The war is drawn out at this point which leaves things uncertain. Policymakers think the biggest problem is not just the war but also there is no clear end and peace talks are uncertain. Uncertainty reduces investment and consumption. Higher energy prices go into global inflation. In the end slower global demand means there is weaker growth. Many officials are now worried about Stagflation which is high inflation with low economic growth. They say energy shocks push inflation up; uncertainty and higher cots push growth down. Some estimate that the inflation could rise to 2.5%, if these stays rising stagflation could occur.
Energy security is the main channel of impact. The biggest transmission mechanism is oil and flows which is through the strait of Hormuz. This is important because large share of oil passes through it. The risks that are brough up is the supply disruptions, shipping delays, and oil price spikes. These all have a impact with the global price shock.
Central bankers, politicians warn of global risks as Iran war drags on
Its shocking how much influence a relatively small area like the strait of Hormuz can have on the entire global economy. Think back to a few years ago when the Suez Cannel was blocked and prices shot up. Our economy seems so complex but a disruption in a specific location can really hurt the global economy. It would be interesting to study all the different locations like these.
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