Warning bells went off in financial markets the instant the extent of the deadly Hamas attack on Israel became apparent – and it is easy to see why.
One of the rules of thumb of geopolitics is that recessions are sparked by a sharp jump in oil prices, and the cost of crude is sensitive to events in the Middle East.
Little wonder then that the war between Israel and Hamas has meant scenario planners have been working to answer the question being asked by finance ministers and central bank governors from around the world: how bad could it get?
Kristalina Georgieva, the managing director of the International Monetary Fund, said last week that analysts at her organisation had been “thinking the unthinkable” in an attempt to plan for the next big shock to the global economy.
In truth, the risk of what at present is a localised – if horrific – conflict in Gaza – turning into something far more serious does not really fall into the category of the “unthinkable”. There are plenty of historical precedents.
It was presumably no coincidence that Hamas chose a week last Saturday to launch an attack, since it was – almost to the day – the 50th anniversary of the start of the Yom Kippur war, a joint assault on Israel by Syria and Egypt that brought the global postwar boom to an end.
Israel’s counteroffensive in 1973 prompted an oil embargo from the Opec cartel, which resulted in a fourfold increase in the price of crude, spiralling consumer prices and a huge increase in business costs. Higher inflation was rapidly followed by higher unemployment. A new word was coined to describe a mixture of a soaring cost of living and a collapse in growth: stagflation.
Opec is no longer such as dominant a force and the global economy is not as dependent on oil as in the early 1970s. The Center on Global Energy Policy at Columbia University in New York noted that five decades ago, the world used a little less than one barrel of oil to produce $1,000 worth of gross domestic product. By 2019, the figure was 0.43 barrels – a 56% decline. “Oil has become a lot less important and humanity has become more efficient in making use of it,” the research centre said.
That said, oil still matters, which is why events in the Middle East are being so carefully monitored.
The first scenario – and the best-case one for the global economy – is that the war is contained to an Israeli ground assault on Gaza Strip. In those circumstances, oil prices would stabilise at about their current level of $93 (£76) a barrel and could soon start to fall back. The IMF estimates that a sustained 10% increase in oil prices shaves 0.15 percentage points off global economic growth and adds 0.4 points to inflation in the following year. On the world’s commodity markets, the cost of a barrel of crude is now about 10% higher than it was before the Hamas attack.
The second scenario involves a broader regional conflict, starting with fighting on Israel’s northern border with Iranian-backed Hezbollah forces in Lebanon, but eventually dragging Iran into the conflict. The arrival of US carrier groups in the eastern Mediterranean suggests Washington is making contingencies for this.
Nicholas Farr, an economist at the research firm Capital Economics, said: “Iranian-backed Hezbollah has exchanged missile fire with Israel from Lebanon, which has the potential to open up a new front in the conflict. If Iran were drawn into the war this would create major global risks by disrupting energy supplies and pushing up oil prices. Natural gas prices could be affected too if there’s disruption to LNG [liquefied natural gas] exports.”
Writing for the OMFIF thinktank, the economist and crossbench peer Meghnad Desai, said he could envisage a broader regional conflict in which Lebanon, Egypt and Syria, as well as other Arab states became embroiled. In those circumstances, Lord Desai said the oil price could approach $150 a barrel, sending inflation back into double digits in the US and Europe. The threat of global recession would prompt central banks to cut interest rates and restart quantitative easing programmes.
For oil to reach $150 a barrel, the flow of crude on to global markets would need to be interrupted, probably by the closure of the strait of Hormuz through which almost 20% of the world’s supply flows daily. Bjarne Schieldrop, the chief commodity analyst at the Nordic financial services group SEB, said: “The fear is that the conflict might spiral out of control and eventually lead to real loss of supply, with Iran being most at risk.” According to Schieldrop, geopolitical risk premiums of the sort seen in recent days tend to be short-lived unless actual supply disruptions occur.
Saudi Arabia, the world’s biggest oil exporter and Opec linchpin will have a critical role to play. It has an interest in keeping the cost of crude high, but not so high that it causes a deep global recession because that would result in oil prices collapsing. There will be pressure on Riyadh – from Washington and elsewhere – to keep oil flowing.
Finally, there is the doomsday scenario – sketched out by the historian Niall Ferguson – in which China takes advantage of the crisis to impose a blockade on Taiwan and by doing so escalates a regional conflict in the Middle East into a third world war. Even if fought by conventional methods, a military conflict between the world’s two biggest economies would lead to a severing of global supply chains, a blow to confidence and crashing asset prices. It would have catastrophic economic consequences, up to and including a second Great Depression.
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
