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한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском The world economy is underperforming as a result of tight monetary policies, weaker global trade, a slowing Chinese economy and uncertainty around the US election. An escalation of conflict in the Middle East could increase uncertainties, harming inflation reduction efforts and hurting growth. It has been over a year since the Hamas-led attack on Israel. Israel’s response in Gaza has resulted in widespread destruction and significant loss of life. The conflict has since expanded beyond Gaza, involving the Houthis in Yemen, Hezbollah in Lebanon and Iranian strikes targeting Israel. In addition to the awful humanitarian cost of the conflicts, the war and the possibility of its further expansion pose significant repercussions for the global economy. This article discusses three potential ways in which the current conflict and a wider conflict in the Middle East could affect the global economy. Increased geopolitical uncertainties First and foremost, an escalation of the Middle East conflict could lead to greater geopolitical uncertainties. Figure 1 shows the evolution of the geopolitical risk (GPR) and geopolitical acts (GPRA) indices (Caldara and Iacoviello, 2022) – these are text-based measures of heightened uncertainties due to adverse geopolitical events such as wars, terrorism and international tensions. (See this article for more discussion about these measures.) Following the Hamas-led attack on 7 October 2023, both the overall GPR index and its ‘war and terror acts’ component spiked strongly, to a level higher than that seen during the ISIS attack in Paris in November 2015. Both indices eased significantly in the months following October 2023 despite the continuation of the conflict. But they jumped again following Israel’s attack on southern Lebanon in September 2024. As of mid-October 2024, the GPR and GPRA remain, respectively, 21% and 35% higher than their historical averages.   What might be the consequences of such elevated levels of risk? Research tells us that higher geopolitical risk raises oil prices (Mignon and Saadaoui, 2024). It also reduces global investment and increases inflation (Caldara et al, 2022). Greater geopolitical risk has a significantly negative impact on business and consumer confidence in several advanced economies (de Wet, 2023). This is because consumers typically cut non-essential spending and businesses postpone investment decisions during turbulent times. This reduces firm-level investment, particularly for businesses with higher initial investment costs and greater market power (Wang et al, 2023). Higher geopolitical risks also reduce global trade and financial flows, causing greater volatility in capital flows in emerging markets (Kaya and Erden, 2023). Oil production cuts and higher energy prices The second way in which the Middle East conflict could affect the global economy is its impact on energy prices, both directly through production cuts and indirectly through greater uncertainties. In response to Israel’s actions against its neighbours, the Organization of the Petroleum Exporting Countries (OPEC) could reduce oil production to penalise countries supporting Israel. A similar action in the 1970s led to a significant jump in oil prices, which contributed to years of stagflation, with higher global inflation and recessions in major economies. Before Israel's attack on Lebanon at the end of September, oil prices had been declining due to falling demand, particularly from China. On the supply side, oil production had increased in Canada and the United States, countering the production cuts by OPEC, and Saudi Arabia was expected to increase oil production from December. But the situation quickly reversed following Israel’s attack on Lebanon. Oil prices jumped by nearly $10 per barrel within a week, before easing by around $5 per barrel. While the immediate oil price impact of Israel’s attack has mostly faded, the potential for higher oil (and other energy) prices still poses a risk to global inflation and economic activity (Liadze et al, 2022). To provide further context for the potential scale of this impact, we can show what would happen if oil and gas prices were to remain $10 higher for two years than the baseline levels projected in the Summer Global Economic Outlook from the National Institute of Economic and Social Research (NIESR), using NIESR’s Global Macroeconometric Model (NiGEM). The results demonstrate that the $10 rise in oil and gas prices increases inflation by around 0.7 percentage points in major economies in the first year (see Figure 2). The impact is higher in China, where the economy relies relatively more on oil imports for its strong manufacturing industries. The inflationary pressures persist for two years despite central banks’ efforts to curb inflation by increasing interest rates.   The effect of higher oil and gas prices on real GDP is shown in Figure 3. In the scenario described above, GDP would fall by 0.1-0.2% in major economies immediately. Partly due to higher interest rates, real GDP would continue to weaken for three years following the shock. After this, economic activity would start to return to base levels as oil and gas prices revert to their levels in the baseline forecast.   Increased shipping costs and supply chain disruptions A wider conflict in the Middle East could also affect the economy through higher shipping costs and supply chain disruptions. Houthi attacks on commercial ships in the Red Sea in late 2023 showed that such disruptions can have a huge impact on global trade through shipping, which comprises 80% of world trade volume. Following the rocket attacks by the Houthi rebels, some commercial shipping re-routed from the Red Sea to the Cape of Good Hope, leading to significant delays in travel times and increased freight costs. As a result, the Shanghai Containerized Freight Index – a measure of sea freight rates – rose by around 260% in the second quarter of 2024 with additional disruptions to supply chains. Our analysis shows that an increase of 10 percentage points in shipping cost inflation can lead to import prices rising by up to around 1% and consumer inflation increasing by around 0.5% in OECD countries. As Figure 4 shows, the impact of shipping costs on inflation shows its full effects over six quarters. This means that inflationary concerns could be with us for the next year and a half as a result of higher shipping costs that may emerge from any possible escalation of the Middle East conflict.   Wider economic implications and policy responses While rising geopolitical risk and increased oil and shipping costs can each individually exert upward pressure on inflation and may slow down economic activity in the global economy, the combined impacts are likely to be greater. Countries with stronger trade and financial ties to the Middle East and those that rely heavily on oil imports as an input for domestic production would be most affected. On the monetary policy front, central banks may have to take a more hawkish stance in response to rising inflationary pressures from the Middle East conflict. This could lead to higher interest rates, which would further dampen economic activity, particularly in an environment where there are already recessionary concerns in some major economies. Beyond its immediate economic implications, an escalation of the Middle East conflict could trigger large-scale displacement of people, which would increase economic and social pressures on neighbouring countries. Many countries may also have to increase their military spending in response to growing regional tensions. Given that public debt levels are already elevated in many countries due to successive shocks to the global economy over the past decade, any additional defence spending could come at the expense of public infrastructure investments that would otherwise boost productivity growth. Overall, the global economy is already underperforming as a result of the lagged effects of tight monetary policies, weaker global trade, a slowing Chinese economy and uncertainties surrounding the upcoming US election and possible changes to US trade policy. A potential escalation of conflict in the Middle East could exacerbate the situation by increasing uncertainties, harming efforts to bring down inflation and reducing global GDP growth. Over the medium and long term, it could further damage the global economy, with the possibility of refugee crises as well as increased defence spending, making the effects more complex and longer lasting. This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Amid the Ukraine conflict, Central Asian states are leveraging a multi-vector foreign policy to balance historic ties with Russia and expanding partnerships with global powers. This strategic pivot highlights their resilience in navigating a complex and shifting geopolitical landscape. The impacts of the Russia-Ukraine conflict have stretched well beyond Europe, shifting global alliances and influencing regions like Central Asia in complex ways. Caught between longstanding ties to Russia and other great powers, Central Asian countries now face a delicate balancing act. While the region has traditionally relied on Russia for economic and security partnerships, the ongoing conflict has created new pressures and opportunities, pushing these nations to adopt a more confident, yet cautious foreign policy. Central Asian states have responded to the shifting geopolitical landscape in several ways: maintaining economic ties to Russia, cautiously refraining from direct criticism of Moscow, and expanding partnerships with other global powers such as China, the West, and Türkiye. These evolving dynamics reveal the region’s vulnerabilities and strategic resilience in navigating an increasingly complex world order.  Since gaining independence from the Soviet Union, Central Asian countries—Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Turkmenistan—have undergone a challenging transition from a shared Soviet past to diverse paths of nation-building and economic liberalisation. The five Central Asian states are members of one or more of the Russian-led institutions, such as the Commonwealth of Independent States (CIS), the Collective Security Treaty Organization (CSTO), and the Eurasian Economic Union (EAEU). For Central Asian states, these organisations serve as platforms for regional security and economic collaboration with Russia, allowing Russia, in turn, to maintain a significant influence in Central Asia’s geopolitical landscape. However, participation in these institutions reflects a complex balancing act; Central Asian states must navigate their relationships with Russia while also exploring partnerships with other global powers.  Since the start of the war, the Central Asian states have been leading the so-called “multi-vector” foreign policy approach, aiming for balanced relations with Russia and other powers such as China, the Western world, and Türkiye. The states of the region did not recognise Russia’s newly annexed territories of Ukraine, and some of the states issued official statements in support of Ukraine’s territorial integrity in the early days of the war in 2022. Yet these states did not officially criticise Vladimir Putin and his “Special Military Operation.” There are several reasons at play here: economic reliance and the factor of Central Asian migrants, and membership in the Russia-led institutions.    Russia is a key economic partner for which each Central Asian state relies on for trade. Although, more recently, China has become the top trade partner for most of them, Russia remains the second one after China for Kazakhstan, Uzbekistan, and Kyrgyzstan. Central Asian states export agricultural products, metal and minerals, cotton, and textile products. Another major factor keeping the region reliant on Putin’s regime is millions of migrants from the region, particularly from Uzbekistan, Tajikistan, and Kyrgyzstan—who work in Russia. According to Russian official statistics, there are about 6.1 million migrants in Russia and most come from the states in the region.   Most of the Central Asian migrants travel to Russia for low-level seasonal work, particularly in the construction industry. In 2021 remittances sent by the migrants in Russia accounted for 35 percent of Tajikistan’s GDP and 33 percent of Kyrgyzstan’s GDP. For Uzbekistan, the remittances made up 13 percent of GDP. Such dependence constrains open criticism of Russia’s actions, as economic stability is tied to these remittances.   Further to economic factors, there are also security concerns and long-standing ties with Russia. Tajikistan, Kazakhstan, and Kyrgyzstan are members of the Russian-led security block CSTO; Kazakhstan and Kyrgyzstan are members of the Eurasian Economic Union; and all of the Central Asian states are members of CIS. These ties and economic elements require the states to maintain a balanced approach to safeguard relationships on all fronts.  With the war in Ukraine, there has been increased attention from the global community towards Central Asia. Regional states have been growing partnerships with other global players like China, the EU, the US and Türkiye. China held the first Central Asia Summit in May 2023 in Xi’an, where all leaders of the Central Asian states attended.     The US held its inaugural C5+1 platform summit on 19 September 2023, with President Joe Biden meeting with the leaders of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. The event was described as “a historic moment, building on years of close cooperation.”   From the European perspective, Germany’s interest in the region has been on the rise; the country initiated the “Germany – Central Asia” platform and held its first summit on 29 September 2023 in Berlin. More recently, on 18 September 2024, Chancellor Olaf Scholz travelled to Astana where the second summit of the platform was held with all Central Asian states. Germany, additionally, recently signed a migration agreement with Uzbekistan with aims to simplify the legal migration of Uzbek skilled workers into Germany.   Meanwhile, Türkiye has strengthened its presence in the region through the platform of the Organization of Turkic States (OTS). The OTS was established in 2009 to enhance cooperation among Turkic-speaking nations across Central Asia, Türkiye, and Azerbaijan, with Turkmenistan and Hungary holding observer status. This cooperation has grown rapidly since the Russian invasion of Ukraine in 2022. It focuses on economic, energy, and transport collaboration among the member states. Central Asian countries such as Kazakhstan, Kyrgyzstan, and Uzbekistan are key players in OTS initiatives. The organisation provides leverage for Türkiye via its cultural and linguistic ties, increasing its influence across the region.   These varying partnerships present viable economic and political alternatives to dependency on Russia. In the shifting geopolitical landscape, Central Asian states are seizing new opportunities to assert their independence and diversify their foreign relations. A key feature of this strategy is their adherence to a “multi-vector foreign policy,” enabling them to engage with various global powers while avoiding alignment with any single bloc. This approach has been strengthened by a renewed emphasis on regional integration, exemplified by the “Consultative Meetings of Central Asian States.” To date, six meetings have taken place, featuring participation from the presidents of each Central Asian country.   Their multi-vector foreign policy allows them to maintain economic and security links to Russia while exploring alternatives with powers such as China, the EU, Türkiye, and the United States. As the global focus on Central Asia intensifies, these countries are also showing renewed interest in regional integration, which may strengthen their collective voice and enhance stability in a volatile environment.