsening with the US attack on Iranian nuclear plants last weekend, especially regarding the possibility of blocking the Strait of Hormuz – through which approximately 20% of daily global oil consumption passes, representing around 25% of the world's maritime trade in black gold». However, «investors remained calm and the price did not worsen». With the announcement of a truce and the easing of hostilities, the price fell back to 68 dollars. «Even so, it remains above the approximately 60 dollars of early May, reflecting fears of a global economic slowdown», details Paulo Monteiro Rosa.

Thus, when asked about the main economic consequences of this war at a global level, the economist has no doubts: «Instability in the supply of oil and gas, the increase in energy prices, volatility in financial markets, disruptions in supply chains and a possible and growing slowdown in global economic growth», warning that the war could also «aggravate trade and geopolitical tensions between major powers».

However, Vítor Madeira, an analyst at XTB, states that at this moment, the main economic threats arising from this conflict “are largely mitigated”, recalling that Donald Trump's recent statement, suggesting a truce between the parties involved, “has almost completely reduced the geopolitical risks that previously worried the markets”.

Among the threats initially identified, Vítor Madeira said, “the possibility of Iran developing or using nuclear weapons stood out, which would represent a systemic risk to regional and global stability”, but this is a scenario that “has been ruled out at this time”. And also the blockade of the Strait of Hormuz, “a critical route for around 20% of global oil trade”. “The current stability in naval movements and the cooling of tension reduce this possibility to levels close to zero”, he added, detailing that “taking into account the rapid and effective diplomatic and military response, the global economic effects should be limited and temporary”.

Ricardo Evangelista, CEO of ActivTrades Europe, also believes that the economic consequences of this war are currently “limited”, but warns that “they have the potential to escalate rapidly”. The closure of the Strait of Hormuz is the main concern at the moment. “A scenario of this nature would have immediate consequences on energy prices, inflation and economic growth, in a context already marked by other geopolitical uncertainties and tariff threats”, he warns.

Portugal with 'marginal effects' We also tried to understand how Portugal could be affected by these consequences, taking into account that we already saw a large increase in fuel prices last week.

Paulo Monteiro Rosa argues that our country has already begun to feel these effects. “The persistence of instability in the Middle East could keep energy prices high, putting pressure on inflation and reducing household purchasing power,” he warns, adding, however, that “with the fall in prices in recent days and the appreciation of the euro against the dollar, which reached 1.17 – the highest value since September 2021 – it is likely that fuel prices will fall again next week.”

The expert argues that the increase in prices at the pumps at the beginning of this week «is a direct result of the rise in Brent to 78 dollars, driven by the worsening of tensions between Israel and Iran since June 13» and that «although prices have already begun to fall with the easing of hostilities and the appreciation of the euro, the war was the main factor that triggered this recent rise».

In turn, Vítor Madeira believes that, for our country, “the impacts will be marginal”, arguing that the main immediate effect “was the one-off increase in fuel prices, reflecting the speculative movement in international energy markets”. However, with the stabilisation of the conflict and the strong correction in the price of Brent “which fell by more than 15% in just three days, it is expected that consumer fuel prices will correct quickly, reversing the initial rise”. Ricardo Evangelista warns: “Portugal, as a net importer of energy, is particularly sensitive to fluctuations in the prices of energy raw materials, which end up being reflected in the price that consumers pay for fuel”. In the expert’s opinion, although the recent increase in the price of oil “was motivated by the fear of an escalation in the conflict that would lead to the closure of the Strait of Hormuz, this movement has since been reversed, as both parties have shown their willingness to respect the ceasefire. At this time, the closure of the strait is considered unlikely.”

And what happens from now on? Unpredictability is the watchword at this point. And knowing what will happen from now on is difficult because everything depends on the actions of both countries and even the US.

Paulo Monteiro Rosa explains that if the geopolitical context in the Middle East stabilizes, “it is expected that the price of a barrel of oil will resume its downward trend, reflecting the global economic slowdown and the increase in supply by OPEC+”.

In turn, Ricardo Evangelista is of the opinion that, in this context, «the baseline scenario points to an easing of tensions, which could translate into greater stability and even a further drop in the price of a barrel». The expert says that, in this sense, «we can expect some volatility in the energy markets – which will continue to be attentive to any sign of deterioration on the ground – but with a bias towards further declines in the short term».

If this scenario is confirmed, “it will be positive for the Portuguese economy, alleviating production and transport costs and family budgets”.

Inflation and energy These are two other issues that are of concern in the case of the war in the Middle East. But, at least for now, there do not seem to be any major problems. In the case of energy, Vítor Madeira says that “unless a new factor emerges to impact global markets – based on the current data and context – no significant impact is expected on electricity prices or the energy sector in general”.

As for inflation, Paulo Monteiro Rosa states that “if the downward trend in Brent continues and the euro continues its upward trend against the dollar, a reduction in pressure on energy prices is expected, which could dispel fears of a new acceleration in inflation”. However, the economist warns that “as long as geopolitical risks persist in the Middle East, there is always the possibility of new instability in the markets and a possible increase in inflation”.