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Is a global recession coming? - Iran war economic fallout · The Fourcast

0:00
It's like panic stations. That's what it feels like from
0:03
the US administration and let's do anything we can to reassure
0:07
people this is a real severe energy shock and it's going to
0:11
be felt globally. I think this goes into next
0:14
month. I think that Donald Trump cannot
0:16
be seen to have concluded this war while Iran is setting the
0:21
pace of events in Hormuz and that will drag him into a bigger
0:25
campaign, possibly one even involving ground forces.
0:28
We have crossed the Rubicon. There is going to be a long term
0:31
impact, even if the war itself ends tomorrow.
0:39
Welcome to this latest edition of The Forecast, yet again from
0:42
me in Jerusalem. And again, it's been a very busy
0:45
day. The Saudi foreign minister has
0:47
just said in the last few minutes that Saudi Arabia
0:50
reserves the right to retaliate to Iran if attacks on its oil
0:54
and gas facilities continue. There's a general sense in the
0:58
last 24 hours that this war, which has become an economic war
1:02
on so many levels, has escalated quite dramatically.
1:06
Well, to talk about this escalation, the economic impact,
1:09
but also the military options, I'm joined now by Shashank
1:12
Joshi. He's the defence editor of The
1:14
Economist and Helia Ibrahimi, our very own economics editor in
1:18
London. Welcome to you both.
1:20
Let me start with you, Helia. I mean, the markets are, they're
1:22
not quite panicking today. I thought they might be
1:24
panicking a bit more, but the numbers are looking pretty
1:26
dreadful as a result of what's happened in the last 24 hours.
1:30
I, I think you have seen a considerable step up actually in
1:34
markets. You know, you're talking about
1:35
gas prices in Europe that have gone up, you know, over 30% oil
1:40
has gone up, but also UK borrowing.
1:44
You know, you've got the Bank of England now saying that this is
1:47
a shock and that inflation is going to be impossible to hide
1:50
from. So you've got some real nerves
1:54
and anxieties in the system coming on the back of the news
1:57
we've just heard with the Qataris saying that actually the
2:02
damage to their gas site is going to take out their LNG
2:06
capacity for three to five years.
2:10
That is a really big step change in demand.
2:14
That's extraordinary because this was the biggest gas
2:16
facility in the world, wasn't it?
2:18
1800 trillion, you know, cubic feet of gas under there, you
2:23
know, part owned by Qatar, part owned by Iran.
2:27
Both sides have been attacked now in the last 24 hours and
2:32
really sending, you know, energy experts into a frenzy about what
2:37
does this mean for long term supply.
2:39
Because closing the Strait of Hormuz had kind of been the
2:42
nightmare scenario for any economist on what would happen.
2:48
Would there be an oil shock? And relatively, the market has
2:51
been quite sanguine about it on this kind of forever, forever
2:56
optimism that the Strait would open and everything would
2:59
resume. And what we've seen happen today
3:02
is confirmation that there is going to be a long term impact,
3:07
even if the war itself ends tomorrow.
3:11
I noticed Helia, that in Vietnam the authorities have been
3:15
telling people to take the stairs and to work from home.
3:19
And the same things happen in a number of Asian countries where
3:22
they rely very heavily on gas, from places like Qatar, where
3:26
they haven't been getting oil or gas through the Straits of
3:28
Hormuz for weeks now. You're absolutely right.
3:31
You know, Asia is the primary recipient of Qatari gas, Qatari
3:36
gas, It supplies 20% of the world's entire gas needs, and
3:42
most of it goes to Asia. And so when you're talking about
3:46
supply, you know, disappearing, you have to talk about demand on
3:51
the other side also coming down. And so you're hearing about, you
3:54
know, all the discussions about controls.
3:57
Are there discussions about export controls and use
4:00
controls? And, you know, the coming days
4:03
will really define whether those become serious policy levers.
4:08
Shawshank I mean, it's a truism to say that, you know, wars
4:11
never quite work out when they collide with reality to what
4:16
the, you know, the generals and the leaders designed for that
4:19
particular conflict. But in this case, you know, you
4:23
kind of ask yourself, whoops, that's interesting.
4:26
So we're just to let you know, just had another alarm.
4:29
And so we'll see how this develops because sometimes they
4:33
go away and we can stay and carry on and sometimes they
4:36
don't, in which case we have to take this conversation elsewhere
4:38
or resume. So I'm going to ask you a
4:40
question and we'll we'll take the V after that.
4:44
What are the military options here to to defeat, you know, to
4:49
win this economic war both in the straits and when it comes to
4:53
battles between Iran and, you know, the Israelis and the
4:56
Americans and possibly even the Gulf states over their
4:59
facilities? Well, Matt, there's two ways to
5:02
look at this. One of them is deterrence, which
5:04
says to Iran, if you hit our gas fields, I hit you back.
5:08
And that's what we saw from Donald Trump saying that if Iran
5:12
continues, he would be willing to destroy the entire S Par's
5:15
gas field, which of course is shared with Qatar.
5:20
That may not be entirely credible given that Iran can
5:22
then in turn 'cause even more damage on top of the already
5:26
catastrophic damage we've just heard described.
5:29
But that's a sort of tit for tat.
5:30
I hit you back if you hit me approach.
5:33
The other approach is more to do with getting oil and gas and
5:37
commodities out of the Persian Gulf beyond the Strait of
5:40
Hormuz. Some of that we know is already
5:43
moving. Iran is allowing some traffic
5:45
through, but it's also preventing other tankers from
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getting through on pain of being attacked.
5:52
The focus of that has been on mines, but the real threat has
5:56
probably come from drones as well as other missiles and what
6:01
we call fast attack craft. The military option to deal with
6:04
that is really complicated because it means you not only
6:08
have to take out all the possible ways Iran could lay
6:11
mines and we have recently seen America bombing mine laying
6:15
craft as well as other ships and boats.
6:18
Because you can lay these things from fishing vessels, but you
6:21
also have to strike missile launches and drone launches,
6:25
which are much harder to spot. They can be the back of a truck
6:28
in land. And of course, as you know, some
6:31
of these drones, particularly the Shaheed type drones, can be
6:35
launched from more than 1000 kilometers in land.
6:38
And so it's not enough just to have your drones surveilling
6:41
that little strip of a couple of kilometres into the Iranian
6:45
coast all along the Strait of Hormuz, Although that's pretty
6:48
hard in itself because a lot of this is mountainous, complex
6:51
terrain. You are also surveilling and
6:54
then potentially having to strike really hundreds of
6:57
thousands of square kilometres into Iran, or at least thousands
7:01
of square kilometres, I should say, into Iran, which would tax
7:04
even America, the most powerful armed forces in the world.
7:08
And, Josh, and do you think that the American planners of this
7:11
one, I'm assuming that there were planners involved at some
7:13
stage, just didn't take this into account or took it into
7:17
account, but the president wasn't interested?
7:19
Or did they just think that the regime would collapse after a
7:22
few days? What was going on in their
7:23
minds? I think somewhere along the way,
7:26
planners at America's Central Command, CENTCOM in in Florida
7:30
would have certainly thought about these scenarios.
7:34
It's it's implausible that they didn't because, you know, we've
7:37
been discussing the closure of the Straits of the Strait of
7:39
Hormuz for years, you know, going back more than 20 years.
7:43
And it was indeed a scenario America faced in terms of
7:47
escorting shipping. No one thought it was actually
7:50
going to materialize Shashank, did they?
7:52
I mean that that's that's the fourth kind kind of confidence
7:55
that they've had. Correct.
7:57
No one thought it would materialize because no one
7:59
thought Iran would be put in so desperate a situation where it
8:03
would be a viable approach. But of course, if you kill
8:06
Ayatollah Khamenei on day one and then say you wish to topple
8:09
the regime, then it's an entirely realistic planning
8:12
assumption. And I think that the political
8:14
leadership thought Iran would be hit so badly it would
8:18
effectively be left reeling, and the rump regime would do a deal
8:23
with America just like the Venezuelan government did.
8:26
And it is that plan that I think has fallen apart when it made
8:30
contact with reality. The pass gas field for Iran,
8:34
which was attacked by Israelis, it's incredibly important for
8:39
the Iranian regime and for the country it fuels, you know, 70
8:44
something percent of their whole energy demand, something 2
8:47
million cars, homes, heating, industrial power.
8:50
So the risk of allowing, you know, the Americans or the
8:54
Israelis to damage that, that could be really, really critical
8:59
for the Iranian regime. If internally, domestically,
9:03
people lose power, a country that is already pushed to the
9:06
limits in terms of their economic experience, and I'm
9:09
very frustrated with the government, could be tipped
9:13
into, you know, revolution if you suddenly have these huge
9:17
blackouts. It's interesting.
9:19
I spoke to the Israeli president.
9:20
It's, it's a headsaw just a couple of hours ago near Tel
9:24
Aviv on the site of a, of a, of some missile fragments that had
9:27
fallen yesterday onto an Arab Israeli village.
9:30
And, and he basically I asked him about this.
9:32
I said, did the Israelis get permission from the Americans to
9:35
bomb the South Park's oil and gas field?
9:38
And he said that, you know, that's beyond my pay grade, more
9:40
or less. You know, I'm not involved in
9:41
operational stuff. But clearly, you know, he looked
9:44
a little bit embarrassed, I have to say.
9:46
And you kind of wonder what is the what goes through the minds
9:50
of the both the Israelis and the Americans to so clearly escalate
9:56
the war, the economic war, by hitting that oil field, that gas
9:59
field, which which of course is also owned by Qatar, supposedly
10:03
one of America's best friends. Well, I think part of it is that
10:06
the Israeli government, much more clearly so than the United
10:09
States, is attempting to topple the regime.
10:14
I think Donald Trump is not so sure whether he really wishes to
10:16
do that. He still wants to deter the
10:19
regime. I think he still harbours hope
10:21
of drawing an end to this without a full scale toppling of
10:24
the regime. But Israel in terms of killing
10:27
Ali Larijani, in terms of threatening to kill Mojtaba,
10:30
Khamenei, in terms of attacks on besieged paramilitary
10:34
checkpoints, everything we see suggests they are trying to
10:37
undercut the regime and create the conditions for regime
10:41
change. But Helia, I mean, just to be
10:44
really clear about the economic consequences here, blocking the
10:47
Straits of Hormuz, which is what Iran has effectively done in,
10:51
you know, the almost three weeks since the war began is really
10:54
serious. And we've seen the kind of the
10:56
trickle of containers going through now and tankers compared
10:59
to what it was before. We've seen the effect on oil and
11:02
gas prices, on fertilizer, etcetera, etcetera.
11:05
But attacking the oil installations, the gas
11:09
installations of these states all the way from Saudi Arabia,
11:14
you know, to Bahrain, Kuwait, Abu Dhabi, I mean, that's a,
11:19
that's different level, isn't it?
11:21
I mean, we have crossed the Rubicon, Matt, and you were
11:25
talking yesterday about the list that the Iranians produced after
11:29
pass was attacked, saying these are the targets we're now going
11:34
to look at and they've gone after them.
11:36
I think you've got to really you, you heard today, not just
11:40
from the Bank of England here in the UK, but from Christian
11:43
Lagarde in Europe talking about this is a real severe energy
11:48
shock and it's going to be felt globally.
11:51
You know, you were talking about the the kind of the impact when
11:55
it comes to oil, but of course it's not just oil and gas.
11:59
It feeds through not just into transportation, but into foods,
12:03
into semiconductors, to all parts of our economy.
12:08
So the ramifications of creating this step change, you know,
12:13
everyone is talking about this is now no longer about are we
12:17
going to get, oh, you know, let me put it like this, Matt.
12:21
You know, at the beginning of this conflict, people were
12:23
saying, well, listen, don't worry because we've got a glut
12:27
of oil supply and actually Europe has got a lot of gas as
12:31
well. And the winter is, you know,
12:34
finishing and we're into the summer months.
12:37
So actually we're going to be relatively insulated.
12:41
I think what we're talking about now is that production has been
12:45
damaged. So is that the long term
12:47
escalation of this, the long term impact is going to be felt
12:50
on the global economy for a while to come?
12:53
By the way, we can hear some rumbling in the distance.
12:55
I think that's Thunder. It's certainly on the on the
12:57
forecast. And if it's something else, I'm
13:00
sure that the alarm would go off again.
13:01
There's always a second alarm from the city of Jerusalem,
13:04
which is much louder. And that's when we, and from the
13:06
hotel, by the way, that's when we scuttle into the corridor to
13:09
continue the conversation behind some very, very thick walls.
13:12
Shashank, what would it take, do you think, for the Saudis to and
13:17
others to come good on their very veiled threats that they
13:20
might get militarily involved in this war?
13:23
Well, of course, as you know, Matt, there have been some
13:25
suggestions. They have covertly retaliated
13:28
already. I've heard that from some
13:31
Israeli sources. Now of course, they fervently
13:34
deny that, as you might expect they would.
13:38
But I think given the escalation we have seen, particularly
13:41
against upstream oil infrastructure in the last few
13:45
days, I think we're getting quite close to the point where
13:49
they could decide one of two things.
13:51
Firstly, participation in a US-led military effort to escort
13:56
ships through Hormuz, although we are still some way away from
14:00
that given you would have to degrade the missile and drone
14:03
threat and I think that takes at least another week or so.
14:07
The other more expansive option would be that the Gulf states
14:11
could directly participate in retaliating in strikes on
14:15
Iranian oil infrastructure. They have the weapons to do it.
14:19
They have things like the Storm Shadow missiles that Ukraine has
14:22
been firing against Russia that can go a very long distance.
14:26
But I think it would be a huge call for them to make.
14:29
But if these energy attacks continue and if there continues
14:33
to be that sense, this war has escalated to the lifeline of the
14:37
Gulf state and particularly if Iran begins touching Desalina
14:41
tion facilities, which, as you know, the Gulf states depend on
14:45
for survival. I think at that stage there is a
14:48
a pretty good likelihood that even these very cautious
14:51
countries are dragged into this campaign.
14:53
But Matt, there's, I mean, foreign policy is being turned
14:56
on its head in some places here because you've also got today
15:00
Scottish lessons today he's been talking, talking about the fact
15:06
that the US is going to look at taking sanctions off Iranian
15:09
oil, you know, in the midst of this conflict, suggesting that
15:13
the the US would take sanctions off Iranian oil.
15:17
I mean, it is completely extraordinary.
15:20
Which I think tells you how rattled they are.
15:22
How, How concerned and sensitive they are to energy, the energy
15:26
impact, despite what JD Van said today, which is don't worry, the
15:30
consolation is our allies are much more affected.
15:32
And if you're Iran listening to that, what lesson do you take?
15:35
I think the lesson you take is this is very painful for us, but
15:39
we can outlast the Americans. And I think that's what a lot of
15:42
hardliners will be saying, including Saeed Jalili, who
15:46
isn't reportedly the man who's going to succeed Ali Larajani,
15:49
OK. So that's the sign what we're
15:51
going to do, because I know you're all very busy.
15:52
We're going to take this. It's all inside.
15:54
And by the way, rather good timing because the heavens are
15:56
about to open as well, in more senses than one.
15:59
So we're going to take this stuff inside.
16:01
We're going to carry on the conversation either in the
16:03
bunker of the hotel or in the corridor, which is almost like a
16:06
bunker because there's some very thick walls.
16:08
But you know, Shawshank, when I went to see the insurers about
16:13
this idea of ferrying ships, they said to me, it's a flip of
16:18
a coin. Whether you think if the US is
16:20
ferrying, if the US Navy is ferrying the ship, whether it's,
16:25
it's an improvement in the risk outcome or actually because the
16:29
US is a combatant, it takes the risk up.
16:33
So, so from there, this is what the I was playing in Lloyds.
16:38
It's, you know, it's it. Makes.
16:40
For you, but it is might not improve what we price it at.
16:44
You're it's a really good point and and I think you've got to
16:47
look at the Iran Iraq tanker war here and, and how, you know, the
16:49
risk was never brought completely down.
16:51
And I think we've just got to learn the idea of reopening the
16:54
Strait is a misnomer here. I think it's, it's never going
16:57
to be binary, but oh, it's open again.
16:59
It's going to be just a a, what can you do to increase volumes
17:03
getting through that? That's really what it will boil
17:05
down to. But have you seen the you've
17:06
seen the Iranians now talking about charging a?
17:10
Oh yeah, I saw that Parliament. It's they feel emboldened, don't
17:14
they? And and so they, so they should.
17:16
It's rational from their perspective to take to try and
17:19
take advantage. To I mean, it's to your point,
17:21
isn't it, that you were saying they don't need to out fire, you
17:25
know, or you know, be able to win this war.
17:29
They just need to outlast the Americans, you know, and, and
17:32
that is critical here because the pain tolerance, I mean,
17:36
going back to what Scott Besson was saying, you know, are they
17:39
really going to not, you know, take sanctions off U.S. oil?
17:43
Or do they just look at crude and think, oh, today is a good
17:46
day to try and say anything because they're talking about
17:49
releasing more oil in strategic reserves as well.
17:53
It's like panic stations. That's what it feels like from
17:57
the US administration. And let's do anything we can to
18:00
reassure people. Matt, how you doing?
18:04
You look safe. I look safe and a little bit
18:06
yellow. I think that's something.
18:07
So anyway, thanks guys for continuing the conversation.
18:10
I mean the let's just quickly talk about Russia.
18:14
I mean, Helia, first to you and then to Shashank for Russia,
18:18
economically, this is a massive win.
18:20
I wonder whether it's a win militarily as well, because of
18:24
course all those drones that might have been going to Russia
18:26
from Iran and are being used by the Iranians themselves.
18:29
First you Helia on Russia. From a financial perspective,
18:32
Russia is the clear winner from this conflict.
18:35
You've got a situation where not only is their primary asset
18:40
going up in value, but the US has already taken sanctions off
18:45
and given a waiver to the Russians to to sell their oil,
18:49
sell it to India, but also to sell it.
18:51
And it's very difficult. When you talk to traders and oil
18:54
analysts, they say it's very unlikely that those sanctions
18:57
return. So Russia is a massive
19:00
beneficiary. When you have oil go from $60 to
19:04
$120.00, they're a big winner. What about militarily, Shasheng?
19:09
Well, I mean, I agree with all of that.
19:11
And militarily, the only thing to add, of course, is that this
19:14
war is, as you know, putting immense pressure on availability
19:19
of stockpiles of air defence interceptors, including those
19:23
for Patriot systems that are also used by Ukraine.
19:27
And that was already a problem prior to this conflict.
19:30
You know, for example, Germany was trying to buy stocks of
19:33
American PAC 3 interceptor missiles to then give to Ukraine
19:38
under something called the Pearl scheme P URL and America was
19:42
saying we're not sure about this.
19:43
I think we need these ourselves. We now have a situation where
19:46
we've had unprecedented consumption of these things.
19:50
Vladimir Zelensky says more used up in the first few days in the
19:53
Gulf of advanced PAC 3 interceptors, the PAC 3 MSE than
19:58
his country has used in. Three or four years of war.
20:02
And so it will become ever harder for Ukraine to get these.
20:05
And in my in my assessment, given how limited annual
20:09
production is, the effect of that will be felt for years to
20:11
come as Taiwan, Ukraine, Europeans all scramble for the
20:16
same fairly limited production capacity of these essential
20:20
munitions. I mean, the thing that's really
20:23
fascinated me, Shah Shang, is that the Americans and the
20:26
Israelis together had these, you know, precision munitions, these
20:29
very smart bombs. You can argue about the
20:32
smartness of the political considerations behind what
20:34
they're doing, but they've got the these very smart weapons
20:37
that are able to take out people in their bedrooms.
20:39
They kill the Ayatollah on day one of the conflict, etcetera,
20:42
etcetera. And they've done 15 or 16,000
20:45
sorties already, which is an extraordinary number.
20:49
And yet the Iranians are still able to, to disrupt the
20:52
economies of the Gulf states, you know, to upend, you know,
20:56
the, the, the, the, the energy market and all the rest of it.
20:59
So the question, Shashank, is, you know, how are they still
21:02
able to do this? And, and are they planning it
21:05
carefully so that they're doing something every day, but they're
21:07
keeping a lot, you know, for, you know, the even the rainiest
21:11
day of rainy days. I think there is some evidence
21:13
they have been husbanding their resources.
21:16
I think a large part of the reason their missile launches
21:18
are down dramatically from the first three days is that their
21:22
launches are being hunted. There's no doubt about it.
21:25
But I think they are also holding back some stockpiles.
21:28
And what's really interesting, Matt, is Despite that pressure
21:30
you describe, which is a intense campaign of thousands of sorties
21:35
a day, you are still seeing the rate of Iranian drone and
21:42
missile launches basically go up in the past week.
21:47
And I think that's very impressive.
21:48
And I think the answer to that is simply very is very simple.
21:51
Iran is a big, big country and hunting for missile launches,
21:56
let alone drone launches is an incredibly difficult task.
22:00
If you put Iran, superimpose Iran on the map of the United
22:04
continental United States, you will see how huge it is.
22:07
And if the Houthis, a rebel group in Yemen, were able to
22:11
continue firing at ships in the Red Sea last year despite an
22:16
American bombing campaign, then we shouldn't be surprised that
22:19
Iran, a large country with a massive stockpile of missiles
22:25
and a very determined leadership, has been able to
22:27
keep up sporadic missile fire for 10 days.
22:31
OK. So final and brief question to
22:34
both of you. First, you Shan.
22:35
Shan, given what you've just described, what is your hunch
22:39
about how long this will continue and how might it end?
22:43
Would it be military exhaustion or some kind of political deal?
22:47
I think this goes into next month.
22:48
I think that Donald Trump cannot be seen to have left the war,
22:53
concluded this war, while Iran is setting the pace of events in
22:57
Hormuz. And that will drag him into a
23:00
bigger campaign, possibly one even involving ground forces to
23:04
do something like seize Hag Island at the northern side of
23:07
the Persian Gulf, something to attack or seize Iran's stockpile
23:12
of enriched uranium. And that will be something that
23:15
can only be measured in weeks, not days.
23:18
So I do not see an end to this until April.
23:22
And I think it still ends with the Iranian regime greatly
23:26
weakened but still in power in Tehran.
23:30
Helia what does this mean for the ordinary consumer and what
23:34
are the political repercussions of that likely to be?
23:37
Look, we're, we, we went from a, a position today where the Bank
23:43
of England was going to cut interest rates.
23:45
That was the expectation. Not just that would help
23:48
consumers, but the, but you know, government in charge were
23:52
quite keen that they do that so that you could have this
23:55
two-month landing strip going towards the May elections.
24:00
That would bring some ease to consumers.
24:02
That would make things a bit easier.
24:04
Interest rates were going to go down.
24:06
Inflation was going to go down. Well, hang about.
24:09
That is now completely off the table.
24:12
You know, the Bank of England are talking about an energy
24:15
shock now and inflation actually, you know, almost
24:19
certainly going up. And traders are betting, you
24:23
know, I think in the market today, it's almost a 50% chance
24:27
the interest rates not only don't get cut, but they get
24:30
hiked 3 times this year. So that is a very different
24:34
outlook for UK consumers. And this is, you know, the
24:39
chancellor was saying at the beginning of the week, Oh my
24:40
God, you know, it's we, we've got this in hand because the UK
24:44
is in a much stronger position today than we were before the
24:48
Ukraine crisis. But, you know, we were looking
24:51
at all the fuel poverty figures and it's hard to see how that's
24:55
possible because actually fuel poverty has gone up.
24:58
There are many more people in the UK who are unable to pay
25:02
their energy bills today. And the amount that's owed to
25:06
energy companies is much higher, sometimes double, sometimes
25:09
triple what it was in 2022. So the position of UK consumers
25:16
is much, much harder today. Shashank Joshi, a defence
25:20
editor, economist, Mahelia Brahimi, economics editor of
25:24
Channel 4 News. Thank you so much to both of
25:26
you. I'm sure we'll be back here
25:28
again soon. Hope you enjoy the podcast.