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The second half of the year rests on a delicate chain of dominoes, according to a new briefing from Oxford Economics, and whether the US-Iran peace agreement holds is the factor that determines how the rest fall.
“Its durability will determine whether the global economy gets an energy-driven disinflation tailwind or absorbs a second oil shock,” stated chief global economist Ryan Sweet in the report, calling the deal “the key domino that will determine whether other risks are amplified or dampened”.
The consultancy expects the global economy to accelerate, forecasting annualised growth of 3.1% in the second half against an estimated 1.6% in the first, powered chiefly by cheaper oil feeding through to household incomes, although Sweet puts the odds of reaching a durable deal at “a coin flip”.
If the truce holds, Oxford Economics sees Brent crude averaging in the low $70s per barrel, easing inflation and financial conditions across emerging markets and tech valuations.
If it breaks, the consequences would not stay contained to the oil market.
Early on Wednesday, the US military attacked Iran after it said Tehran struck three ships in the Strait of Hormuz. Iran retaliated with strikes targeting Bahrain and Kuwait. The regional crossfire raised the risk that the interim agreement to halt fighting in the war could break down. However, the exchange of fire followed a pattern of similar attacks during the deal’s shaky ceasefire, and neither country immediately signalled it would step away from the negotiating table.
Oil prices reacted to the attacks by increasing more than 3% by Wednesday morning, with international benchmark Brent trading above $76 a barrel.
“A peace deal breakdown won’t just raise oil prices, it would also increase pressure on AI supply chains in Asia, force central banks to be hawkish, tighten financial conditions, and could shift the outcome of the US midterms and Israeli elections […] the cascade runs fast,” Sweet stated.
