LONDON — The fallout from two months of war in Iran is closing textile factories in India and Bangladesh, grounding planes in Ireland, Poland and Germany, and leading to energy rationing in Vietnam, South Korea and Thailand. It seems that the only country relatively spared from the economic chaos is precisely the one that started the conflict: the United States.
While recession warning signs flash in countries across Asia and Europe, the United States tends to outperform most of the world’s advanced economies. Growth is stable and unemployment is low. “It is still difficult to bet against the U.S. economy,” Royal Bank of Canada said.
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The United Arab Emirates, one of the richest countries in the world with sovereign wealth funds totaling more than US$2 trillion, asked the United States for financial help following missile damage to gas fields and the disruption of shipping in the Strait of Hormuz.
In just eight weeks — less time than it takes for a traditional English fruitcake to ripen — the outlook for the global economy has been profoundly shaken.
The worst economic impact will be felt in poorer countries, where consumers cannot afford higher energy prices and governments are unable to offer help to offset these costs. And as financing becomes scarcer, the cost of much-needed borrowing for these countries increases.
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The current spike in fuel and fertilizer prices means more expensive food throughout the year. In Africa, “food insecurity is a significant threat,” the International Monetary Fund said. In the Asia-Pacific region, millions of people are at risk of falling into poverty because of conflict, the United Nations Development Program has warned.
Many Asian countries already face fuel shortages, a situation that will only worsen as the war drags on, said Raghuram Rajan, an economist at the University of Chicago and former governor of India’s central bank.
“Shortages will start to hit more and more sectors,” said Rajan, who also held a senior role at the International Monetary Fund. In many countries, the real consequences are just beginning to be felt.
Energy stocks are running low, and some shipments have been interrupted. “The water is already warming up, the frog is in it and the temperature is rising,” Rajan said. “And now, more and more, you will see industries closing.”
Steel plants in India and automakers in Japan have reduced production due to higher energy prices and concerns about falling demand. Toy factories in China, already damaged by US tariffs, face the dissatisfaction of thousands of workers angry at the loss of jobs.
One morning last week in Firozabad, a city in northern India, workers milled aimlessly in an open-air labor market. “Because of the war, work has slowed down,” said Muhammad Waseem, a plasterer. He was negotiating with a potential employer who wanted to pay 500 rupees (R$26) for a construction service, much less than he usually earns.
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Aas Muhammad, 25, a worker who loads bricks and cement into trucks, walked about 8 kilometers from his home to the market. He would accept the 500 rupees, but even that amount would not yield much. A kilo of cooking gas that normally costs 80 rupees (R$4) now costs 200 (R$11).
Millions of other Indian workers who normally live and work in the UAE and Saudi Arabia, and who together send billions of dollars in remittances to their countries every year, are stranded abroad without work.
Shortages of other commodities that normally pass through the Strait of Hormuz, such as helium, aluminum and naphtha, are affecting the supply of a huge range of products, from condoms to microchips.
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Of course, the U.S. economy is not fully protected from the shock. Gasoline prices have risen by more than US$1 per gallon (3.78 liters) since the start of the war, acting as an extra burden on American consumers, especially those with lower incomes.
On Wall Street, banks have reduced their growth projections and raised their inflation projections since the start of the conflict, practically abandoning expectations of new interest cuts before the American autumn, at the earliest.
Still, compared to the rest of the world, the impact on the domestic economy was moderate. Consumption remains strong, layoffs remain low and analysts still project solid growth this year.
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Economists say it would take a much more significant increase in the price of oil — possibly as much as $150 per barrel — for serious concern about a possible recession in the United States to emerge.
That’s not the case in other regions, where the feared combination of slower growth and higher inflation is already raising warnings of stagflation.
Around the world, shortages and high prices are triggering a worrying cycle of reduced economic activity: high prices reduce demand for fuel and, in turn, lower demand reduces production, employment and consumption.
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German airline Lufthansa canceled 20,000 flights scheduled for this summer in the Northern Hemisphere. With the price of jet fuel having doubled, all of the world’s 20 largest airlines have cut at least part of their flights, according to Freightos, a digital transportation marketplace.
Fewer flights drastically reduce tourism and business travel, reducing spending in hotels, restaurants and commerce.
For the United States, the main advantage is that, unlike most of its global peers, the country produces more oil and gas than it consumes. That doesn’t mean it’s immune to what happens in global energy markets, but it helps cushion the impact.
The American economy is also heavily service-based and relies relatively little on energy-intensive manufacturing industries, which have been hit hardest by rising oil prices.
Furthermore, it entered the war with a stronger economy than many other countries, giving it greater protection against a downturn.
“We’re not feeling the same pain as the rest of the world,” said Jason Bordoff, founding director of Columbia University’s Center for Global Energy Policy.
“In a shock of this magnitude, physical shortages are appearing in Asia and gradually spreading to Europe,” he added. “We are the last to feel the effects.”
The impact on the US economy will increase if the war continues. Higher fuel prices will further drive up transportation costs, which could put pressure on the costs of other consumer goods.
“We don’t know how long this shock will last, and I think if it persists, we’ll probably be having a very different conversation six months from now,” said Ben Harris, an economist at the Brookings Institution who served as chief economist at the Treasury Department during the Biden administration.
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