Posthaste: How the Iran war could throw the world into one of the worst recessions in 40 years
The Iran war has sparked what the International Energy Agency has called the biggest energy supply disruption in history, and as the conflict continues economists are scrambling to gauge its impact on the global economy.
After talks broke down over the weekend, there are fears a U.S. blockade of the Strait of Hormuz could widen a war now entering its seventh week.
The IEA’s base case assumes oil will start flowing again by midyear, but it also presented a scenario with a longer disruption.
“In this case, energy markets and economies around the world need to brace for significant disruptions in the months to come,” it warned.
Oxford Economics developed its own model for a prolonged Iran war and “the results are sobering.”
In this scenario oil prices remain above US$150 for four months, pushing global inflation to 7.7 per cent, close to the last peak in 2022.
“But unlike 2022, when the global economy kept growing through the price shock, the severity of this disruption tips the world into outright contraction,” said Oxford.
Alternative routes to the Strait of Hormuz such as Saudi Arabia’s pipeline to the Red Sea come under attack and more energy facilities in the region are targeted, resulting in production taking longer to recover after hostilities cease.
The loss of almost 20 per cent of the world’s oil supply leads to shortages in the second half of 2026, hitting economic activity in transportation, agriculture and industry.
Stock markets, whose reaction has so far been moderate, fall 20 per cent into a bear market, which in turn lowers consumer spending.
Global recessions are rare, the last two occurring during the financial crisis early in the century and then the pandemic.
“While less severe than the pandemic or global financial crisis, the hit to growth would represent a larger, more co-ordinated slump than any other global downturn of the past 40 years,” said Ben May, director of global macro research at Oxford Economics.
And severe as this scenario sounds, it could get worse.
Oxford said if fuel shortages are larger than predicted, core inflation could rise, making the Federal Reserve’s interest rate trade-off more difficult.
Another bout of high inflation so close to the post-pandemic surge could cause expectations to creep up, resulting in higher inflation risk premia for long-dated debt and increasing borrowing costs.
The crisis could also trigger a pullback in artificial intelligence investment in the United States — either through semiconductor shortages or tighter financial conditions — which would deepen the downturn.
For now it’s wait and see.
“The world is not yet in this scenario. But the mechanisms that would take us there are very much in play,” said the economists.
Spring is traditionally the busiest time for real estate and this year, the stakes couldn’t be higher. Follow our Spring Real Estate Survival Guide series as we unpack some of the most pressing questions buyers and sellers are grappling with, plus expert advice on how to navigate the reality of a slower market. Read the series here
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Canadian consumers are running on empty, spending data shows, as rising gas prices push the cost of living even higher. Canadians spent 8 per cent more at gas stations in March as gas prices jumped 23 per cent amid the Iran conflict.
But according to TD Spend data , we’re spending less at supermarkets and on travel and recreation, suggesting that households are tightening their budgets to offset fuel costs, said Toronto Dominion economist Maria Solovieva.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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