- Higher energy and fertiliser costs expected to increase inflation and damp growth
- Continued conflict could shave 0.4 percentage point off the EBRD’s growth forecast for its regions
- Economies with high energy import bills, strong trade and remittance links to the Gulf particularly exposed
The European Bank for Reconstruction and Development (EBRD) expects the conflict in the Middle East to weigh on economic activity across its regions by way of higher energy and fertiliser prices, disruptions to trade and tourism flows, and tighter financing conditions, according to its latest Regional Economic Update.
Entitled “Potential economic impact of the conflict in the Middle East”, the new brief assesses how geopolitical tensions are being transmitted through commodity markets, supply chains and financial channels.
“The conflict shows how quickly geopolitical shocks can ripple through energy markets, supply chains and financial conditions,” said Beata Javorcik, EBRD Chief Economist.
“Rising energy prices come at an already challenging time for the European manufacturing sector, while the broader fallout from the conflict is likely to strain government budgets already overstretched by high defence spending in central Europe and elevated debt-servicing costs in the southern and eastern Mediterranean and sub-Saharan Africa. The effects of the conflict are likely to linger beyond the end of hostilities.”
Energy prices have increased sharply as a result of recent disruptions to production and transport routes in the Persian Gulf. Even though oil and gas prices remain below historical peaks, short-term demand for energy is relatively inelastic and prices could rise significantly further should disruptions persist.
The analysis notes that if oil remains above US$ 100 per barrel for a prolonged period and supply-chain disruptions involving chemicals and metals continue, global growth could be reduced by at least 0.4 percentage point, while inflation could rise by more than 1.5 percentage points. Under such a scenario, growth forecasts for the EBRD regions could be cut by up to 0.4 percentage point in the Bank’s next outlook.
Gas markets remain tight, with European storage levels significantly below those seen in recent years. Even if the conflict ends quickly, prices may remain elevated as buyers rebuild inventories, because liquified natural gas (LNG) production will take time to resume.
The impact is also being felt in agricultural inputs and industrial supply chains. A significant share of global trade in fertiliser raw materials passes through the Strait of Hormuz, raising the risk of higher food prices. Disruptions to Gulf trade routes may also affect key inputs, such as aluminium, sulphur, helium, petrochemicals and plastics, adding to global inflationary pressures.
Trade with the Gulf Cooperation Council (GCC) is significant for many economies in the EBRD regions, while direct trade with Iran remains limited. Economies reliant on routes through the Strait of Hormuz, including Iraq, may face particular challenges, although existing reserves of key commodities, such as wheat, provide some buffer.
The update notes that tourism and remittances are additional transmission channels. Tourism-dependent economies, such as Jordan, are likely to see a decline in visitor arrivals, while remittances from GCC countries – an important source of income for economies including Lebanon, Jordan and Egypt – may come under pressure.
Financial conditions have also tightened, with bond yields rising in the southern and eastern Mediterranean region and in Türkiye. Capital outflows from some economies have so far remained manageable, but could intensify if global financial conditions deteriorate further.
The extent to which economies can cushion the terms-of-trade shocks will depend on their fiscal and external buffers.
EBRD economies with high energy, fertiliser and food import dependence, strong links to the Gulf and limited fiscal space are likely to be most affected. These include Egypt, Iraq, Jordan, Kenya, Lebanon, Moldova, Mongolia, North Macedonia, Senegal, Tunisia, Türkiye and Ukraine.
In the longer term, the conflict may reinforce the importance of energy security and accelerate the fragmentation of global trade, particularly in energy and critical raw materials. At the same time, higher energy prices are already generating windfall revenues for commodity exporters, including Russia.
The EBRD stands ready to support its clients and countries of operation in addressing the economic impact of current developments in the Middle East.