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The war in Iran is pushing oil and gas prices higher, and while the world economy faces a shock from energy prices, an analysis by Goldman Sachs finds that the conflict is unlikely to lead to a broader supply chain crisis like what occurred due to the COVID-19 pandemic.
Economists at Goldman Sachs found that the Iran war is expected to lead to higher oil prices that will reduce global economic growth by 0.3% of GDP while increasing headline inflation by about 0.5 to 0.6 percentage points over the next year, with a smaller 0.1 to 0.2 percentage point boost to core inflation.
The report noted that risks are skewed toward larger impacts as long as the Strait of Hormuz remains closed to shipping. The strait is a narrow choke point that shipping traffic from the Persian Gulf must pass through to access global sea lanes.
Goldman Sachs assessed that global central banks will be particularly sensitive to inflation concerns in the wake of the supply chain disruptions that occurred due to the pandemic and were a key contributor to a surge in inflation. However, the economists’ analysis sees the Iran war supply shock as being limited to energy as opposed to the broader supply chain.
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“A key difference between 2021-2022 and today, however, is that today’s shock is more narrowly concentrated in the energy sector, whereas the energy price increases in 2022 were only one aspect of a much broader global supply chain crisis and inflation surge,” the Goldman Sachs economists wrote.
One of the reasons for the supply shock being confined to energy products is that most of the developed economies around the world have limited non-energy trade exposure to countries in the Middle East.
The report found that less than 1% of imports to the U.S. and other developed markets like the Eurozone, the U.K., Japan and Canada come from the Middle East. By comparison, China and East Asia account for more than 20% of global trade, Goldman’s analysis noted.
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Another contrast with the 2021-2022 supply chain issues is that fewer disruptions of critical inputs and “just in time” inventory management are anticipated, as the analysis found the Middle East’s potential bottleneck exports are focused on certain chemicals and metals that are unlikely to create significant disruptions.
Goldman Sachs said methanol appears to be the most likely source of production disruptions, as it’s used in making acetic acid, which helps produce industrial adhesives, solvents and paints.
Iran is the source of about 20% of global production capacity and while the loss of that supply could have an impact over the longer term, the economists don’t see clear choke points at this time.
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The third reason the firm sees limited supply chain impacts beyond the energy sector is that the Middle East isn’t a significant trade hub where products are re-exported from.
Vessels such as yachts, tugboats and floating cranes are the main goods that are re-exported from Middle Eastern countries.
“In summary, our analysis suggests that the major risk to global supply and inflation is mostly confined to energy, which limits the risk that the severe supply chain disruptions (and associated surge in inflation) and large second-round inflation effects observed in 2021-2022 will re-emerge,” the Goldman Sachs economists said.
