What does the Middle East conflict mean for global growth?

Middle East conflict sends shockwaves through oil, inflation and global growth: This is what Investec experts are thinking

In our latest Q&A, Investec experts Callum Macpherson (Head of Commodities), Philip Shaw (Chief Economist) and Chris Holdsworth (Chief Investment Strategist for Investec South Africa) explain what could happen if the Middle East conflict continues, what key indicators markets are watching and what risks to the global economy are already emerging.

From surging oil prices to rising inflation risks, the economic consequences of the escalating conflict with Iran are beginning to take effect. Specialists from Investec say the moderate resilience in equities masks deeper risks building beneath the surface, particularly if the disruption proves longer-lasting than analysts currently expect.

The most immediate and severe impact of the conflict has been in energy markets, where supply disruptions are already significant.

Impact on energy markets 

Callum Macpherson, Head of Commodities at Investec, points to the scale of the shock. “Something like 20 per cent of world supply is currently unavailable because of the war that’s going on, which is absolutely unprecedented,” he says.

Even if the conflict were to end quickly, the aftershocks would linger. “The degree of disruption to logistics, damage to infrastructure, and inventories that have been drawn down already, mean that it would be very difficult for the market just to snap back,” he adds.

If the war continues, the adjustment required could be extreme. “At some point we must face the reality that the demand for oil is going to have to be cut back. Cutting back demand by 20 per cent would need mobility and operations to reduce to a similar level as what we saw during Covid,” Macpherson warns.

Attempts to offset the disruption by the International Energy Agency may prove insufficient. A 400-million-barrel reserve release “helps, but it isn’t a solution,” he says. “If the war continues much longer, then this will clearly not be enough.”

In a prolonged scenario, prices could rise sharply. “The level at which oil would need to get to could be $150 per barrel plus,” he adds.

The impact is already impacting the broader economy, says Philip Shaw, Chief Economist. “With a 40 per cent surge in oil prices and spot natural gas prices nearly doubling, early signs of strain are emerging. “You can see the negative impact on confidence in the economy beginning to creep in,” he says, adding that sustained high energy costs would “hurt consumer spending” and weigh on investment.

Inflation risk 

If the shock persists, inflation could become more entrenched. “The danger is that energy costs result in higher pay settlements and what you see is the risk of permanently higher inflation,” Shaw warns.

That, in turn, would force central banks into tougher action. “If this persists, I think we’ll start to see inflation expectations shift up,” says Investment Strategist Chris Holdsworth. “At that point, you have to start to question the growth outlook for the global economy.”

Despite the scale of the energy shock, financial markets have so far remained relatively composed.

Holdsworth says this reflects expectations of a short-lived disruption. “Equities are down, but they’re only down by a couple of percent… markets are pricing in that the oil shortages will be very short-lived,” he explains.

But that positioning may be fragile. “If the conflict does persist a bit longer then it does suggest that there is some downside ahead,” he says.

Look beyond the headlines 

With uncertainty high, each expert is focused on key indicators that could signal how the situation evolves.

For Holdsworth, shipping flows are critical. “The first metric we’re monitoring is the number of ships passing through the Strait of Hormuz. We track that on a daily basis,” he says, alongside close attention to equity markets for signs of stress or opportunity.

Macpherson is looking beyond benchmark crude prices, warning that headline oil contracts can obscure tighter conditions elsewhere in the system. “The price of jet fuel has been particularly severely affected… we’ve seen prices the equivalent of something like $200 per barrel,” he notes, highlighting how refined products are already signalling more acute strain. He also points to the physical oil market, where cargoes from the Middle East to Asia are trading at elevated levels, suggesting real-world pressures.

Shaw, meanwhile, is watching the political backdrop closely. “I’m keeping an eye on President Trump’s approval ratings,” he says, noting that political pressure could ultimately shape the duration of the conflict. With midterm elections approaching in the US and approval ratings already at -15 any further deterioration in public support could force a shift in US strategy – and potentially accelerating a de-escalation and easing pressure on oil prices and inflation.

Ultimately, as Shaw puts it, “the longevity of the shock is critical.”

Important information: The views expressed are those of the contributors at the time of publication and do not necessarily represent the views of the firm and should not be taken as advice or recommendations.