Israel-Iran, all the impacts on the economy and finance
Tensions between Israel and Iran represent a risk factor for markets, but it is too early to talk about a lasting impact on the global economy. Analysis by Richard Flax, Chief Investment Officer of Moneyfarm
Last week the spotlight remained on monetary policy and geopolitics. On the first front, President Powell tempered expectations of an imminent interest rate cut by the Fed by underlining that, while the US economy remains solid, progress in containing inflation is proceeding more slowly than expected. The markets reacted: the yield on 10-year Treasuries began to rise again, while Futures began to price in just one rate cut in the United States this year, compared to the seven expected at the end of 2023.
THE REACTION TO POWELL'S COMMENTS
Powell's comments have sparked debate about why the U.S. economy is proving so resilient. Several possible hypotheses have been put forward, all probably related to each other: the first, as Bloomberg explains, is that higher rates mean that American families are obtaining a return on their savings for the first time in years, thus managing to support the the economy and to stimulate domestic demand (despite the dominant macroeconomic thinking that high rates slow down growth). The second explanation – which draws from the International Monetary Fund's semi-annual report on the economy – is that current US growth is actually fueled by public spending and fiscal incentives, therefore a model that is not sustainable in the long term. As can easily be understood, the American government does not embrace this view, but it now seems clear that we will not see a change in fiscal policy, at least not before the presidential elections.
THE SITUATION IN THE EUROZONE
The situation in the Eurozone is different: here growth is weaker and inflation is closer to the 2% target, so the ECB should be in a position to cut rates before the Fed, with a consequent improvement in the outlook on global growth for the rest of 2024 and 2025. Halfway between the EU and the US is the United Kingdom, where growth remains anemic and inflation above target, although the prospect of a rate cut in the short term is more likely than in the United States.
THE CONSEQUENCES OF THE ISRAEL-IRAN CRISIS
As regards the escalation of the conflict in the Middle East, although financial markets have a tendency to overlook geopolitical uncertainties, the prospect of an expansion of hostilities does not fail to raise concerns, especially if two risk factors are considered. The first is market sentiment, since during crises investors liquidate risky assets and invest in “safe haven assets”, such as gold or government bonds. This sentiment can change quickly, in either direction. The second is the macroeconomic impact, with the risk of slower growth and higher inflation, driven by a combination of sentiment and supply chain pressures.
The current situation remains very uncertain, but it is too early to conclude that there will be a long-term impact on the global economy. Geopolitics are complicating the short-term outlook and have weighed on market performance in recent days, as well as the challenges policymakers face as they seek the balance between inflation and growth.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/crisi-israele-iran-conseguenze-economia-finanza/ on Sat, 27 Apr 2024 05:30:47 +0000.