After a tough global economic year due to the ramifications of the US-China trade war, the world economy faces another challenge as the US-Iran conflict threatens to boil over into outright armed conflict.
Last Thursday, a US military drone attack assassinated Iranian military commander Qasem Soleiman in Baghdad. The killing reverberated throughout the region and thousands of mourners jammed Tehran’s streets this week to pay respects to their fallen hero.
Iran retaliated by firing missiles at US military bases in Iraq Wednesday morning Baghdad time as Ayatollah Ali Khamenei, the supreme leader of Iran, said on Wednesday that the US presence in the Middle East must come to an end.
“This region does not accept the US presence,” he added.
The tit-for-tat that threatened to devolve into armed conflict embroiling a region where the US government has been fighting war for two decades.
How will this affect Asia’s regional economy? Will it compound the problems weighing down growth stemming from the US-China trade war in 2019?
*Uncertainty Hurts the Global Economy
What global investors dislike most is uncertainty. The uncertainty caused by the US-China trade war in 2019 generated billions of dollars in losses with the International Monetary Fund estimating the loses to equal to $700 billion.
US-China trade war has slowed global GDP growth and will cost the world’s economy up $700 billion in lost revenue by 2020, according to the IMF.
“This subdued growth is a consequence of rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and aging demographics in advanced economies,” said IMF Economic Counsellor Gita Gopinath in a statement.
One of the main factors for the sharp decline in exports in Asia was due to the ongoing trade tensions in the region and resulting uncertainty it caused.
The US-China trade war has already began to rearrange global value chains around the world and is affecting trade-dependent Asian nation.
*Gold, Oil Prices on the Rise
Gold prices continued to soar today gaining as much as two percent to break through $1,600 as investors reacted to a possible breakout of war between the US and Iran.
Gold prices spiked globally to $1,610.90 per ounce (or around 31 grams), prices unseen since March 2013. Gold is considered a safe haven investment during times of crisis and uncertainty and retains true value compared to unbacked national currencies around the world.
Additionally, global oil prices rose to up to $70 a barrel as of this week as investors feared a regional war would disrupt supplies. But after Trump’s speech the price went back under $60.
Iran controls the world’s most important oil passage way at the Strait of Hormuz –a narrow passage way only a dozen kilometers in length and the only route to transport the oil out of the Persian Gulf and into the ocean.
“Iran will also likely resume harassment of commercial shipping in the Gulf and may launch military exercises to temporarily disrupt shipping,” stated a research note by analysts at Eurasia Group.
Any form of closure of the strait could dramatically impact global oil prices.
What would devastate the Asia regional economy will be if oil prices skyrocket above $100 per a barrel.
The Organization of the Petroleum Exporting Countries (OPEC) promised that it would do all it could to stabilize prices and prevent such an increase in price.
“The Strait of Hormuz is not only important for us, it is important for the world economy and the whole supply chain, and Iran understands that,” said Suhail Al Mazrouei on US TV. “The world economy cannot sustain another $100 oil price and another huge spike.”