A prolonged conflict in the Red Sea and escalating tensions across the Middle East risk having devastating effects on the global economy, reigniting inflation and disrupting energy supplies, some of the world’s leading economists warn this weekend.
Before a statement expected on Monday by Rishi Sunak in the House of Commons about UK and US airstrikes on Houthi sites in Yemen, economists at the World Bank say the crisis now threatens to feed through into higher interest rates, lower growth, persistent inflation and greater geopolitical uncertainty.
After a second night of strikes against the Iranian-backed rebels in Yemen, President Joe Biden said that the US had sent a private message to Tehran that “we’re confident we’re well prepared”. Speaking to reporters on the White House lawn on Saturday, on his way to Camp David, Biden declined to go into further detail.
But there is now growing concern in government circles in London and Washington that as Sunak and Biden fight for re-election, events in the Middle East could dash what had looked like improved prospects for economic recovery and therefore their chances at the ballot box.
While the airstrikes against Houthi targets in Yemen have broad cross-party support at Westminster, Sunak will face questions from anxious MPs about a prolonged conflict and the longer-term plan for Middle East peace. Some leftwing Labour MPs are expected to put Keir Starmer under pressure over why he backed the military strikes having said that he would only support such action after parliament had voted in favour of it.
Biden also faced pushback from progressives in his own party, already deeply opposed to US military support for Israeli action in Gaza. California congressman Ro Khanna said: “The president needs to come to Congress before launching a strike against the Houthis in Yemen and involving us in another Middle East conflict.”
In its latest report on global economic prospects, the World Bank says the Middle East crisis, with the war in Ukraine, has created real dangers. “Conflict escalation could lead to surging energy prices, with broader implications for global activity and inflation,” it says.
“Other risks include financial stress related to real interest rates, persistent inflation, weaker than expected growth in China, further trade fragmentation and climate change-related disasters.”
It adds: “Recent attacks on commercial vessels transiting the Red Sea have already started to disrupt key shipping routes, eroding slack in supply networks and increasing the likelihood of inflationary bottlenecks. In a setting of escalating conflicts, energy supplies could also be substantially disrupted, leading to a spike in energy prices. This would have significant spillovers to other commodity prices and heighten geopolitical and economic uncertainty, which in turn could dampen investment and lead to a further weakening of growth.”
John Llewellyn, former chief economist of the Organisation for Economic Co-operation and Development (OECD), said: “This has escalated to become a serious problem.” He put the probability of serious disruptions to world trade at 30%, up from 10% a week ago: “There is a horrible and inevitable progression that could see the situation in the Red Sea spread to the strait of Hormuz and the wider Middle East.”
An economist at the Institute for Fiscal Studies, Ben Zaranko, told the Observer the crisis underlined the perils of the chancellor, Jeremy Hunt, using limited fiscal headroom to promise tax cuts. “If we have learned anything over the last few years it is that bad shocks can and do come along,” Zaranko said. “Spending every single penny of ‘headroom’ on tax cuts leaves him no room for manoeuvre if a nasty shock comes along and the outlook deteriorates.”
The conflict in the Middle East widened on Thursday when dozens of British and US strikes hit Houthi sites in Yemen. The strikes were in retaliation for attacks on vessels passing through the Red Sea, which have paralysed shipping in one of the world’s most important maritime channels.
The Houthis say they are targeting only Israel-affiliated vessels, in an effort to support Palestinians in Gaza, but many of their targets had no known links to Israel. They have also fired missiles at Israel’s territory.
A US strike on a radar site in Yemen on Friday night prompted Houthi threats of a “strong and effective response” to international attacks, and fuelled fears of regional escalation in a conflict already playing out across multiple borders.
Houthi spokesperson Mohammed Abdulsalam said the strikes had had no significant impact on the Houthis’ ability to prevent vessels from passing through the Red Sea and the Arabian Sea.
The top UN official for Yemen, special envoy Hans Grundberg, warned of “serious concerns” about stability and the fragile peace efforts in Yemen, which has endured years of civil war.
The Houthis are just one of several Iran-aligned groups across the region, including in Syria, Iraq and Lebanon, which are attacking targets either inside Israel, or which they say are linked to Israel. Hezbollah in Lebanon represents perhaps the most severe threat.
Farea Al-Muslimi, from the Chatham House Middle East programme, said: “The Houthis are far more savvy, prepared and well-equipped than many western commentators realise. Their recklessness, and willingness to escalate in the face of a challenge, is always underrated.”
William Bain, the British Chamber of Commerce’s trade expert, said: “About 500,000 containers were going through the Suez canal in November and that had dropped 60% to 200,000 in December.”
Ships are taking different routes, but that has raised costs, with a container that cost $1,500 in November rising to $4,000 in December.
“If things get worse, it only adds to the disruption, and the cost of containers will go up and global trade will fall further,” he said.
Economists, many of them arriving in Davos this week for the annual World Economic Forum, have become increasingly worried that many of the world’s major economies may now suffer a recession this year. They fear that central banks will make only modest cuts to borrowing costs, adding to the cost of living crisis faced by millions of households.
The prospect of higher oil prices could convince central banks to hold firm and maintain high interest rates for a longer period than currently expected.
Liam Byrne, chair of the Commons business and trade select committee, said: “There’s now a real risk that a Red Sea battle will push up prices, just as inflation was beginning to fall. The World Bank is already warning that global supply chains are once more in peril … not least because this new struggle in Suez comes as drought is cutting trade through the Panama canal. Two of the world’s five keys to trade are now in real jeopardy.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
