What West Asia now means for the global economy, markets

Ira Singh
Khabar Khabaron Ki,16 April’24

In recent years West Asia has emerged as a focal point of geopolitical tensions, economic shifts, and strategic realignments. This region, comprising countries such as Saudi Arabia, Iran, Iraq, and the Gulf states, holds significant sway over the global economy due to its vast oil reserves, geopolitical importance, and role in international trade. As dynamics in West Asia continue to evolve, it’s crucial to analyze the implications for the global economy and financial markets.

It is generally agreed that the longstanding tensions between Iran and Israel has seen a significant escalation with both countries accusing each other of attacks on their territory. The escalation has sparked fears of a wider conflict in the region, despite calls from other nations for restraint.

Regardless of what happens next, many feel that a significant line has now been crossed in an unsettled part of the world that has experienced tremendous human tragedy, especially in the last six months. What some had deemed a relatively contained disequilibrium in the Middle East has now transitioned to a perilously unstable disequilibrium involving many parties.

As global markets reopen for trading on Monday,renewed tensions in the Middle-East sent benchmark indices Sensex and Nifty into a tailspin on April 15. Most of the sectors came under pressure, with IT and banking indices emerging as the worst hit. However, analysts believe that the war woes are mostly priced in and investors will now take cues from corporate earnings season and 2024 general elections for further direction.

While analysts are hopeful of no further escalation, Israel has vowed to ‘exact a price’ from Iran in retaliation for the large- scale aerial attack.If it further escalates, it could disturb commodity supplies, especially oil and prompt investors to flee away from equities and seek refuge in safe-havens like gold, believe market experts.

What comes after that will be a function of whether the collective wisdom of traders and investors concludes that both Iran and Israel have sent a message to each other and thus feel that they have done enough for now. That is what international diplomacy, including Sunday’s Group of Seven meeting,aims to accomplish. However, they are dependent on the two countries’ assessment of the situation.

The global economy and financial markets have demonstrated resilience in the face of recent geopolitical tensions, with analysts suggesting that they are adequately positioned to absorb a one-time increase in the geopolitical risk premium. However, concerns mount over the potential consequences of further escalations involving multiple parties, which could significantly disrupt markets and undermine economic stability.

The energy price shock that would follow such further escalations would stifle the recovery in manufacturing that is helping countries such as Germany and the UK emerge from their technical recessions. It would complicate a US inflation picture that is already subject to price increases proving more stubborn than many, including the Federal Reserve, expected. It would make the structural reforms that China needs more difficult. And it would intensify the move toward greater international economic and financial fragmentation.