Iran War Impact Seeps Ever Deeper Into Global Economy

Iran war impact seeps ever deeper into global economy

Global Economic Strains and Sector Responses

By Jonathan Cable and Kaori Kaneko

LONDON/TOKYO, April 23 (Reuters) - The global economy is facing ever more tangible strains from the energy shock triggered by the Iran war as factories grapple with soaring production costs and activity weakens even in services sectors, major surveys showed on Thursday.

While much of the world's economy has shown resilience in the face of the worst disruption to energy supplies in modern times, the knock-on effects of the near-two-month conflict are starting to push up inflation while raising alarm bells about food supplies and prompting downgrades to economic growth.

This week has already seen a string of downbeat business and consumer morale readings and cautious outlooks from top listed companies. The closely watched set of S&P Global surveys of purchasing managers released on Thursday showed worse to come.

Euro Zone Among the Hardest Hit

They pointed to the 21 countries of the euro zone as among the hardest hit, with the preliminary reading of its headline index for the region falling from 50.7 in March to 48.6 in April - a sub-50 tally that indicates a shrinkage in activity.   

The input price index surged to 76.9 from 68.9, showing how euro zone factories are facing a jump in their production costs. The index covering the bloc's dominant services industry meanwhile sank to 47.4 from 50.2, well below a Reuters poll estimate of 49.8.

"The euro zone is facing deepening economic woes from the war in the Middle East," said Chris Williamson, chief business economist at S&P Global. "Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding more upward pressure to prices in the coming weeks."

Companies Warn of Financial Hit from Conflict

COMPANIES WARN OF FINANCIAL HIT FROM CONFLICT

Counter-intuitively, purchasing managers reported higher output levels in Japan, India, Britain and France - an effect that S&P in some cases attributed to companies speeding up production on concerns of greater supply chain disruption.

That notably meant that Japan saw the strongest expansion in its factory output since February 2014 even as input costs rose at their sharpest rate since early 2023.

If such "front-loading" is happening, that would be akin to the effect seen early last year when companies raced to push out their products ahead of a rise in U.S. trade tariffs - and implying a commensurate drop in activity later on.

The PMI readings tallied with cautious statements around first-quarter earnings this week, with companies from French food group Danone to elevator-maker Otis Worldwide citing war-related shipment disruption.

Corporate Guidance and Inflation Trends

According to a Reuters review of 166 company statements since the start of the war, 26 companies have withdrawn or cut financial guidance, 38 have signaled price hikes and 32 have warned of a financial hit from the conflict.

The rising cost of fuel has led automatically to increases in the headline rate of inflation, with U.S. consumer prices up by the most in nearly four years in March and rises in Britain and across the euro zone. So-called "core" inflation rates excluding fuel have not seen such sharp increases, at least so far.

Tech and Finance Among the Rare Outliers

TECH AND FINANCE AMONG THE RARE OUTLIERS

There are a few stark outliers. The global surge in AI investment continues to benefit technology activity while the sheer volatility on world markets is a boon to trading firms.

South Korea, for example, delivered its fastest growth in nearly six years last quarter thanks to a jump in chip exports, while the tech sector is seen leading U.S. first-quarter earnings higher.

London Stock Exchange Group said earlier on Thursday it expects annual revenue growth at the upper end of its forecast range after posting record first-quarter revenue boosted by a surge in trading activity.

Uncertain Outlook and Future Risks

With no clear prospect as to how the conflict initiated by U.S. and Israeli strikes on Iran will end, the future impact on the world's economy remains dependent on how long it continues to logjam shipping through the Strait of Hormuz.

The International Monetary Fund last week cut its global growth outlook to 3.1% for this year but warned the world was already drifting toward a more adverse scenario - including outright recession if the disruptions continue.

Historical Parallels and Long-term Effects

Jamie Thompson, head of macro scenarios at Oxford Economics, said its review of the scarring impacts of previous energy shocks from the Yom Kippur War of the early 1970s to the 2022 invasion of Ukraine by Russia showed lingering impacts on inflation, investment and energy production years later.

He said one-in-four businesses surveyed by Oxford now believed that disruptions would be felt beyond the end of this year. "This evidence highlights the risk of an abrupt adjustment in sentiment," he concluded.

(Writing and reporting by Mark John; Editing by Toby Chopra)