Iran War Starts to Hit Global Economy, Business Surveys Show

Iran War Hits Global Economy: Energy Price Surge and Inflation Fears

Global Economic Impact of the Iran Conflict

By Balazs Koranyi and Lucia Mutikani

FRANKFURT/WASHINGTON, March 24 (Reuters) - The Iran war is already taking a toll on major economies around the world, according to business surveys on Tuesday which showed how a surge in energy prices and rising uncertainty were dampening activity and pushing inflation expectations higher.

Business Surveys Reveal Economic Strain

The initial findings of questionnaires sent to purchasing managers at companies in the United States, Europe and Japan are the most comprehensive snapshot yet of the economic impact of the near four-week conflict that has shut off indefinitely a large chunk of the world's energy supplies.

The ensuing leap in the price of oil, gas and other related products is a potential double whammy for economies around the world, feeding through into wider inflation and stunting growth.

Central Banks Respond to Inflation Threats

Beyond the trouble that spells for leaders of those economies - including U.S. President Donald Trump himself - it has already prompted many of the world's central banks to envisage tighter policy to keep a lid on price pressures.

Regional Economic Effects

Euro Zone: Stalling Growth and Stagflation Fears

Among the 21 economies that share the euro currency, private sector growth all but stalled this month as companies signalled an increase in delivery times and expectations of rising costs that they in turn would be trying to pass on.

S&P Global said its flash euro zone composite Purchasing Managers' Index fell to a 10-month low of 50.5 in March, below expectations, from 51.9 in February. A reading above 50 indicates expansion in the private sector. 

Measures for both input and output prices in euro area manufacturing showed much sharper moves. Within the national readouts, business confidence dropped markedly among French firms while German private sector growth slowed to a 3-month low.

Expert Insight: Stagflation Alarm Bells

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the euro area numbers were "ringing stagflation alarm bells", referring to the risk of a painful combination of stagnation amid rising prices.

United States: Inflation Fears and Weakening Sentiment

S&P Global's U.S. survey painted a similar picture of the world's largest economy, with higher energy prices raising inflation fears amid weaker business sentiment that pointed to weaker private sector employment prospects.

Its flash U.S. Composite PMI Output Index fell to 51.4 this month. That was the lowest level since last April and followed a 51.9 reading in February and marked two straight monthly falls. The drop this month was in the services sector.

Other Major Economies: UK, Japan, and India

Other Group of Seven (G7) economies fared little better. In Britain, S&P Global's survey showed business activity growing at the slowest pace in six months while manufacturers' input costs accelerated at the fastest rate since 1992.

In Japan, the flash composite PMI combining manufacturing and services activities dropped to 52.5 in March from 53.9 in February, its slowest rise in three months.

Outside the G7, India - which sources roughly 90% of its crude and nearly half its natural gas from abroad - saw its private-sector growth hit a three-year low in March with input costs rising at their fastest pace since June 2022, in part passed on by firms who also saw their margins compressed.

Long-Term Outlook and Risks

Recession Risks and Energy Supply Disruptions

So far, few economists are talking about the war plunging the global economy into outright recession, even as the energy shock from the de facto closure of the Strait of Hormuz - through which around a fifth of the world's oil passes - deepens.

Expert Commentary: Uncertainty Over Conflict Duration

"The scenario is very dependent on the duration of the conflict and on the outlook for energy prices," said Nicola Nobile of Oxford Economics, commenting on the euro area impact.

That said, there is a growing realisation that the economic consequences will not be short-lived, given the damage to energy infrastructure in the Gulf region inflicted by Iranian strikes in retaliation for U.S. and Israeli missile attacks.

OECD Perspective: Downside Risks to Global Growth

The Organization for Economic Co-operation and Development think tank said last week it was too early to quantify the impact of the conflict on global growth but cited a "significant level of downside risk" for the global economy.

(Writing by Mark John)