256. Will Trump’s war on Iran sink markets and the global economy?

0:00Robert Colvile:Even if he chickens out, he has unleashed something that he cannot control. There's no turning back. This morning, I am feeling pretty anxious about what awaits us all.

0:22Robert Colvile:Hello and welcome to a special edition of The Rest is Money with me, Robert Peston.

0:26Steph McGovern:And with me, Steph McGovern. Now, obviously, the major unrest in the Middle East is a huge political, huge humanitarian problem. It's one that's still very much unfolding. But what we want to do today is focus on the economic side of all of this, because it matters hugely what happens in that region in terms of the global economy. So in this episode, we're going to explain why we're going to look at the impact of oil prices and in turn, what that means for energy prices, what that might do to inflation, and from that, how central banks might react to all of this with things like rate decisions.

1:02Steph McGovern:But Robert, first of all, should we just look at the market reactions? Obviously, the markets have just opened. Hey, the stock market, what's going on? Because it doesn't look great this morning, does it?

1:13Robert Colvile:Price action on markets is absolutely predictable. So we are currently seeing the oil price up a little bit less than 10 percent. It has been higher in trading overnight. That's the Brent crude price. But, you know, that is a significant increase in the cost of energy. Gas prices up much more than that. And obviously, particularly for Europe and the UK, a rise in gas prices. I mean, I think the market price is currently near 20 % up. So that is very significant. We're seeing the stock market, the FTSE 100 down a bit more than 1%. As we speak, we are seeing the futures price. That is the expected price in U.S.

2:11Robert Colvile:stock prices, share prices down more than one and a half percent. That is what, you know, if you look at the S &P 500, currently investors expect the S &P 500. That's the broad based American stock market to open at least one and a half percent lower. The dollar is up, which is what you would expect at a time of uncertainty like this, even though we have talked in the past about, or the last year since Trump got elected, how actually it doesn't always happen that the dollar rises in value in conditions of uncertainty because of the way many would argue that Trump has undermined the value of American assets.

2:55Robert Colvile:Gold is up very sharply too, which again always happens at a time of uncertainty. So there are two things we're going to be looking at today, as you say. One is the impact on all of our living standards of the rise in energy prices, which we are seeing. We can talk a bit about how long that might persist for, what that will mean for interest rates. And then we'll also talk, I think, quite a lot about our old enemy, uncertainty, because, of course, uncertainty is, I'm afraid, way more significant than it was before Trump launched these extraordinary, Trump and Israel launched these extraordinary historic attacks on Iran.

3:49Robert Colvile:and as you say, obviously the most important impact is on lives, but also that we should be under no illusion. The economic impact of all of this is very significant.

4:01Steph McGovern:Yeah, and it's worth just looking at which sectors in particular are being hit the most in the stock markets from this because obviously travel and leisure is under a lot of pressure from this in terms of what it means for them. So the owner of British Airways, that's been the worst performer this morning on the FTSE 100. IAG, the company that owns them, is down more than 12 % this morning. Also, you've got groups like the Intercontinental Hotels and EasyJet, they're down more than 5%. And then those big companies that run the international exhibitions that you've got Informer, who've just signed that big deal with Dubai World Trade Center, they're down 8 % this morning because of this, you know, it's less than a month since they signed that deal.

4:47Steph McGovern:So you can see how this is really impacting specific companies that are important to our economy too. We're delighted to say that this year the rest is money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six?

5:04Robert Colvile:You know what? We've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable. Well, then Aldi and Lidl turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.

5:32Steph McGovern:Cheers, Greg, and thank you for powering this episode of The Rest.

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6:38Steph McGovern:And let's, I think, just explain why. I mean, it's something we've talked about before, the importance of this region because of all the oil that comes from and through the area. You know, it's a key part of international shipping, particularly that narrow waterway called the Strait of Hormuz. It's surrounded by Iran, Oman and the UAE. And a fifth of global oil supplies travel through that tiny waterway every day. So it's one in every five barrels of oil going through that strait. It's a real choke point. Also liquefied natural gas goes through there. And it's often used at times of unrest in the Middle East as a bit of a bargaining chip.

7:16Steph McGovern:Iran used this as a strategic bargaining chip and repeatedly threatened it. We've talked about it before. So what's happening there at the moment is international shipping has pretty much come to a standstill there. We understand that at least three ships in the area have been attacked. And there's people like Lloyds of London, who are a major insurer, saying that they're not going to insurerships going through that area. So because of that, it's put a real chokehold on oil moving through that region. It's a key part of getting it across to Asia and lots of oil coming from that area. And it is an area that we've seen targeted before, as I say, it's kind of used as a bargaining chip.

7:58Steph McGovern:We saw back in the 80s in the Iran-Iraq war, it was also used then. We talked about it last year about the problems there but in the and it's what happens next in terms of whether they can get the the oil through there and this liquefied natural gas and and whether that is going to be a sustained problem or if they can get it sorted and if they can't get it sorted that's the real pressure point on oil prices isn't it because that's then going to mean they're going to stay high if they can't use that straight in the way they have been every day for many years

8:31Robert Colvile:Yes, that's absolutely right, Steph. There is a second, though, oil and gas related factor that is weighing on markets and causing considerable concern. One of the most striking characteristics of Iran's retaliation against America and Israel is the way it has lashed out against other Gulf states, states that, you know, you might have thought they would have wanted. I mean, obviously, you know, places like, you know, Saudi and the UAE are not exactly allies of Iran. You know, they had been urging caution on Trump. They didn't want these attacks to happen. And one of the things that's very striking is the way that Iran has been firing missiles at these Arab states.

9:31Robert Colvile:And therefore, there is a real worry that oil production, oil refining, gas production, gas liquefying facilities will be damaged. And so it's not just traffic through that incredibly important shipping lane, the Straits of Hormuz, that is forcing up oil and gas prices. It is also the fear that the productive capacity of these countries will also be will also be damaged. And, you know, around all of this is the uncertainty, the extraordinary uncertainty about where this conflict goes. Just overnight, you know, we have heard Donald Trump tell the New York Times that this conflict could go on for four to five weeks.

10:29Robert Colvile:You know, there are concerns, frankly, that over that time period, America and Israel will exhaust their stocks of missiles and ballistic armaments. And, you know, which is one of the reasons why, you know, the bombing is so intense, because they want to disable Iran as quickly as possible. Four or five weeks is an enormous period of uncertainty for the economy and uncertainty for markets. And then the other thing, you know, I don't know, you know, you know, how you felt about this. But, you know, he's asked, what's the plan? Right. And he and he varies between, well, we want an uprising. You know, we want the Iranian people who, you know, obviously suffered the most brutal oppression at the hands of the Tehran regime.

11:23Robert Colvile:to rise up. And he keeps saying, this is your moment. Although there doesn't appear to be any American plan for supporting the building of democracy in the event that that happens, and nobody knows whether that's going to happen. But then he also talks about a Venezuela kind of outcome. You know, essentially, having killed Khamenei, the Ayatollah, he also talks about, Well, you know, one outcome would be, we'll have the equivalent of Venezuela, where the sort of second in command or somebody would be chosen from the existing regime with whom Trump would feel he could have a relationship. But nothing internally would change that much other than Trump's insistence they cannot develop nuclear weapons.

12:12Robert Colvile:But given that he doesn't appear, oh, and he also said, and this is the bit that made me my jaw drop, he told ABC News. So he was asked by ABC News. So who would that equivalent to the Venezuela new president be in which of the Ayatollah's colleagues would be that person you could do business with? And he actually said that their attacks on Iran have been so successful that they managed to kill the two or three people who might have played that role. So you just emerge from all of this thinking, actually, you know, I'm slightly surprised if I'm honest with you, given this uncertainty, that markets haven't reacted more strongly, that the oil price isn't up more and stock markets aren't down more.

12:55Robert Colvile:Because, you know, every time he opens his mouth, you just feel even more unease and uncertainty because he patently doesn't, you know, he's sort of basically just hoping for the best. there's no plan. Yeah, I know.

13:12Steph McGovern:And that is really scary. I think there was an Iranian, a tweet during the Rams yesterday from an Iranian, which explained this point really well. And I'm just going to read you a little bit of it. And it says, as an Iranian, I can tell you the situation is no longer just political, it's existential. We are trapped between two collapsing structures, one internal, one external. On the one hand, we face a deeply dysfunctional government, you know decades of economic mismanagement suppression of dissent brutal ideological you know problems and then on the other hand this is the paradox they're also terrified of regime collapse because they've watched the aftermath of western intervention in countries like Iraq and Libya and Syria and Afghanistan each was promised civil you know freedom but they descended into chaos civil war or foreign occupation and that's the point here isn't it it's you know know, as an Iranian, you are stuck between these two collapses of regimes.

14:11Steph McGovern:And that's a huge, awful uncertainty for them, a terrible situation to be in. And as you say, how do you work out then what happens next in all of this?

14:20Robert Colvile:I mean, you are right. I mean, this may be, I don't know, fourth or fifth time lucky for America. But, you know, as you just said, the problem is, the precedents, whether it's Iraq or Libya or Afghanistan, they are really depressing because what followed the toppling of autocratic, brutal regimes was chaos, terrorism. It is sort of extraordinary how little effort the American administration seems to have put into how you build nations in these circumstances.

15:05Steph McGovern:But this is the whole thing with popularism because two things can be true at the same time. And yes, they were in a terrible situation with their supreme leader and the oppression felt there. But there's also the truth that the alternatives that are being offered by foreign intervention and not liberation, their potential collapse. But what Trump plays on and what we've seen with popularism is he'll just focus on that one truth, won't he? I've got rid of, same with Venezuela, I've got rid of an evil dictator and that's the narrative that's told to the world and forgetting about, as you say, a plan but also what taking away a regime without any plan actually means for a country.

15:47Robert Colvile:The fact that the regime, you know, Aiton Khamenei, who was behind the slaughter of tens of thousands of Iranian protesters only recently, we've all got to pray that this is the end of that kind of slaughter. But we did a podcast recently about not just the brutality of the regime, but also that many people are frankly struggling to feed themselves there. The economic conditions are terrible. And again, we've got to hope that within Iran itself, because obviously, you know, in these sorts of circumstances, you know, the blow to their living stands and cost of living will be, you know, significant.

16:35Robert Colvile:But as you say, we should probably also now look a bit about what it means for all of us.

16:41Steph McGovern:And it's a good point after the break to focus on what this all means then in terms of oil, energy prices, and then how that feeds through to inflation and what that means for central banks deciding interest rates. All of that to come after the break.

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18:43Robert Colvile:Hello and welcome back to The Rest is Money with me. Robert Peston.

18:47Steph McGovern:And with me, Steph McGovern. So, Robert, what's interesting, I think, to look at now is what the possible outcomes are here. If we are right to assume that this is going to go on for some time and there's certainly be some unrest and oil prices will be pushed higher in that time, what is that going to mean in the longer term? Because I suppose the intuitive thing is to think if oil prices go up, energy prices go up, that hits us all, inflation will go up. But there is another alternative to all of this, isn't there? So do you want to just explain what this, the ways that this could play?

19:22Robert Colvile:Yeah. So look, I've been talking to central bankers and economists over the last 24 hours, because one of the big issues around all of this is what is the overarching macroeconomic impact on the world of this? Is it higher inflation or is it lower growth? And I'm afraid my sort of settled position is that it's both, which is the sort of worst of all possible worlds. Now, you know, let's put this into a bit of historical context. I don't think this is 1973. And the way that oil producing countries in the Middle East, OPEC, massively reacted by choking off oil supplies in the wake of the Yom Kippur war involving Israel back in 1973.

20:12Robert Colvile:That led to massive rises in oil prices and absolutely spiraling inflation. It actually was in many ways the dominant force within the global economy, that inflationary force, for years after that. I mean, that's not going to happen this time, partly because the global economy, while oil is still incredibly important as a cost for businesses and for all of us as individual citizens, consumers, you know, there are alternatives. One of the important, you know, one of the good things about the transition to greener energy is we are less dependent on oil and we use it more efficiently than we used to.

21:00Robert Colvile:The motor car is less dependent on oil. There are lots of electric vehicles now. So just to be clear, we are a less oil dependent global economy. But the kind of rises we've seen in the oil price today would lead probably to a half percentage point or something like that, something between a half and a percentage point increase, probably near a half. in the global inflation rate. And on the basis of that, you would say the kind of interest rate cuts we've been seeing across the developed world in Britain, America, Europe, they're going to be slowed down. And I think they will be slowed down, right?

21:45Robert Colvile:I do think, but central bankers will also be acutely aware that both the rise of business uncertainty, consumer uncertainty, and the increase in the costs that we all pay as a result of rising energy prices, that slows the economy down. So, you know, we had hoped in the UK this was going to be a slightly better year for economic growth. Undoubtedly, what's happening in the East will slow down that growth a bit. And I have to say, you know, I slightly pity the Chancellor, Rachel Reeves, because tomorrow she will be laying out the official forecasts for the economy over the coming few years. And I have to say, pretty much everything that's happened, what's happened overnight doesn't make those forecasts completely useless.

22:43Robert Colvile:but there's no way the OBL will be able to update properly for the economic inflation, you know, the growth and inflation impact of what's happened overnight because of the uncertainties we've been talking about. So you have to sort of say that this spring statement tomorrow, if not, as I say, if not pointless, it's way less important than it was. Because, you know, we just know now that those sums that, you know, that have been done that will, you know, leader to announce the outlook for the economy. They're wrong. They're just wrong. We know they're wrong. Donald Trump and his attack on Iran has made them wrong.