The renewed conflict between the US and Iran has shown the weakness that investors had hoped had disappeared. Brent crude oil shot to about $79 per barrel this week after Washington resumed its attacks and President Trump said that the ceasefire was over.
It is important to note that right before the renewed attacks, the Brent crude oil price was approaching its pre-war level. The fact that prices fell before the attacks suggests that markets rely on fragile agreements that can break at any time, as was the case here.
The IMF has already cut its forecast twice this year, reducing it from 3.1% to 3%. The growth is expected to rebound next year (it will reach 3.4%). The expected 32% rise in oil prices will lead to a 4.7% rise in consumer prices, making the situation even worse, as it means the deflationary period has been wiped out.
The original forecast assumes that the Strait of Hormuz will open up this month and return to pre-war conditions in March, an assumption that strikes have cast doubt on. IMF officials acknowledge that two conflicting forces influence the outlook: an energy shock from the war in the Middle East and a technology-driven investment boom, while the overnight escalation proves how fragile that balance is.
Different economies suffer from the war to various extents. The US economy is expected to grow at 2.3%, followed by the Eurozone at 0.9%, the UK at 1%, Canada at 1.1%, and Japan at 0.6%. Such a gap enables energy exporters to make even more money and reduces the chances of improved performance in energy-importing economies.
China is expected to enjoy 4.6% growth, driven by exports and technology, notwithstanding troubles in its real estate sector. Finally, nothing illustrates India’s economic suffering better than the rupee’s depreciation to below ₹95.5 per US dollar, while the Sensex fell by more than 2%.
The scale of capital outflows is frightening, as foreign portfolio investors withdrew $21 billion from Indian stocks in just two months. This year might turn out to be the worst in this regard since foreign investment began entering the Indian market in 1993. However, the fact that capital leaves the Indian market does not mean that investors flee from all risky economies; rather, it seems that they are shifting their capital to Taiwan and South Korea, two nations that receive fabulous profits from the demand for AI chips and with which India cannot compete simply because of a lack of semiconductor production.
According to Pankaj Murarka of Renaissance Investment, if oil prices remain around $85-95 per barrel, the Indian economy will face an additional $40-50 billion in capital outflows, cutting its GDP growth from 7.3% to 6.5%.
The shift to the defence and technology sectors makes good sense as a means of hedging against such a shock. But it demonstrates that investors are, in fact, starting to view the war as a long-term risk rather than just a regional event.
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