182. Are Iran and Israel About To Trigger A Global Economic Crisis?

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1:38Hello and welcome to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. Fresh off a plane, Robert, you've been out in Canada in the Rockies, haven't you, at the G7? What a week. Oh my God. Tell me what's been going on, because obviously watching it here, back home, what we saw was Trump leaving early and, you know, all kicking off with Iran. So, I mean, what was it like there when this was all happening? Trump, as you implied, sort of dominated everything. One of the reasons I'm going to mention this is because I heard Rory and Alistair talking about this particular incident on a rather brilliant new episode of The Rest is Politics.

2:20and Rory was asking Alistair, you saw that moment where the US president dropped the trade deal, all those papers, and Keir Starmer then bent over to pick up the papers. And there was some conversation between Rory and Alistair about, was it dignified for a prime minister to pick up the president's papers and all of that? and I think Alistair was saying why didn't why wasn't one of you know Trump's assistants on the scene to pick them up and actually weirdly the reason as I understand from what you might call a credible shall we say first hand source the reason why the Prime Minister picked up the papers is because he was very worried that if anybody else came near the President security people would shoot them so he felt he needed to pick the papers up So we had that extraordinary filmed sort of encounter between the two of them, of which the high point was because we'd all been briefed to say this is going to be a really important meeting and there'll be announcements.

3:29And President Trump duly says, and I'm absolutely thrilled here to be signing a deal, a trade deal with the European Union. And he meant the United Kingdom. so that was a slight oh my god cringe making moment but um anyway we all moved on uh no he doesn't have the cognition issues that president bryden had this is no sign of a deteriorating capabilities so all his people are telling us it's just one of those things and i guess it was just one of those things so just to give you that detail then on that deal so we now know that the tariffs for cars being exported from the UK to America will go down to 10 % from that 27.5 % which they faced before.

4:19So that's really good news for the automotive sector. But, you know, continued anxiety for our very fragile steel industry, because the 25 % tariffs tariffs remain in place. It's not as high as the 50 % that are on steel manufacturers in other parts of the world. But nonetheless, we don't have a competitive steel industry. 25 % is a lot for them to bear. And they had been led to believe only a few weeks ago that there would be zero tariffs. So, you know, there is a lot more work that the British government has to do on their behalf. Yeah, because while you've been over there, we've obviously had Heidi Alexander doing the rounds talking about this deal with British Steel, haven't we?

5:04So, of course, you know, you'll remember the company was saved back in April by the government from the Chinese owners. And it was a company losing about£233 million a year, nearly 3 ,000 people employed there. And this week we heard Heidi Alexander talking about this new contract for British Steel to make this track for network rail. So it's worth about 500 million. This contract represents about 80 percent of the track that network rail needs to make these railway lines to do these railway lines. The rest of that's going to come from Europe. So not great news on the, as you say, the tariffs in terms of aluminium and steel.

5:43But there was that news this week about that contract for British steel, which is very much needed given how much money they've been losing. But how much of a difference that will make in the longer term is what we're waiting to see. It's not a, I don't know, do you think this is a huge deal for them or not? It feels like it will get them through maybe for a bit, but not necessarily provide any longevity to what British steel need in order to survive in the current climate with everything going on. Yeah. And as we talk repeatedly, and this is not just true of steel, it's true of all manufacturing.

6:19One of the big issues, and we'll come back to this, is of course the cost of energy, which relatively speaking in the UK is high. I'd like to take us on to the central issue of this G7 was how to limit the costs in terms of lives and economic impact of the conflict between Israel and Iran. And the thing that I found most disturbing about the meeting of leaders is how disunited they were. You had President Zelensky from Ukraine come over. And I think you mentioned earlier that President Trump left a day early, left G7 a day early, and he left before Zelensky arrived. And actually, as I said to our Prime Minister, Kier Starmer, this looked desperately disrespectful of the American president.

7:24But what it frankly manifests is simply that there is a big divide among the leaders of the big liberal democracies on how to bring peace in Ukraine. And there was no statement from the G7 about how to expedite or indeed even move forward towards peace in Ukraine. So that split between Trump and the rest in terms of what to do about Ukraine is just one manifestation of the doubts that I certainly have about whether or not the G7 remains a relevant forum for trying to solve these sorts of problems. And, you know, right at the start, you know, President Trump made clear the division that he has on this central issue related to our to both global stability, European stability and our prosperity.

8:17when he actually said in his very first appearance at the summit, standing next to Mark Carney, that he deeply regretted that the G7 was no longer the G8 because for a period after the collapse of communism, Russia was invited in. And he said something which I think, I imagine he almost uniquely believes, that if a few years ago, the other G7 leaders hadn't disinvited Putin, after Putin had become a warmonger. He thinks that if Putin had still been on this body, Putin would never have invaded Ukraine. I think that is a highly dubious statement, but its significance is simply that it shows you that Trump's views of Putin and essentially the ability to negotiate rationally with him, he takes a far more optimistic view than any other Western leader does.

9:18But when it comes to Israel and Iran, actually the disunity, the chaos was even worse. And I think given how extraordinarily important this is, not just for lives in the Middle East, but actually our prosperity, if you'll forgive me, I will just talk you through all of this. So what we began with was, you know, on the plane out with the Prime Minister, He repeatedly says that his primary aim in this conflict is secure what he calls de-escalation. Right. And de-escalation simply means in our terms a ceasefire. Yeah. And then we get a statement from the G7 leaders after the first day. Trump is still there.

10:12and the statement seems to me to have two really material points and they are that Israel has a right to defend itself and that Iran should not acquire nuclear weapons. Now the common sense interpretation of that statement and it's the one that I put out in broadcast and on social media is that this looks like the G7 effectively endorsing Israel's attack on Iran. I then get contacted by British officials saying, no, no, no, no, no, that's not what it means at all. Look at that phrase about de-escalation. There is a phrase in there about de-escalation, but what it says is de-escalation in the wider Middle East, including Gaza.

11:02And it refers in a fairly general sense to, which is something many of us believe in, that the Israeli government should allow in way more aid into Gaza and should stop herding the Palestinians in Gaza into these narrow strips, a process that many people see as ethnic cleansing, and should stop killing civilians. Right. So that's what that looks like. But it doesn't seem to me to have any relevance to the Iran-Israel conflict. Anyway, British officials say, no, no, no, the de-escalation applies to the whole thing. And then when I interview the prime minister, he won't, interestingly, say whether he thinks that the Israeli government is justified in bombing Iran's nuclear facilities.

12:07But this is the extraordinary thing. Keir Starmer, right, is telling me in this interview that the whole of the G7 is united in this effort to get a ceasefire. Right. Literally, on the balcony above me, Chancellor Mertz of Germany is doing similar interviews with the German press. Right. And ZDF, the broadcaster, then puts out what the German chancellor has said. And he doesn't talk about de-escalation at all. What he says is that Israel is doing the West's dirty work, that, you know, Iran is a terrorist state and that it may be necessary if Iran doesn't surrender, that the rest of the West may have to help Israel completely destroy any capability that Iran has to produce nuclear weapons.

13:02We then get President Macron and he then says, if there's regime change, if the West, if Israel, if potentially Israel and the US take out Khamenei, the leader of Iran, that will lead to chaos. We shouldn't do that. And then, more or less exactly the same time as all of this is going on, you've got President Trump on his way back and then back in Washington making statements like, I'm in no mood to negotiate with Iran, warning the citizens of Tehran to evacuate Tehran because they're going to be in danger. and sending very, very clear signals, and this is where we are as we speak, that he is minded, hasn't made up his mind as far as we can tell.

13:52I mean, he said just minutes before I'm having this conversation with you that nobody knows what he has decided on whether America will bomb Iran. But, you know, this is this hugely important moment that we're speaking where he is trying to decide whether or not to take this military action. It's a hugely big and delicate moment in all of this. But the point I want to make is you would want in this kind of situation unity among the leaders of the leading liberal democracies. And what I've just described to you is disunity like very little I've ever encountered when we're faced with such a crisis.

14:32And obviously in so many respects, Robert, I mean, it's a really scary time and the human cost to all of this is by far the most important. But I know when we do this, we try to focus more on what it means economically and things. And, you know, how are people looking at it from that perspective, don't we? And that's what we're going to do after the break is look at what does this mean in terms of things at all prices and energy and just the uncertainty again in the global economy. But first, let's go to a quick break.

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15:51Welcome back to The Rest is Money with me, Robert Perston. And me, Steph McGovern. Now, in a minute, I'm going to talk through what would lead to a massive, almost certainly negative market reaction if things go wrong in this conflagration. But before I go through how leading investors see this, at the heart of what would cause a market shock is this passageway for oil known as the Straits of Hormuz. And I know you've been thinking quite a lot about its significance. Well, yeah, because it's interesting because obviously, you know, when we talk about these conflicts, there often is, particularly in the Middle East, these parts of the, you know, the seas, the waterway systems that transports goods, oil and everything, which can get caught up in the conflict.

16:44You talked about the Red Sea. Remember, we're talking about that and the impact that that could have. And now everyone's kind of looking at this Straits of Hormuz, as you say, which is this critical passage for oil shipments. So it's a narrow waterway. It's bordered, I guess, around Iran, Oman, the UAE. They surround it and a lot of crude oil is shipped there, through there. So if you look at the figures, it's something like a fifth of the global oil supplies travels through this waterway every single day. You've got liquefied natural gas. You've also got other goods and things that come through there as well.

17:24And so for years, we've had this kind of issue with what might happen there. You know, in the past, there's been threats in the past about the closing down and blocking off this area to stop oil being able to go through it. You might remember it was an area targeted back in the 1980s in the Iran-Iraq war. And now there's concerns it might happen again. And one of the things that has happened in the last few days there is this interference in the navigation system for the ships going through that part. So there was something like 170 ships who were, I guess their systems were jammed and that caused two of the ships to actually crash.

18:07One of those ships owned by one of the world's biggest oil tanker companies called Frontline. I think it's the world's largest listed oil tanker company. and people had to be rescued off that ship and obviously that then affects the oil being able to get through. And we've heard the frontline CEO, I think he did an interview with the FT about this, saying that they're now not going to take on any contracts going through that strait until they know what's going to happen. But interestingly, it's not in Iran's interest either to stop oil getting through that waterway because then that impacts everyone.

18:47You say it's in no one's interest. What world leaders and indeed investors fear is that as a last resort, it would be a lashing out. Iran, even though, of course, it would have a direct and negative impact on its own ability to move oil around, nonetheless, in a context where the survival of the regime is at stake, it would, of course, be in its interest to totally disrupt the flow of oil. because the inevitable surge in the oil price would hit every major economy's living standards really hard. Just because we are still, whether we like it or not, we're still massively dependent on oil and gas and energy.

19:30And so that is a sort of last resort threat against the West that, you know, Iran has as one of the nations bordering the Straits of Hummus. And, you know, most analysts think that it has vast numbers of mines available to deploy, you know, in the shipping lanes and the ability to wreak, you know, really hideous damage against ships going through there. So it could stop all traffic. Yeah, but wouldn't that be cutting your nose off to spite your face, though? But when you're facing catastrophe, you know, if you are the leadership, you're going to lash out. When the chips are down, I suppose you just do anything you can to survive, which is what scares me about the nuclear capabilities and all of this.

20:17So one of the things that has been sort of different from what people expected, when Israel launched its initial bombing, most analysts took the view that this would lead both to sharp rise in the oil price and sharp falls in stock prices. that hasn't really materialized. Yes, the oil price has gone up. Actually, over the period of the week, it's about 10%. Not all of that necessarily attributable to the crisis in the Middle East. And share prices fell a bit and then did nothing. So actually, the market impact so far has been very muted. And one of the reasons why there's been a muted reaction is because people have actually enormous respect for Israel's ability to conduct a war of this sort in a sort of, I hate this phrase, but a semi-surgical way that, you know, they have concentrated their bombing on nuclear facilities and on members of the military and the relevant nuclear scientists, and that they are therefore containing, as far as possible, the collateral damage from all of this.

21:33There's also been a view, I don't know whether this is naive or not, that actually Iran's ability to retaliate is significantly less than the leadership implies. And then there's a final thing, which is investors have sort of taken Donald Trump at his word. And this is where I think they have been naive. Donald Trump went into the election saying he would not put American troops at risk. I have to say, as I've already said, he is giving very serious thought to joining with Israel. His military are making contingency plans in case that's what he decides. And that would be a very, very big moment for markets because at that point, all sorts of risks then materialize.

22:26Interestingly, I mean, we speak, you know, at a moment where there is widespread anxiety in all governments that Trump could launch this attack at any point. Interestingly, when you talk to investors, they say if he's listening to his markets, people, he'll do it at the weekend. Because if you do it at the weekend, you can do it when markets are closed and you've got a couple of days to carry out whatever he wants to carry out. and then markets can assess whether or not this is a contained thing on the Monday morning. The problem with doing it, let's say, overnight as we speak, is markets will react in real time and you'll both get the horrors on the ground and general global market mayhem.

23:10I cannot believe this is the conversation we are having, like whether America's going to go and bomb Iran potentially at the weekend because of the markets being closed then. It's just, I feel like we're living in a different, on a different planet at the moment. And also the fact that you just don't know whether, you know, you're going to get Trump on a bad day when he's miffed with people and he'll just say, yeah, go and do it without really giving the second thought. And the second thought comes two days later when lots of lives have been lost and we're in global economic hell. Right, well, that's it from us for now.

23:47Thank you very much for listening. there'll be loads more to get out even too as we uh see what develops over the next few days but thanks very much for listening to us bye-bye all the best goodbye