Kathy Gibson reports – Even if the conflict in the Middle East were to end tomorrow, the long-term impacts will continue to dog the world for months.
That’s the key takeaway from KPMG’s latest Global Economic and Geopolitical Outlook, which unpacked what some of the key impacts are from the war, and how businesses could pivot to weather them.
Stefano Moritsch, global geopolitics lead at KPMG, explains that the war has pushed the world into a prolonged and structurally unsound environment.
“Even the end of the conflict will not restore normality,” he warns.
He outlines three possible scenarios for how the conflict could play out:
- The base case is a cycle of deescalation and reescalation will see continued limitations on throughput in the Strait of Hormus and asymmetric strikes carried out by Iran to impose greater economic cost in an effort to pressure the US to end the conflict. Meanwhile, the US and Israel would sustain military posture, trying to deny Iran the ability to stop shipping, while degrading its missile and nuclear ability. While this is happening, there will be back-door diplomatic efforts by Pakistan. But disruption is starting to become embedded across multiple verticals, with investment appetite in the region softening.
- A best case scenario, which Moritsch warns is unlikely, would see a managed pause while the backdoor diplomacy prevails. This could lead to a resumption of shipping though the Strait of Hormuz, but it will recover only slowly and the threat of attacks will remain as long as there is a hostile government in power.
- The worst case is a scorched earth scenario with uncontrolled escalation. If there is no way to reopen the Strait of Hormuz even partially, the conflict could escalate to Iran’s energy infrastructure and retaliatory strikes on other Gulf nations’ infrastructure. “If this happens we can expect a severe global economic cost,” Moritsch says.
While diplomacy offers the best way forward, he points out that the players in the conflict all have widely divergent goals.
The US will docus on restoring stability and safe passage through the Strait of Hormuz, while limiting Iran’s capacity to be a regional threat. Israel is even more focused on neutralising Iran’s conventional military capability. And Iran is focused on preserving its regional power while keeping control of the Strait of Hormuz.
“There is very little overlap in their goals,” Moritsch says. “So it is hard to see how any potential deescalation could lead to a sustainable resolution.”
The core reality is that the global economy is deeply reliant on oil and gas. And, despite years of talking about derisking the environment, there is no viable substitute for the Strait of Hormuz. So global systems are quietly repricing to factor in the Strait being unusable in the long-term.
And now that Iran’s proxies in the region, particularly the Houthis, have started interrupting Red Sea shipping, the situation could escalate.
Another factor to be aware of is whether Iran can sustain its rate of fire, Moritsch says there are signs that missiles are starting to be depleted but the number of drones available to Iran appears to still be high.
Meanwhile, the US military posture points to the possibility of new developments or potentially convoys escorting shipping through the Strait of Hormuz.
Diane Swonk, America regional chief economist for the Americas at KPMG, points out that the knock-on effects of the oil and gas disruption are driving a supply chain shock that goes beyond the cost of energy.
As an example, she points to depleted supplies of helium, a key input for the production of micro-electronics. As a result, chip makers have switched to procucing only the highest-margin chips and memory.
Aluminium prices have also spiked.
For global markets these energy and supply chain shocks come on top of US tariffs, and put additional stress on the system, potentially leading to shortages and inflation.
In terms of energy supplies, the world has gone from an oversupply of oil and gas at the beginning of the year to a shortage of about 10-million barrels per day now. Because they cannot ship oil and gas, and have reached storage capacity, refineries in Saudi Arabia and the Gulf are starting to shut down – and they can’t be started up quickly once the conflict is over.
Some countries have been stockpiling oil and gas, but those that don’t have reserves or domestic capacity will quickly see impacts.
As a result of these issues, central banks around the world are looking to increase borrowing rates. Even countries that had expected cuts this year will reverse their position in an attempt to counter inflationary pressure.
A significant impact from the shortages and supply chain pressures will be a shortage of fertilizer, which will hit emerging markets particularly hard. The production of food will be more expensive with lower yields, and the cost of transporting it will be higher. This will further drive inflation up.
Africa will be hit particularly hard, says Yael Selfin, EMEA regional chief economist at KPMG.
“The conflict exacerbates energy prices across the region, and is particular acute for countries that rely on imports.”
And, although oil-producing countries may benefit from higher oil prices, Nigeria relies on imported fuel because it lacks sufficient capacity to refine oil itself.
Selfin points out that countries in sub-Saharan African are entering their planting season and are faced with shortages of fertiliser or increased costs.
She stresses that the current crisis will likely have significant longer-term implications for businesses, which need to keep those impacts top of mind.
Dr Brendan Rynne, APAC chief economist at KPMG, cautions businesses to stay steady. “If you panic there’s a likelihood you could lock yourself into bad decision that could extend the pain. Rather, take your time, understand the optionality you have, and apply decisions in a measured way.”
Swonk adds that this shouldn’t stop businesses from acting. “I have seen firms freeze. One of the hardest things to do is act, but you still have to move forward with plans. So don’t panic, but do take action.”
Moritsch points out that clarity is a luxury right now, and no-one really knows what to expect. “But agility could be a competitive advantage, so don’t wait on a perfect data environment.”