What does the US-Iran deal mean for global growth?
The recent deal between the US and Iran, aimed at ending the war that started almost four months ago and reopening the Strait of Hormuz, marks a significant moment for the global economy. Oil prices dropped on the news and market expectations for inflation and future interest rate hikes were scaled back. Here are five observations on its wider implications for the global economy.
First, on the macroeconomic front, the deal aims to deliver what base case scenarios by many forecasters already assumed - a gradual recovery in energy production in the Gulf and a full resumption of trade through the Strait of Hormuz from the middle of this year. Therefore, most economists will not be rushing to update their assessments.
Earlier this month, the OECD published forecasts for two scenarios, with one closely resembling the outcome described above. Under that, global growth settles at 2.8% this year, down from 3.4% in 2025 before recovering to 3.1% in 2027.
Second, as recent clashes between Israel and Hezbollah, and subsequent threats from the US and Iran demonstrate, there remain significant risks to the durability of this agreement. Although the earlier scenario is now more likely to come to pass, one cannot entirely rule out the alternative - where current energy production and export issues in the Gulf persist well into 2027.
In that case, the OECD estimates global growth to fall further - to 2.1% this year - and then slow to 1.8% in the next, which would be the global economy's weakest performance since 1991, except during the pandemic and the global financial crisis.
Third, even with an immediate easing of shipping disruptions, oil prices will remain above their pre-conflict levels for some time. The price of crude oil is now around $80 a barrel and futures markets expect little change in that over the next six months. This compares to a pre-conflict price of around $60 per barrel.
Markets are accounting for the fact that it takes time to restart refineries and get oil tankers where they need to be. Insurance premia for shipping are also likely to remain elevated as long as the risk of a rupture in the US-Iran talks is real. Together with the need to rebuild depleted inventories across the world, these factors will maintain upward pressure on oil prices.
Fourth, to south and southeast Asian economies, which have borne the brunt of the energy shock, the deal should provide some respite from this historic disruption. As the destination for more than three quarters of the crude oil and condensate moving through the Strait of Hormuz, the region relies heavily on imports from the Gulf. Over the last few months, these economies have braved significant fuel shortages, with many resorting to rationing of some form.
Even a partial resumption of supplies should lower fuel prices and reduce inventory hoarding. Major importers such as India should see a meaningful easing of inflationary pressures, through reductions in transport and distribution costs. This should also create room for some central banks in the region to keep rates on hold.
Finally, global growth has slowed, not collapsed, in face of this unprecedented shock. Oil markets have lost nearly 13 million barrels of output per day, over 12% of global supply, dwarfing the lost output during the 1970s and 1980s shocks that triggered deep downturns. Yet, even the prolonged disruption scenario from the OECD doesn't tip the global economy into recession.
Advanced economies have become more energy-efficient over the decades, switching to a more diversified energy mix, including renewables and increased US fossil fuel production. Their strategic petroleum reserves have also acted a crucial buffer over the last few months. Add to that the ongoing boom in AI investment and you have all the ingredients for this remarkable economic resilience.
The global economy has weathered this historic energy shock well. Yet, momentum has slowed and there remain limits to its endurance. A meaningful resolution to the conflict with Iran should support a gradual recovery. But, as events over this weekend show, that is by no means given.
Chart of the week
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A recent study shows that the use of LLMs has driven a sharp rise in submissions of manuscripts, especially from junior researchers. These drafts can be linguistically complex but are often of poor quality.
As a result, arXiv now requires first-time authors to seek endorsement from an established academic before accepting their drafts. It recently introduced a one-year ban on authors who submit papers with unverified AI-generated content such as hallucinated references or accidentally included user prompts.
What we're looking out for this week?
This week, we will be looking out for the US personal consumption expenditures index, the Federal Reserve's preferred gauge of price pressure, set to be released on Thursday. Economists expect this measure of inflation to have accelerated to 4% in May, up from 3.8% in April. A higher-than-expected reading, alongside a recent hawkish shift in the Fed's own interest rate forecasts, would add to expectations of policy tightening. Markets are currently pricing in a 25-basis-point rise in the Fed Funds Rate by the end of this year.
And finally...
Japan’s fair-trade commission raided six of the country’s largest ice-cream makers for allegedly colluding to raise prices together, ahead of the summer months – cone-spiritors