War with Iran delivers another shock to the global economy

The war with Iran is another shock to the world economy The war with Iran is another shock to the world economy WASHINGTON (AP) — The war with Iran is causing collateral damage to the world economy. The conflict is driving up energy and fertilizer prices; threat of food shortages in poor countries; destabilize fragile states like Pakistan; and complicating the options for those fighting inflation at central banks like the Federal Reserve. Causing much of the pain: The Strait of Hormuz, through which a fifth of the world's oil passes, was effectively closed after the United States and Israel launched missile strikes on February 28 that killed Iranian leader Ayatollah Ali Khamenei. “For a long time, the nightmare scenario that deterred the United States from even thinking about an attack on Iran and that led them to urge restraint against Israel was that the Iranians would close the Strait of Hormuz,” said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund. "Now we are in the nightmare scenario." With a key shipping route cut off, oil prices have soared: from below $70 a barrel on Feb. 27 to a high of nearly $120 early Monday before stabilizing closer to $90. They have taken gasoline prices with them. According to AAA, the average price of U.S. gasoline has skyrocketed to $3.48 a gallon from just under $3 a week ago. Prices could be felt even more significantly in Asia and Europe, which are more dependent on Middle Eastern oil and gas than the United States. In India, restaurants are already warning of possible closures as the government prioritizes supplying gas to homes. Thailand suspended foreign travel for public officials and urged them to use stairs instead of elevators. The Philippines has introduced a temporary four-day work week for some government agencies, while Vietnam encourages people to work from home. 20 million barrels of oil are lost per day Every 10% rise in oil prices (provided they persist for most of the year) will increase global inflation by 0.4 percentage points and reduce global economic output by up to 0.2%, said Kristalina Georgieva, managing director of the International Monetary Fund. “The Strait of Hormuz must be reopened,” said economist Simon Johnson, of the Massachusetts Institute of Technology and winner of the Nobel Prize in Economics in 2024. “20 million barrels of oil pass through there a day. There is no excess capacity anywhere in the world that can fill that gap.” The global economy has shown it can take a hit, absorbing blows from Russia's invasion of Ukraine four years ago and President Donald Trump's massive, unpredictable tariffs in 2025. Many economists express hope that global trade could falter during the latest crisis. "The global economy has proven capable of shrugging off major shocks like broad U.S. tariffs, so there is room for optimism that it will prove resilient to the fallout from the war with Iran," said Eswar Prasad, a professor of trade policy at Cornell University. Timing is everything Especially if oil prices can fall back to the $70 to $80 per barrel range, wrote economist Neil Shearing of Capital Economics, “the global economy can absorb the shock with less disruption than many fear.” But many questions remain. "The question is how long is it going to last?" said Johnson, also a former IMF chief economist. “It is difficult to see Iran retreat now that it has announced this new leader” – Mojtaba Khamanei. The slain ayatollah's son is believed to be even more uncompromising than his father. Also clouding prospects for an end to the crisis is uncertainty about what the United States is trying to achieve. “This all has to do with President Trump,” J.