Rising oil prices add to global economic strife

June 14, 2019

By Jonathan Cable

LONDON (Reuters) – Escalating tension in the Middle East is driving up oil prices, a huge import cost for many economies, putting more strain on global growth already hurt by the trade war being waged by U.S. President Donald Trump and weakening consumer confidence.

Crude oil prices spiked more than 4% after two oil tankers were attacked in the Gulf of Oman on Thursday, just a month after strikes on tankers in the United Arab Emirates and oil-pumping stations in Saudi Arabia.

Trump, meanwhile, has been fighting a trade war against China and is beginning to turn his attention to other trading partners, a policy likely to raise the chances of a recession both at home and abroad.

Global growth is already under threat from the trade war, slumping demand, Brexit and wider geopolitical uncertainty.

The last thing it needs is another serious problem.

“Adding to the ubiquitous trade tensions, an increasingly uncertain situation in the Middle East is arising after U.S. Secretary of State Michael Pompeo blamed Iran for attacks on two oil tankers,” UniCredit economists told clients.

Pompeo said the U.S. government believes Iran is behind the latest attacks, fuelling fears of a new confrontation between the two countries. Tehran has bluntly denied the allegation.

But even before the latest flare-up, Brent crude was expected to be more expensive this year as supply risks in the Middle East offset risks to demand from the U.S.-China trade spat, a Reuters survey showed last month. [O/POLL]

“We’re seeing markets broadly in the red around the globe on Friday with traders continuing to respond to developments in the Gulf of Oman, as the U.S. doesn’t hesitate to point the finger of blame at Iran,” said Craig Erlam at Oanda.

Investors have flocked to safe assets such as gold and the Japanese yen. Gold hit its highest level since April 2018 on Friday, according to EBS prices.

Higher oil prices also generally act as a drag on growth, accelerating production costs and reducing demand as consumers are less wealthy.

Therefore, major central banks are already lining up for a race to the bottom on interest rates as they battle to shore up their struggling economies.

The chances of a Federal Reserve interest rate cut this year have dramatically increased in the past month, while the European Central Bank has opened the door to more stimulus. [ECILT/US]

Borrowing costs have already fallen in India, New Zealand, and Russia.

On Thursday, the Bank of Japan will announce its latest policy decision – almost certainly no change – and may tweak its inflation and growth forecasts.

“The BoJ is likely to stay on hold at the upcoming policy meeting. The key focus will be whether the Bank provides any hint of imminent rate action with the JPY appreciating sharply,” HSBC economists said.

Britain’s Bank of England also meets in the week and economists polled by Reuters were unanimous in expecting no change there. If anything, its rates could be going up. [ECILT/GB]

Deputy Governor Ben Broadbent added his voice on Tuesday to reminders from the BoE it still wants to raise interest rates, echoing comments from two of his fellow policymakers.

Another Reuters poll said the median chance the next move from the BoE would be a hike was 60% and that rates would go up – although only by 25 basis points – in the third quarter of next year. [ECILT/GB]

(Reporting by Hugh Lawson; Editing by Hugh Lawson)

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