Concerns over the impact of the war in Iran on the global economy heightened on Monday as new countries announced emergency support measures to counter the surge in energy costs, while others called for international aid.
The conflict – the third major shock to hit the global economy after the COVID pandemic and Russia’s invasion of Ukraine – will dominate discussions among financial officials gathered this week at the International Monetary Fund in Washington.
Any lingering hopes of a rapid resumption of oil shipments through the Strait of Hormuz, a crucial chokepoint, were dashed after talks between the United States and Iran failed over the weekend, further jeopardizing a fragile ceasefire.
The IMF and World Bank have already indicated that they will lower their global growth forecasts and increase their inflation projections due to the war, with emerging markets and developing countries being hit the hardest.
Nigeria stated on Monday that it would need increased international support to cope with rising fuel costs domestically, despite the boost in foreign currency earnings for Africa’s largest oil producer due to the surge in oil prices.
“This shock comes at a critical transition point, intensifying inflationary pressures and raising the cost of living for households,” said Finance Minister Wale Edun in a statement preceding this week’s meetings in Washington.
Local gasoline prices have surged by over 50% and diesel prices by over 70% since the start of the conflict, added Mr. Edun, warning that this shock could derail efforts launched in 2023 to stabilize the economy and reignite growth.
FEW COUNTRIES IMMUNE TO ENERGY SUPPLY DISRUPTIONS
Few countries have been immune to the aftershocks of the energy supply halt through the strait since the war broke out on February 28, causing the worst disruption to global supply ever recorded. Dozens of governments have already taken steps to conserve energy or support consumers.
The German coalition government, which initially resisted calls for support, announced on Monday that it had agreed to reduce fuel prices for consumers and businesses by 1.6 billion euros (1.9 billion dollars) through tax cuts on diesel and gasoline.
“This war is the root cause of the issues we are also experiencing in our own country,” said Chancellor Friedrich Merz at a press conference.
The Swedish government also disclosed plans to cut fuel taxes and increase subsidies for electricity as part of a plan worth around $825 million.
“This is a sign that we will do whatever is necessary to… mitigate the shock for households in light of what is happening right now,” said Finance Minister Elisabeth Svantesson to reporters.
British Finance Minister Rachel Reeves is expected to outline later this week her approach to helping businesses grappling with high energy prices. In an article for the Sunday Times, she wrote that British industries had been facing uncompetitive energy prices for too long.
Moreover, Prime Minister Keir Starmer referenced global conflicts to explain his government’s plans to realign with the European Union and its single market ten years after the country’s Brexit vote.
“We are in a world of massive conflicts and great uncertainty, and I am firmly convinced that the UK’s higher order lies in a stronger and closer relationship with Europe,” he told BBC radio.
The war in Iran is also reshaping the policies of central banks worldwide, with policymakers trying to assess how it will weigh on economic growth while exacerbating inflation – potentially simultaneously, which would constitute a dreaded episode of “stagflation.”
European Central Bank Vice-President Luis de Guindos said on Monday that any ECB rate hikes would depend on how the rise in crude oil costs would impact prices across the economy.
The Bank of Japan policymakers are also keeping all options open ahead of their monetary policy meeting this month, although the likelihood of a rate hike, once seen as very probable, is dwindling.
[Context: Impact of the war in Iran on the global economy. Fact Check: Countries announce support measures due to surge in energy costs caused by the conflict.]
