Goldman Sachs says the war in Iran is unlikely to cause a COVID-like supply crisis

The war in Iran is pushing up oil and gas prices, and while the global economy is facing a shock from energy prices, a Goldman Sachs analysis shows that the conflict is unlikely to lead to a broader supply chain crisis like the one that has emerged due to the COVID-19 pandemic.

Economists at Goldman Sachs note that the war in Iran is expected to lead to higher oil prices, reducing global economic growth by 0.3% of GDP, while headline inflation will rise by about 0.5 to 0.6 percentage points over the next year, with a smaller boost of 0.1 to 0.2 percentage points to core inflation.

The report notes that the risks focus on greater impacts as long as the Strait of Hormuz remains closed to shipping. The strait is a narrow chokepoint through which Persian Gulf shipping traffic must pass to access global shipping lanes.

Goldman Sachs assessed that global central banks will be particularly sensitive to inflation concerns in the wake of the supply chain disruptions that have occurred as a result of the pandemic and have contributed significantly to a increase in inflation. However, the economists’ analysis sees Iran’s supply shock as limited to energy, as opposed to the broader supply chain.

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“However, a key difference between 2021-2022 and today is that today’s shock is more concentrated in the energy sector, while 2022’s energy price increases were just one aspect of a much broader global supply chain crisis and a rise in inflation,” the spokesperson said. Goldman Sachs economists wrote.

One of the reasons why the supply shock remained limited energy products is that most developed economies around the world have limited exposure to Middle Eastern countries, with the exception of energy trading.

The report shows that less than 1% of imports to the US and other developed markets such as the Eurozone, Britain, Japan and Canada come from the Middle East. By comparison, China and East Asia account for more than 20% of global trade, according to Goldman’s analysis.

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One reason why the supply shock is limited to energy products is that most developed economies have limited exposure to Middle Eastern countries, with the exception of energy trading. (Giuseppe Cacace/AFP via Getty Images)

In another contrast to the supply chain challenges of 2021-2022, fewer disruptions to critical inputs and ‘just in time’ inventory management are expected, as the analysis shows that the Middle East’s potential bottleneck exports are concentrated on certain chemicals and metals that are unlikely to cause significant disruptions.

Goldman Sachs said methanol appears to be the most likely source production disruptionsbecause it is used in making acetic acid, which helps in the production of industrial glues, solvents and paints.

Iran is the source of about 20% of global manufacturing capacity and while the loss of that supply could have longer-term consequences, economists see no obvious bottlenecks at the moment.

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The third reason why the company sees limited supply chain impacts outside the energy sector is that the Middle East has no significant impact trade center from which products are re-exported.

Ships such as yachts, tugboats and floating cranes are the main goods re-exported from Middle Eastern countries.

“In summary, our analysis suggests that the greatest risk to global supply and inflation is largely confined to the energy sector, limiting the risk of a recurrence of the severe supply chain disruptions (and associated rise in inflation) and large second-round inflation effects observed in 2021-2022,” the Goldman Sachs economists said.

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