US-Iran Conflict, Global Economic Downturn Risk... "Could Trigger Recession Overnight"

Oil Prices Likely to Remain Strong for a While
China and Europe, Highly Dependent on Energy Imports, Expected to Be Impacted

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The conflict between the United States and Iran is emerging as a new negative factor for the global economy. With the signing of the US-China Phase One trade agreement expected to take place this month and key economic indicators showing improvement, the global economy, which had been raising expectations, could be shaken again due to instability in the Middle East region.

Michael Maloof, a former senior official at the US Department of Defense, appeared on Russian media RT on the 5th (local time) and stated, "Iran could block major transportation routes in the Gulf region following a US attack," adding, "This could cause serious problems not only for the global oil market but also for the world economy." He further warned, "If Iran blocks the Strait of Hormuz, it could cause a recession overnight." This is because about 40% of the world's crude oil supply is transported through this region. Experts are concerned that if the conflict between the US and Iran is not resolved, there could be a sharp rise in oil prices, a flight to safe-haven assets, financial market volatility, and a contraction in consumption.

The first market to show movement due to the Middle East issue is the crude oil market. As of 9:58 AM, the price of February West Texas Intermediate (WTI) crude oil rose by $1.30 (0.82%) to $63.86 per barrel. March Brent crude also surpassed $70 during the session. Previously, on the 3rd at the New York Mercantile Exchange (NYMEX), WTI closed at $63.05 per barrel, up 3.1% ($1.87) from the previous day. This is the highest level in about eight months since May last year. Brent crude also rose by 3.6%.

Experts expect the strong oil prices to continue for the time being. Oil prices have already rebounded on news of the US-China trade agreement, and the addition of Middle East instability has further fueled this trend. In particular, countries dependent on imported energy such as China, the world's largest oil importer, and Europe are expected to be hit. Bloomberg reported, "Energy-importing countries may see household income and spending decrease and inflation accelerate if oil prices surge." If China's economic growth rate falls more than expected, it could have direct and indirect effects on South Korea. However, there is also analysis that the current accounts of emerging countries not solely dependent on energy imports could slightly recover with rising oil prices.

The biggest cause of financial market anxiety is the unpredictability of Iran's retaliatory attacks. Expected Iranian actions include ▲ attacks targeting oil facilities in the Gulf region ▲ disruption of maritime oil transportation in the Strait of Hormuz or the Red Sea ▲ attacks on Israel through Lebanese proxy forces ▲ attacks on Gulf countries through Yemeni rebels.

[Image source=Reuters Yonhap News]

However, there is also a forecast that oil prices will fluctuate within a range without surging sharply as in past oil shocks, due to increased shale oil production in the US. When Saudi Arabia's state-owned oil company Aramco's facilities were attacked in September last year, oil prices surged 20% in one day but recovered within about two weeks. If the situation with Iran escalates, US President Donald Trump may approve the release of strategic petroleum reserves (SPR). For now, Asian stock markets are all declining.

Therefore, market experts unanimously say that how the US financial market moves on Monday is crucial. If the shock to the US market is not significant, the possibility of it spreading to Asian markets is also expected to be limited.

Meanwhile, on the 6th, the Nikkei 225 index in the Japanese stock market started with a sharp decline. As of 9:11 AM, it was trading at 23,249.83, down 1.72% (406.79 points) from the previous trading day. The TOPIX index also started down 1.39% from the previous day. The Shanghai Composite Index also opened down 0.33%. The price of gold spot continued its sharp rise. As of 10:25 AM, the gold spot price was trading at $1,573.59 per ounce, up 1.38% from the previous trading day. This is because the flight to safe-haven assets, which had recently subsided due to expectations of economic recovery, has reappeared.

Domestic stock markets also fluctuated. The KOSPI index widened its early losses to over 1% but was down 0.88% as of 1:58 PM.

This content was produced with the assistance of AI translation services.