Peace deal could buoy world economy, though oil prices are still uncertain
Markets rallied after President Donald Trump announced a peace agreement with Iran over the weekend. Stock prices rose. Oil prices fell. The U.S. and Israeli war against Iran, which dragged down economies around the world, now looks closer to a conclusion than at any time in its 3 1/2 months.
But the full terms of the agreement have not been released. It鈥檚 set to be signed Friday in Switzerland. Markets are reflecting cautious optimism.
鈥淭he agreement between the US and Iran is a significant step towards reaching a full-blown deal,鈥� Oxford Economics, a global economic advisory firm, wrote in . 鈥淏ut there will likely be bumps in the road.鈥�
Why We Wrote This
The global economy was the clear loser from the U.S.-Israeli conflict with Iran, as oil prices surged. The expected peace deal would reopen the Strait of Hormuz, though a full restoration of oil flows could take months.
Oil-dependent Japan鈥檚 Nikkei stock index soared on Monday, closing up 5%, while China鈥檚 Hang Seng index rose a muted 0.5%. In afternoon trading, German and French stocks were up 1.3% while Britain鈥檚 FTSE index barely moved. In the United States, the Dow Jones Industrial Average was up 1.3% in early trading while the tech-heavy NASDAQ was up 2.6%.
From the details released so far, Iran would reopen the Strait of Hormuz and engage in negotiations over its nuclear program in exchange for the dropping of economic sanctions imposed by the U.S. With the key sticking point over nuclear enrichment not settled, it is too early to assess the winners and losers of the conflict.
Iran says it wants the material to fuel yet unbuilt nuclear power plants. The United States and many other nations believe Iran aims to build a nuclear weapon.聽
From an economic perspective, however, the picture is clear.
The world economy was the loser in the conflict. This year was expected to see lower oil prices, a drop that would have boosted most economies dependent on oil imports. Instead, oil prices nearly doubled.
The price of Brent crude, an international benchmark, surged from around $60 a barrel in January to $118 in late March and flirted with the $100 level for most of the conflict. By Monday morning, it had dropped to around $83 a barrel 鈥� its lowest level since one week into the conflict, which began Feb. 28 with the U.S. and Israel bombing Iran.
The World Bank last Thursday cut its for this year to 2.5% from 2.9%. The drop represents the economic spillover from high energy prices, including rising inflation and borrowing costs as central banks try to tame a general price rise. The Global Peace Index, issued by the London-based Institute for Economics & Peace, a peaceful solution could save the world economy some $2.2 trillion.
Even as oil tankers start to move again through the strategic Strait of Hormuz, freeing Mideast oil production bottled up by Iran, analysts agree it will take months for oil prices to potentially get back to their prewar levels.聽
鈥淭he latest developments don鈥檛 automatically point to a faster ramp-up in the amount of oil flowing through the Strait of Hormuz over the coming months compared with our June baseline,鈥� the Oxford Economics report said.
