Any extension of the conflict in Iran risks triggering an unprecedented crisis in energy supply which, sooner or later, will impact every segment of the global economy.
It is clear that some countries are more exposed to this impact or are less equipped to deal with it. Here are the economies to watch closely.
THE MAJOR POWERS OF THE G7 The focus first turns to Europe. A new energy shock revives painful memories in the region of Russia’s invasion of Ukraine four years ago. This event highlighted its dependence on imports and propelled inflation to double digits.
GERMANY – Its heavily industrialized economy has more to lose from an energy price increase. Its manufacturing sector has just stopped contracting for the first time since 2022. As an exporter, Germany is also exposed to any global slowdown.
ITALY – It also has a significant manufacturing sector. Additionally, oil and gas represent a large share of its primary energy consumption in Europe.
UNITED KINGDOM – Its electricity production is more reliant on gas-fired power plants than other major European economies. Gas prices almost systematically dictate electricity prices in the UK, and they are rising faster than oil prices since the start of the war.
A cap on energy prices will limit the initial inflationary impact. The risk is that this could lead to interest rate hikes, leaving the UK with the highest borrowing costs in the G7 for an extended period in the face of rising unemployment. Budgetary tensions and pressure on the bond market limit its options to support businesses and households.
JAPAN – Also on the front lines, the archipelago gets about 95% of its oil from the Middle East, with almost 90% passing through the Strait of Hormuz.
This situation adds to the inflationary pressures already present due to the weak yen, impacting food and essential products prices, given Japan’s heavy reliance on imports of raw materials.
THE HEAVYWEIGHTS OF EMERGING MARKETS
The Gulf region will inevitably face a direct economic backlash. Some analysts are already predicting an economic contraction this year, reversing the solid growth prospects before the war.
The surge in oil and gas prices offers little relief if the effective closure of the Strait of Hormuz prevents countries – including Kuwait, Qatar, and Bahrain – from sending their hydrocarbons to international markets.
The conflict could also affect the remittances of expatriate workers to their families, who inject tens of billions of dollars into local economies every year.
INDIA is another heavyweight profoundly exposed. It imports about 90% of its crude oil and nearly half of its liquefied petroleum gas (LPG). Around half of this oil and an even larger part of its LPG must pass through the Strait of Hormuz.
Economists are already revising down the country’s growth forecasts, and the rupee has plunged to a historic low. In Indian restaurants and households, hot dishes and drinks – even samosas, dosas, and tea – are disappearing from menus as the surge in gas prices leads to informal rationing.
TURKEY – Sharing a border with Iran, it is preparing for a potential influx of refugees and increased geopolitical uncertainty. However, the major economic impact has been felt at the central bank level.
The central bank is reliving past nightmares of inflation crises. It was forced to halt its rate-cut cycle for the second time in a year and sold up to $23 billion of its precious reserves to support its currency.
THE VULNERABLE ECONOMIES
There are a handful of countries that appear particularly vulnerable, all having recently endured – or teetering on – major economic crises.
SRI LANKA has just established Wednesday as a public holiday to limit energy costs. Schools, universities, and public institutions are closed, non-essential public transport suspended, and drivers must now register to obtain a “National Fuel Pass,” restricting fuel purchases.
PAKISTAN, which was on the brink two years ago, has raised petrol prices and closed its schools for two weeks. Administrations have seen their fuel allocations halved, are forbidden from buying new air conditioners or furniture, and have been ordered to immobilize part of their vehicle fleet.
EGYPT – In addition to soaring fuel and staple food costs, the country faces the prospect of a sharp drop in Suez Canal and tourism revenues, the latter being worth nearly $20 billion last year. Servicing its debt, mainly in US dollars, has become even harder after a currency drop of over 9% since the conflict began.
