- Mohamed El-Erian says the Iran war is about to hit a tipping in terms of its economic impact.
- The famed economist sees big consequences once supply chains in Asia are impacted by the war.
- Hope for de-escalation was waning on Thursday after reports of a US peace plan sent markets higher on Wednesday.
The economic fallout from the Iran war is approaching a tipping point, Mohamed El-Erian says.
The top economist and former chief investment officer at PIMCO said he believes the damage stemming from the conflict in the Middle East has already reached a critical threshold, and it's likely to approach another inflection point within the next few weeks if there's no sign of de-escalation.
The first tipping point occurred in the first several weeks of the war, when both sides began attacking energy infrastructure, El-Erian said. At that point, oil-supply disruptions switched from temporary to medium-term in how long they could last, he said.
The next tipping point will occur when those disruptions start to hit supply chains, particularly in Asia, he said, likely referring to how the region is one of the most affected by the closure of the Strait of Hormuz. In 2024, around 84% of all crude oil that passed through the Strait went to Asia, according to an analysis by the research group Zero Carbon Analytics.
"The next tipping point is when actual supplies, actual quantity, do not get to the countries in Asia, in particular. If that happens — and I suspect we are within a couple weeks of that — if that happens, then you're going to see an enormous economic impact because it's not just about the price, but it's also about the quantity available," he said.
Oil rose again on Thursday after prices cooled in Wednesday's trading session, following reports of a US peace plan sent to Iran. Iran has pushed back, sending stocks lower and oil back up. Brent crude rose 4% to $106 per barrel, and US oil was up 3% to $93.
Fears of hotter inflation are at the heart of the economic anxiety around the Iran war. On one level, supply disruptions in the Middle East have sent crude prices soaring, which can impact the prices of other goods and services and lift overall inflation.
Furthermore, if less supply reaches the market, prices will need to rise even further to lower demand for oil and oil products.
It's nearly impossible to predict the price at which oil sees demand destruction, though some economists have floated the possibility that oil prices could rise as high as $200 a barrel before that happens.
Apart from oil, other supply chains have already started to feel the inflationary impact of the war. Flows of helium, pharmaceutical drugs, fertilizer, and other materials have also been impacted by disruptions from the Strait of Hormuz.
El-Erian has been vocal about the economic damage that could accrue the longer the Middle East conflict drags on. Previously, he told BI he believed the odds of a US recession had climbed to 35% due to the war, and that higher inflation was raising the risk for a "financial accident."
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