THE war in Iran is driving up oil and gas prices, and as the global economy faces a shock from energy prices, a Goldman Sachs analysis finds the conflict is unlikely to lead to a broader supply chain crisis like the one that has occurred due to the COVID-19 pandemic.
Economists at Goldman Sachs found that the war in Iran is expected to lead to higher oil prices that would reduce global economic growth by 0.3 percent of GDP while increasing headline inflation by about 0.5 to 0.6 percentage points over the next year, with a more modest 0.1 to 0.2 percentage point increase in core inflation.
The report notes that risks are tilted toward greater impacts as long as the Strait of Hormuz remains closed to navigation. The strait is a narrow chokepoint through which maritime traffic from the Persian Gulf must pass to access global shipping lanes.
Goldman Sachs estimated that global central banks will be particularly sensitive to inflationary concerns following supply chain disruptions arising from the pandemic and played a key role in a surge in inflation. However, economists’ analysis considers the supply shock from the Iran war to be limited to energy and not the entire supply chain.
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Iran has carried out missile strikes against targets in the Middle East amid the conflict. (Reuters)
“However, a key difference between 2021-2022 and today is that today’s shock is more narrowly concentrated in the energy sector, whereas energy price increases in 2022 were just one aspect of a much broader global supply chain crisis and surge in inflation,” the report said. Goldman Sachs write the economists.
One of the reasons why the supply shock was limited to energy products is that most developed economies in the world have limited non-energy trade exposure to Middle Eastern countries.
The report reveals that less than 1% of imports to the United States and other developed markets such as the Eurozone, the United Kingdom, Japan and Canada come from Middle East. By comparison, China and East Asia account for more than 20% of global trade, Goldman’s analysis notes.
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One reason why the supply shock is limited to energy products is that most developed economies have limited non-energy trade exposure to Middle Eastern countries. (Giuseppe Cacace/AFP via Getty Images)
Another contrast to the supply chain issues of 2021-2022 is that fewer disruptions to essential inputs and “just-in-time” inventory management are expected, as the analysis found that potential Middle East exports are focused on certain chemicals and metals that are unlikely to create significant disruptions.
Goldman Sachs said methanol appears to be the most likely source of production disruptionsbecause it is used in the manufacture of acetic acid, which contributes to the production of industrial adhesives, solvents and paints.
Iran is responsible for about 20% of global production capacity, and while losing that supply could have a long-term impact, economists don’t see clear choke points at the moment.
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Ships transiting the Strait of Hormuz risk attack from Iran. (Fox News)
The third reason the company sees limited supply chain impacts beyond the energy sector is that the Middle East is not a large country. commercial center from where the products are re-exported.
Vessels such as yachts, tugboats and floating cranes are the main products re-exported from Middle Eastern countries.
“In summary, our analysis suggests that the major risk to global supply and inflation is confined primarily to energy, limiting the risk that the severe supply chain disruptions (and associated surge in inflation) and large second-round inflation effects seen in 2021-2022 will re-emerge,” Goldman Sachs economists said.
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