The economic fallout from the war in Iran is putting pressure on consumers and businesses around the world, driving up the price of essential items like food and fuel.
“While war can shape the global economy in different ways, all paths lead to higher prices and slower growth,” wrote the IMF’s (International Monetary Fund) top economists.
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Last week, signs of tension could be seen in new projections of a sharp rise in poverty across the Arab world, a big jump in inflation in Europe and new highs in gasoline prices in the United States.
The effects are especially heavy for poor countries, which have fewer resources. Nations in Africa, South Asia, Latin America and parts of the Middle East that import most of their energy face great difficulties in meeting skyrocketing costs.
For these economies, the effect is like “a large and sudden income tax”, explained IMF economists.
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Still, even if countries manage to raise funds, supplies of oil, gas and many other crucial commodities may not be available because of Iran’s effective blockade of the Strait of Hormuz, a key shipping route, as well as damage to energy infrastructure across the Gulf region.
About a third of the world’s fertilizers are transported through the Strait of Hormuz. As planting season begins in the Northern Hemisphere, fertilizer shortages now could result in weaker harvests and higher food prices in the future.
Shortages of other materials produced in the Persian Gulf, including helium, sulfur and naphtha — used in plastics processing — could slow industrial production, reducing growth in some countries.
For many people in the Middle East, the prospect is particularly worrying. A new United Nations report estimates that the war could push an additional 4 million people in the Arab world into poverty and reduce the region’s output by well over $100 billion.
In Europe, higher energy prices caused by the war have helped drive up inflation in the 21 countries that use the euro, raising concerns that central banks could raise interest rates if prices continue to accelerate.
Euro zone consumer prices rose at an annual rate of 2.5% in March, the fastest pace in a year, the bloc’s statistics agency said on Tuesday. In February, the increase was 1.9%.
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Christine Lagarde, president of the European Central Bank, said last week that policymakers were prepared to raise interest rates if inflation remained above the bank’s 2% target.
In the United States, the average price of gasoline exceeded US$4 per gallon last week, a level that had not been reached since August 2022. Since the end of February, the average cost of regular gasoline has jumped 35%, according to data from the automobile association AAA.
Seeing gasoline above $4 per gallon — when it was below $3 a month ago — could prompt American drivers to change their drinking habits.
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Low- and middle-income families are those who feel the pinch most. The disproportionate impact is making the U.S. economy even more unequal and dependent on the consumption of high-income people, rating agency Moody’s said.
Uncertainty about how long the war will last and how severe the damage to energy infrastructure in the region could be is leaving governments, businesses and consumers apprehensive.
Some authorities have taken steps to reduce consumption — including asking the public and civil servants to use bicycles instead of cars, take stairs instead of elevators, and work four days instead of five.
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There are some winners amid the economic turmoil. Oil-exporting countries that are able to deliver their product — including Iran and Russia — are reaping extraordinary profits from higher prices.
Now that the United States has lifted some sanctions against these two nations, both can use the inflow of resources to finance their war efforts.
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