The petroleum supply shock from the Iran-US War looks likely to cost global GDP growth about 0.5% - 0.6% with potential losses rising the longer the Strait of Hormuz remains effectively closed, said Eastspring Investments in its quarterly outlook report.
In Asia, India, the Philippines, and Thailand are being hit hardest because of their large net trade deficits in energy and petrochemical products and negative effects on tourism arising from higher air fares and travel disruptions. Air travel is on the leading edge of demand destruction in response to higher energy costs. India has seen additional impacts as the GCC countries account for a large share of India’s goods exports.
In contrast, growth in China, Korea, and Taiwan currently looks better insulated, according to the report. China is more resilient due to large oil reserves, alternative energy sourcing and strong demand for EVs and renewable technologies. Eastspring has maintained its forecast for China’s GDP to grow 4.8% this year. Korea and Taiwan are cushioned by strong semiconductor export demand from AI infrastructure spending. Guidance from both their leading semiconductor companies and end-user technology companies in the US points to continued high growth in exports.
The longer the Strait of Hormuz remains effectively closed the more likely inflation will exceed Eastspring’s forecasts. In particular, the longer energy prices remain high, the greater will become the pressure on governments to cut subsidies to manage their impact on budget deficits. “We think this risk is high for India, Indonesia, and Malaysia in a scenario in which the Strait remains closed in May and oil futures price Brent at over $90bbl in Q4,” Eastspring said.
“We stress that the lack of a resolution to the War at present makes our outlook more uncertain than is usual. Higher for longer energy prices would threaten larger trade deficits for much of Asia, adding to pressure for currencies to depreciate and increasing imported inflation. A more benign monetary outlook requires both the reopening of the Strait of Hormuz before May and a rapid recovery in shipping volumes to close to pre-War levels by mid-summer.”
Eastspring Investments is the asset management business of Prudential plc.