FXTRADING Financial Focus (Asia-Pacific 06/12)Global Growth Faces Rising Energy Risks

The latest assessment from the World Bank indicates that the Middle East conflict is becoming a major risk to the global economic outlook. Under its baseline scenario, assuming shipping through the Strait of Hormuz gradually returns to normal, global growth is expected to slow from 2.9% last year to 2.5% in 2026, slightly below earlier forecasts. Excluding periods affected by the pandemic and the global financial crisis, this would represent one of the weakest growth performances since the 1990s.

Energy supply remains the critical factor shaping the economic outlook. The Strait of Hormuz handles a significant share of global crude oil and natural gas shipments, and any prolonged disruption could quickly drive energy prices higher. Rising energy costs would likely feed through to manufacturing, transportation, and consumer spending, increasing inflationary pressures while weighing on economic activity.

The World Bank has significantly revised its commodity price forecasts higher. It now expects average oil prices to reach USD 94 per barrel in 2026, substantially above previous projections. Industrial metal prices are forecast to rise by 18%, while fertilizer prices are expected to increase by 38%. Although adequate food supplies may help limit increases in food prices, overall cost pressures continue to build.

For developing economies, the impact of higher energy and raw material prices is often more severe. Rising import costs, growing fiscal burdens, and tighter financing conditions could all restrain economic growth. The World Bank estimates that around two-thirds of economies worldwide will experience slower growth, with low-income countries and poorer households likely to be affected the most.

Countries in the region surrounding the conflict are already beginning to feel economic pressure. The World Bank expects Iraq, Kuwait, and Qatar to experience varying degrees of economic contraction this year. At the same time, Iran, Lebanon, and Syria have not been included in the latest forecasts due to ongoing uncertainty, highlighting the unpredictable nature of the regional economic outlook.

If shipping through the Strait of Hormuz does not return to normal until the fourth quarter, global growth could slow further to 2.1%, while average oil prices could rise to USD 115 per barrel. Should this scenario be accompanied by broader financial market stress, including falling global equity markets and rising borrowing costs, global growth could decline to as low as 1.3%, with developing economies facing a much sharper slowdown.

From FXTRADINGs perspective, the primary risks facing the global economy have expanded beyond inflation alone to include energy supply, trade transportation, and financial market stability. Going forward, market attention is likely to focus on developments in the Middle East and the pace of recovery in energy transportation routes. If supply chain disruptions persist longer than expected, rising business costs and weaker investment activity could place additional pressure on the global recovery and increase uncertainty surrounding economic growth worldwide.

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