This informal CPD article, ‘The Effects of Middle East Wars on the Global Economy: A Perspective for UK Finance Professionals’, was provided by GIRA - Global Institute of Regulatory Accreditation – who offer a powerful new way to learn online with every course designed according to principles of effective learning, through storytelling, discussion, visible learning, and using community support to celebrate progress.
The Middle East has been the epicentre of geopolitical unrest for several decades. Its strategic importance, primarily due to its vast oil and gas reserves, has rendered the region crucial to the global economy. This relationship has manifested itself in various ways, from oil price fluctuations to shifts in investment strategies. For finance professionals based in the UK, understanding these dynamics can provide crucial insights into global financial forecasting and risk management.
1. Oil Price Volatility
Arguably, the most immediate and evident impact of Middle Eastern conflicts on the global economy is the volatility in oil prices. The region is home to a significant portion of the world's oil reserves, including Saudi Arabia, Iraq, and Iran, which are among the top oil-producing countries globally.
Whenever there's instability or outright conflict in the region, the global oil supply chain is affected. Supply disruptions or even the mere perception of potential disruptions can lead to dramatic spikes in oil prices. Such a phenomenon was evident during the 1973 oil embargo and more recently, in the aftermath of the drone attacks on Saudi oil facilities in 2019.
For UK finance professionals, this volatility can have a myriad of implications:
Equity Markets: Oil and gas companies constitute a significant portion of the FTSE 100. Hence, rising oil prices can boost the stock prices of energy companies, but they may simultaneously impact other sectors adversely, especially those heavily dependent on oil, such as airlines and logistics firms.
Currency Markets: The UK, being a net oil importer, might witness a weaker pound against oil-exporting nations' currencies during times of elevated oil prices.
2. Global Trade Disruptions
Middle Eastern nations are pivotal links in global trade routes, especially for maritime trade. The Suez Canal in Egypt, for instance, is one of the world's busiest shipping lanes. Wars or tensions in the area can disrupt these critical pathways, leading to delays and added costs for businesses globally. Such incidents can reverberate in the form of increased costs for goods, impacting inflation rates and consumer purchasing power.
3. Shifts in Investment Patterns
Political instability often deters foreign direct investment (FDI). With the Middle East representing a significant market and a source of returns for many international investors, wars and conflicts can lead to a rapid shift in investment patterns. Finance professionals in the UK need to be attuned to these changes, as the pullout of investments from the Middle East could lead to redirected capital flows, potentially benefiting safer markets or those with better yield opportunities.
4. Impact on Interest Rates
The Bank of England, like other central banks, monitors global economic conditions to guide its monetary policy. Sudden inflationary pressures due to rising oil prices or global trade slowdowns influenced by Middle Eastern tensions can influence the Bank's decisions on interest rates. For instance, if inflationary pressures rise, the Bank might consider hiking interest rates to combat inflation, impacting borrowing costs for businesses and consumers alike.