Gauging the economic impact of events in the Middle East
Recent days have seen sharp declines in equity markets, risk aversion and fears on inflation driving significant moves in financial markets. For now, commodity markets see disruption to Middle East energy supply to likely be temporary, futures contracts for oil and natural gas falling back through 2026. However, bond markets have taken a less sanguine view, 3-year swap rates rising by 15-20bps in recent days, with expectations for Central Bank rate cuts pared back markedly. Notably, options prices now imply a 20% probability the ECB will hike rates once by end-2026. However, with markets in flux these views may quickly change as events unfold.
The key issue is how long the period of political uncertainty, military action and disruption to energy supply in the Middle East persists. The Middle East represents 2% of Irish merchandise goods exports and 3% of imports. However, higher energy prices may lead us to revise up our forecast for CPI inflation slightly, hurting real incomes, but with high savings likely utilized to sustain consumer spending. Many firms could be affected by supply-chain issues, or higher costs, especially if Asian imports are affected by disruption to the Strait of Hormuz. That said, both Ireland and the global economy have proved resilient to the range of geo-political uncertainties presented by the Trump Presidency, including the imposition of tariffs.
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